Historic employment revisions and persistent inflation cloud the policy outlook
The U.S. labour market delivered a paradoxical message in early 2026, with January’s employment report revealing both unexpected strength and underlying fragility. While 130,000 jobs were added—well above the 70,000 analysts had expected—massive downward revisions to 2025 data painted a sobering picture of persistent labour market weakness. Combined with January’s inflation data showing renewed price pressures in key categories, these developments have prompted financial markets to reassess the Federal Reserve’s expected monetary policy trajectory.
The Bureau of Labor Statistics’ annual benchmark revision revealed one of the largest adjustments on record. Total 2025 job growth was slashed from 584,000 to 181,000—a downward revision of 403,000 positions. This recalibration dropped the monthly average from approximately 49,000 to just 15,000 jobs, revealing that the labour market essentially stagnated throughout 2025 despite earlier optimistic readings. Modest improvements in the unemployment rate, to 4.3 per cent, and in labour force participation, to 62.5 per cent, offered little comfort in that context.
Beneath the surface, the employment picture reveals a stark divide. Healthcare dominated January’s gains, accounting for over half of new positions, while cyclical sectors suffered notable declines. The federal government shed 34,000 jobs due to administrative cuts, financial activities dropped 22,000 positions, and transportation and warehousing continued hemorrhaging jobs, losing 116,900 since January 2025. Manufacturing remains under severe pressure, down 126,000 jobs since November 2024 despite a marginal 5,000-job gain in January. This K-shaped recovery concentrates growth in defensive sectors while trade-exposed and interest-sensitive industries struggle.
The January inflation report compounded concerns about the Fed’s policy path. While headline CPI of 2.4 per cent and core CPI of 2.5 per cent appear benign, a closer examination reveals troubling dynamics. Airfares surged 6.5 per cent, public transportation jumped 5.1 per cent, miscellaneous personal services rose 3.3 per cent, and water and sewer services increased 0.7 per cent. Most critically, supercore inflation, which excludes volatile food, energy, and housing components, remains elevated, signalling persistent pricing power across services sectors. This metric weighs heavily on Federal Reserve deliberations and explains the disconnect between official statistics and public discontent about cost-of-living pressures.
Bond markets responded decisively to this data constellation. Treasury yields retreated sharply last week, with the 10-year yield falling from a six-month high of 4.30 per cent to approach 4.05 percent by Friday—the lowest level in over two months. The 2-year yield dropped nearly 10 basis points to 3.4 per cent. This rally reflects market expectations for approximately two rate cuts through the remainder of 2026. However, there remains minimal probability of Fed action in the next two meetings under Chair Powell’s leadership, as stubborn supercore inflation prevents any premature policy pivot.
Canadian bonds mirrored the Treasury rally, with 10-year Government of Canada yields easing 15 basis points to just below 3.25 per cent. Despite this correlation, the Bank of Canada faces a distinctly different calculus and shows little inclination to cut rates in 2026, maintaining a more restrictive stance than the Fed.
The combination of weak underlying employment trends, persistent inflation in key categories, and dovish bond market repricing has created a challenging environment for policymakers. While markets anticipate modest Fed easing later this year, the path remains data-dependent and vulnerable to upside inflation surprises.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Nova Scotia has made it easier for first-time buyers to step into the housing market. A new four-year pilot program lowers the minimum home down payment to just two per cent.
In this week’s Housing Affordability Watch, we explore the factors behind the program’s launch, how it compares to Australia’s deposit scheme, and key considerations for borrowers.
Read the full analysis here: [Link]
Independent Opinion
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