STIR: Front End Fed Pricing Slightly More Hawkish As Unemployment Falls

The delayed Employment Cost Index report for Q3 saw its softest nominal wage pressures since 2021 even if the wages & salaries component has recently seen equally soft quarters. At these rates, the labor market is unlikely to be putting material pressure in either direction on inflation. 

• The ECI increased 0.79% non-annualized in Q3 (sa, cons 0.9) after an unrevised 0.94% in Q2 and 0.89% in Q1. It’s the softest quarter since 2Q21.
• The wages & salaries component also moderated to 0.79% after 1.01% in Q2 although that’s back close to the 0.77% in Q1.
• The private sector metrics broadly reflect these trends, at 0.80% for total compensation and 0.80% for wages & salaries.
• It leaves total employment compensation costs running at 3.2% annualized in Q3 after 3.8% in Q2, as are private sector wages & salaries at 3.2% annualized after accelerating to 4.2% in Q2.  
• The combination goes against the Q3 acceleration in average hourly earnings growth to 4.0% after 3.3% in Q2, or 3.8% for the non-supervisory category after 3.4% in Q2.
• We’re yet to see Q3 productivity data – the preliminary report is now set for Jan 8 vs Nov 6 originally scheduled) but having been running at 1.5% Y/Y in Q2, it should continue to see employment costs broadly consistent with the inflation target rather than implying material risks in either direction. 

• -2,000 WNH6 118-07, sell through 118-08 post time bid at 0845:05ET, DV01 370,000.
• The 30Y Ultra contract trades 118-07 last (-4)

Pricing for today's Bank of Canada decision (945ET) shows extreme confidence in a rate hold, with only about 1bp of a cut priced. That confidence looks justified given that the BOC clearly telegraphed at its last meeting in October that it had ended its easing cycle as rates were at "about the right level", and data since then has argued more if anything for tightening than for further easing (MNI's preview of today's decision is here).

• With strong labour market data in particular since the October meeting, markets have gone from pricing in a flat rate path through 2026 with a slight easing bias, to an expectation of a rate hike by Q4 (about 20bp cumulative through Sep 2026 and 34bp through Oct 2026).
• Today's message is expected to be pretty neutral on that front - emphasizing again that Governing Council sees rates at about the right level but is prepared to respond accordingly if the outlook changes - but there will be significant attention on any implicit pushback to the 2026 hiking narrative.
• Gov Macklem in the October press conference said that the BOC would be able to assess incoming data relative to its base-case outlook and adjust policy if there has been a “material change”. We think that's a key phrase that he will be asked about today - it seems likely Macklem will argue it's too soon to determine that there has truly been a “material” shift in the outlook, even if incoming data, particularly GDP and labour market readings, have surprised to the upside versus the Bank’s October Monetary Policy Report projections as well as the market’s.
• Indeed, even the strong data include some caveats in what has been a volatile year for Canadian macro amid a broader structural economic transition. That should keep the BOC patient in discerning the signal from the noise.
• While the press conference will probably be the focus in this regard, MNI's Instant Answers for today's decision releases include the following questions:
• Does the Bank signal it is prepared to lower rates in the future?
• Does the Bank signal it is prepared to raise rates in the future?
• Does the Bank say the policy rate appears appropriate if its economic forecast is realized?
• Does the Bank signal it intends to leave rates on hold?