Foreign Exchange Commentary

Summary

• Canadian dollar weakens after Canada jobs data; stronger-than-expected U.S. numbers.
• Euro currency trades below $1.03 after U.S. payrolls data.
• U.S. December nonfarm payrolls estimate +165,000.
• Treasuries slide to day’s low after strong U.S. jobs report. U.S. 10-year yield touches 4.75%.
• U.S. December unemployment rate unexpectedly drops to 4.1%; estimate 4.2%.
• U.K. pound sterling falls 0.7% to lowest since November 2023; U.K. dual deficit remains key risk for sterling.
• Japanese yen gains on Bank of Japan report prior to U.S. NFP report.
• Mexico peso weakens above 20.50.
• Australian dollar drops to lowest level since 2020 after U.S. payrolls.
• University of Michigan preliminary U.S. January consumer sentiment falls to 73.2; estimate 74.0.

Noteworthy

• U.S. Hiring Blew Past Expectations With 256,000 Jobs Added
• Dollar Jumps to Highest Levels Since 2022 After Payrolls

The U.S. economy added 256,000 jobs last month and the unemployment rate edged down, the Labor Department said Friday.

December’s gain in nonfarm payrolls was well above the 155,000 jobs that economists had expected, according to a Wall Street Journal survey. The 4.1% unemployment rate was also better than the expected 4.2%.

The results were the latest sign that the U.S. labor market has recovered from its midyear stumble and may even be gaining steam. But Friday’s job report also shuts the door on a rate cut at the Federal Reserve’s next meeting, which is Jan. 28-29, and reduces the chances of a cut at its subsequent meeting in March.

“The bottom line is the economy is in a good place. It’s growing very strongly. The labor market is at full employment,” said St. Louis Fed President Alberto Musalem in an interview Thursday. Looking ahead, the pace of rate reductions “has to be patient and careful and very dependent on the outlook.”

Stock futures fell after the report was released, and the yield on 10-year Treasury bonds jumped to 4.79% from around 4.7%.

Hiring was driven by the same sectors that have powered the labor market all year—healthcare, social assistance, government and leisure and hospitality. The economy also added 43,000 retail jobs, as a late Thanksgiving likely pushed some holiday hiring from November to December.

Market reaction aside, Friday’s data paint a solid picture of the U.S. labor market.

“It was a great year,” said Jay Bryson, chief economist at Wells Fargo. “The labor market is now in better balance than it was in 2023.”

The U.S. added 2.2 million jobs in 2024. That was more than double the number expected by economists heading into the year, according to a Wall Street Journal survey conducted last January.

Average hourly earnings rose 0.3% from November to $35.69. That was up 3.9% from December 2023.

The unemployment rate is close to a level that Federal Reserve officials believe sustainable over the long run, and Fed Chair Jerome Powell has said he doesn’t think further cooling in the labor market is necessary. The unemployment rate, after rising in the first half of 2024, appears to have stabilized since the summer, easing concerns that arose in the fall about a potential deterioration.

In contrast to the situation a year ago, Fed officials no longer see the labor market as so strong it could jeopardize their goal of wrestling inflation back down to 2%.

Minutes of the Fed’s Dec. 17-18 policy meeting, released Wednesday, showed policymakers were broadly comfortable with holding interest rates steady in the near term after cutting them by a cumulative percentage point since September. Friday’s report is unlikely to change that stance. The Fed’s next interest-rate decision is expected Jan. 29

The outperformance of both the labor market and the economy at large in 2024 can be attributed to two main factors: a greater-than-expected influx of workers and an increase in their productivity.

A historic surge of border crossings since the end of 2020 has added some 10 million people to the U.S. population, most of them working age.  That has increased the number of jobs that can be added to the economy without overheating it.

At the same time, American workers’ productivity is on the rise.  Workers’ output per hour has risen 2% or more, in annual terms, for five straight quarters, a rate that exceeds that of most other advanced economies. 

Having more workers who are getting more done has enabled the U.S. economy to significantly exceed expectations. Gross domestic product—the broadest measure of goods and services produced in the U.S.—likely grew around 2.5% in 2024. At the start of the year, economists in The Wall Street Journal survey predicted it would expand a paltry 1%. 

Barring a resurgence in inflation, economists expect the good times to continue into the new year—albeit with slower rates of hiring and GDP growth as the incoming Trump administration’s policies take shape. 

President-elect Donald Trump has signaled he intends to drastically curb immigration, which has been the main source of growth in the labor force in recent years as the U.S. population ages. The likely impact of his plans remains impossible to know at this stage.

Trump has also promised to ratchet up tariffs on the U.S.’s top-three trading partners—Mexico, Canada, and China—along with many other countries. Economists say that would likely weigh on growth, particularly in the second half of the year, since businesses will attempt to front-load production and orders before the tariffs take effect. 

Musalem on Thursday reiterated the Fed’s more-cautious stance toward additional rate cuts, saying the economic outlook has changed since the central bank began easing policy four months ago.

“Since September, the picture changed,” he said in an interview at the bank.