Work It: All About the Jobs

January 10, 2025
6 min read

Work It: All About the Jobs

  • The spotlight today is on the December US non-farm payrolls and Canada labor force survey.
  • GBP and gilts remain under downside pressure.
  • The PBOC will temporarily stop buying China government debt to boost bond yields and support CNH.

USD is up against most major currencies and 10-year Treasury yields are holding near the highest level since April 2024. More evidence of solid US economic activity will underpin the uptrend in USD and Treasury yields.

The US December non-farm payrolls report is anticipated to stay consistent with a healthy labor market (1:30pm London). A 165k rise is penciled-in vs. 227k in November, slightly below the average monthly gain of 186k over the prior twelve months. The unemployment and participation rates are projected to be unchanged at 4.2% and 62.5%, respectively. Average hourly earnings are forecast to rise 0.3% m/m vs. 0.4% in November and print at 4.0% y/y for a third consecutive month.

The University of Michigan preliminary consumer sentiment index is expected to remain steady at 74.0 in January and below its long-run average of 84.7 (3:00pm London). Overall, positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth. The Atlanta Fed GDPNow model estimates Q4 growth at 2.7% SAAR, unchanged from January 7 and tracking well above long-run annual trend growth of 1.8%.

Fed officials stick to the cautious policy easing script: Philadelphia Fed President Patrick Harker (non-voter) noted “I still see us on a downward policy rate path” but added “I think it’s appropriate for us to take a bit of a pause right now and see how things shake out.”

Boston Fed President Susan Collins (2025 voter) said the current US macro backdrop “implies a more gradual approach to policy normalization.”

Kansas City Fed President Jeff Schmid (2025 voter) pointed out “my read is that interest rates might be very close to their longer-run level now. Regardless, I am in favor of adjusting policy gradually going forward and only in response to a sustained change in the tone of the data. The strength of the economy allows us to be patient.”

Fed Governor Michelle Bowman argued she “continue to prefer a cautious and gradual approach to adjusting policy” as the current stance of policy may not be as restrictive as others may see it. Chicago Fed President Austan Goolsbee (2025 voter and notorious dove) speaks later today.

USD/CAD is firmer above 1.4400 ahead of Canada’s December labor force survey (1:30pm London). Consensus sees a 25k rise in jobs vs. 50.5k in November, while the unemployment rate is expected to rise one tick to 6.9%, the highest since September 2021. Canada’s labor market is softening, and the Bank of Canada (BOC) has room to keep cutting the policy rate which is an ongoing drag on CAD. The market is pricing-in 80% odds of a 25bps cut to 3.00% at the January 29 BOC meeting and the policy rate to bottom between 2.50-2.75% over the next 12 months.

GBP remains under downside pressure and 10-year UK government yields are at the highest since August 2008. The sell-off in GBP and gilts reflect a deterioration in the UK’s fiscal prospects, driven by heightened risk the UK could be entering a period of stagflation.

Indeed, BOE Deputy Governor Sarah Breeden acknowledged yesterday that the recent string of downside surprises in economic activity and upside surprise on inflation complicates the appropriate policy response. As such, the BOE’s limited scope to ease policy can worsen the already fragile UK growth outlook and lead to a further deterioration in the UK’s fiscal prospects.

The implication is GBP and gilts are vulnerable to more downside until we have some positive UK economic growth and/or inflation surprise. UK November GDP, December CPI, and December retail sales data are due next week. Stay tuned…

USD/CNH is range-bound near all-time highs just under 7.4000. The PBOC took more steps to curtail CNH weakness. The PBOC announced overnight it will stop buying sovereign debt this month to boost bond yields, which slumped to a record low. Yesterday, the PBOC announced plans to auction a record 60 billion yuan of six-month bills in Hong Kong on January 15 to reduce the supply of yuan in the offshore market and make it more expensive to short the currency. Nevertheless, China’s record yield differential with the US will maintain upward pressure on USD/CNH.

 

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