Douglas Porter

February 4, 2021

It was a tough week for forecasters. In fact, the debate is which of the following caused the most pain and grief, and brought general humiliation upon themselves with bad calls in a surprising week?

1. Economists, on January jobs
2. Equity analysts, on Meta/Facebook’s quarterly results
3. Commodity specialists, on unstoppable oil prices
4. Currency strategists, on the listless loonie
5. Fixed-income gurus, on central bank rate hikes (redux)
6. Your local groundhog, on winter

Well, we can eliminate #6, because one gets the sense that the species doesn’t do humiliation. But going through the rest, let’s start at the start.

January jobs: After a mostly mixed week for economic indicators, which suggested the U.S. economy cooled moderately at the start of 2022, the U.S. employment report was a lightning bolt of surprising strength. Lulled by a back-up in jobless claims in the month, widespread reports of workers off sick, and ADP estimating a big 301,000 drop in jobs, markets were caught looking the wrong way. Not only did the headline 467,000 payroll gain blow past the highest estimate, but the prior month was cranked up to a gain of 510,000 (initial guess 199,000). Brief aside: The huge upward revisions to the final months in 2021 make a mockery of all the in-depth analysis to each monthly jobs tally, when the reality seems to be there are only two speeds for the U.S. economy—solid, steady growth, or steep reverse.

While the U.S. jobless rate nudged up last month, that was due to a big pop in the participation rate to 62.2%, its highest level since March/20. The companion household survey reported a massive 1.2 million job gain in January, and it’s now within 1.1% of returning to pre-pandemic levels (versus a 1.9% gap on payrolls). But perhaps the most noteworthy aspect of the employment release was another piping hot reading on average hourly earnings, which zipped 0.7% m/m, lifting the annual pace to 5.7%. Juiced by revisions, this was half a point above consensus, and simply further fuels rising inflation anxiety.

Canadian employment was almost the polar opposite, faltering by a heavy 200,100 in January. (Does anyone else find that extra ‘100’ decline weirdly precise?) While this was roughly double the official consensus estimate, the reality is that most were expecting a triple-digit setback, and it’s little surprise since some previous waves also saw 200,000 job declines. The usual suspects were hit, with restrictions in Ontario and Quebec accounting for all of the drop, and the hospitality sector alone shedding 112,900 positions. As restrictions are already reversing, look for a full rebound in the next two months, and for the unemployment rate to soon back down (it rose 5 ticks to 6.5%). Beyond the headline tally, the biggest divergence with U.S. trends is on the wage front, as average hourly wages faded to a mild 2.4% y/y pace in January. Not only is that less than half the U.S. clip, but it’s also exactly half the latest inflation rate—suggesting there could be some serious catch-up for wages in the coming year.

Central bank hikes: After last week’s big swing and a miss on the Bank of Canada by most forecasters (present company excluded, of course), analysts appeared to get it right on the Bank of England this week. The BoE’s 25 bp rate hike marked the first full-on tightening move by a G7 central bank of the cycle (after their mini 15 bp budge in December). However, even here there was some surprise, as almost half the voting members pushed for a 50 bp move, powering the pound above $1.35, and setting the stage for more aggressive moves later this year. Even the ECB sounded less dovish this week as well, as inflation surprised at a meaty 5.1% y/y last month (a record high for the Euro Area’s 23-year history), while unemployment eased to a record low of 7.0%.

The combination of a robust U.S. jobs report, the BoE narrowly missing a 50 bp hike, and even the ECB not ruling out a rate hike later this year conspired to ramp up the odds of more aggressive action by the Fed. Market pricing is now placing almost a 40% chance of an opening salvo of 50 bps by the Fed in March, and a bit more than our cumulative 125 bps of rate hikes for all of 2022. We still believe that a 25 bp hike is the more likely option, and Fed speakers tended to lean that way as well this week, but there will be another jobs report and lots of inflation releases to chew on in the meantime, and the 25/50 debate will continue. Treasury yields reflected the amped up odds, as 2s rose 14 bps on the week to above 1.3% and 10s rose a bit more to a pandemic high of 1.93%.

The Bank of Canada will not have the luxury of another employment report before next deciding on rates at the start of March. There may be some mild communications challenge in explaining a rate hike in the face of a weak January, but the coming CPI release may provide all the justification the Bank needs. Moreover, early reports from the big-city housing markets revealed zero let-up in the ‘speculative fever’, also weighing in favour of fast action.

Oil prices: Adding yet another element of urgency to the task at hand for central banks is the unstoppable rise in oil prices. WTI leapt to US$93/bbl on Friday, up more than 6% on the week, and more than 60% y/y. OPEC+ studiously stuck to its plan of gradual increases in production this week, apparently totally unfazed by the pronounced strength in crude prices. Some have cited the tensions in Ukraine as a cause of the latest bounce, but it seems that something more fundamental has lifted prices to their highest level since 2014—namely the lack of a sizeable supply response to the big comeback in global demand in the past year. At the start of the year, many analysts called for a moderation in crude prices, with the conventional view looking for prices to simmer down to $70-75. The upside surprise simply cranks up the risk on an already fraught inflation outlook globally.

Canadian dollar: This is the equivalent of the loon that didn’t cry. Even amid sustained strength in oil prices, the Canadian dollar remains incredibly stable. Not only did it barely budge on net this week even as oil prices jumped, it is almost unchanged from a year ago (at $1.278/US$, or just over 78 cents). This defies the conventional wisdom that the loonie is a petro-currency. What gives? In part, the currency has been held back by generalized strength in the U.S. dollar, as the view on the Fed has shifted so abruptly. Yet, the greenback mostly eased this week, and the Canadian dollar still did not benefit. True, the BoC disappointed markets by not hiking last week, but there is still more priced in for the Bank in 2022 than the Fed (a view with which we continue to have a serious quarrel).

In any event, the lack of a currency response to the spike in oil has lifted domestic prices to the equivalent of C$118/barrel, the highest ever aside from 2008. That’s great news for producers, but not so good for consumers, as gasoline prices continue to hit record highs, and point squarely to persistence in coming headline inflation readings.

Tech stocks: Just as it looked like tech stocks were brushing off their January funk, with the Nasdaq surging 8% in four sessions, a one-day 26% faceplant by Meta crashed the party. Even so, the index still managed to be on course for a moderate weekly gain, after eking out a puny rise last week. More broadly, both the S&P 500 and the TSX also managed a second week of decent gains after a shaky start to the year. Note that the TSX is now up fractionally since the start of 2022 (as of Friday noon), while the S&P 500 is still smarting with a 6% drop. Clearly, the relative performance of the TSX is benefitting from raging oil prices, even if the same can’t be said for consumers, bonds, or the loonie.

Doug Porter is chief economist and managing director, BMO Financial Group. His weekly Talking Points memo is published by Policy Online with permission from BMO.