Bad economic news is good news for rate cuts
On the first Friday of May 2024, a paradox played out across North American markets: news of a weakening American labour market sent stocks surging in Toronto and New York alike. When April's jobs report revealed far fewer positions added than expected, investors heard not a warning but a signal — that the long season of high interest rates may at last be drawing to a close. In the strange grammar of modern finance, economic softness had become a form of hope.
- April's U.S. jobs report landed well below forecasts — 175,000 positions added against an expected 233,000 — and the gap between those two numbers moved markets more than any rally cry could.
- What might elsewhere read as economic trouble was received on trading floors as relief, since a cooling labour market weakens the case for keeping interest rates painfully high.
- Toronto's main index climbed 124 points, the Nasdaq leapt nearly two percent, and Apple alone surged six percent on a buyback announcement — the enthusiasm was wide and fast.
- Portfolio managers began speaking openly of a 'Goldilocks' moment: the economy slowing just enough to invite rate cuts, but not so sharply as to signal collapse.
- The Bank of Canada is now eyed for a possible June cut, while the U.S. Federal Reserve is being pencilled in for September — the long era of monetary tightening edging toward its end.
Stock markets on both sides of the border had a striking Friday. Toronto's main index closed up 124 points, while New York saw the Nasdaq jump nearly two percent, the S&P 500 add 63 points, and the Dow gain 450. The catalyst was, by ordinary logic, unwelcome news: the American economy had added only 175,000 jobs in April, well short of the 233,000 economists had forecast. Unemployment nudged up to 3.9 percent, and wage growth came in softer than expected.
But markets do not always read bad news as bad. For investors who have spent months watching the Federal Reserve hold interest rates at punishing levels, a cooling labour market is precisely the kind of signal that could finally prompt a cut. Andrew Buntain of Fiduciary Trust Canada described the report as 'not too cold, not too hot' — the Goldilocks outcome central banks have been quietly hoping for. Slowing without collapsing, the economy may now give the Fed room to ease without reigniting inflation.
The rally was broad. In the U.S., technology led — Apple surged on a major buyback announcement, Microsoft and Nvidia both climbed. In Canada, base metals, utilities, and telecom carried the index higher, sectors that tend to benefit when borrowing costs fall. Commodity markets shifted quietly alongside: oil dipped, gold eased, and the Canadian dollar firmed slightly.
The emerging picture is one of transition. A September rate cut from the Federal Reserve now looks plausible. For the Bank of Canada, facing an economy more exposed to mortgage rates, June is increasingly in view. After a long period of monetary tightening, the markets are beginning to price in a different kind of future.
The stock market had a very good Friday. In Toronto, the main index climbed 124 points to close at 21,947. In New York, the gains were sharper still—the Nasdaq jumped nearly two percent, the S&P 500 rose 63 points, and the Dow added 450. The reason was counterintuitive: the U.S. economy had weakened.
April's jobs report, released that morning, showed the American labour market adding only 175,000 positions. Economists had forecast 233,000. The unemployment rate ticked up to 3.9 percent. Wage growth came in softer than anticipated. On the surface, these are signs of trouble. But for investors and traders watching the Federal Reserve, weakness in the job market means something else entirely: the central bank might finally start cutting interest rates.
Andrew Buntain, a portfolio manager at Fiduciary Trust Canada, explained the logic. The Fed has held rates steady because the economy has remained resilient. Inflation has been stubborn. But a cooling labour market changes the calculus. "Financial markets have responded robustly in North America, with equity markets and bond yields falling," Buntain said. For months, investors have been waiting for rate cuts. Bad economic news, paradoxically, is the permission slip they need.
The market's enthusiasm was broad. In the U.S., technology stocks led the way. Apple surged nearly six percent after announcing a major stock buyback. Microsoft rose 2.2 percent. Nvidia climbed 3.5 percent. In Canada, strength came from base metals, utilities, and telecom—the kinds of sectors that benefit when borrowing costs fall and economic uncertainty eases.
Buntain saw the jobs report as "not too cold, not too hot"—the Goldilocks outcome the Fed has been seeking. It suggests the economy is slowing without collapsing, which means the central bank can begin easing without reigniting inflation. The market agreed. For the U.S. Federal Reserve, a September rate cut now looks plausible. For the Bank of Canada, which faces a more mortgage-sensitive economy, a June cut is increasingly likely.
Commodity markets reflected the shift. Crude oil fell 84 cents to $78.11 a barrel. Gold dipped a dollar to $2,308.60 an ounce. Natural gas rose slightly. The Canadian dollar strengthened to 73.14 cents U.S., up from 73.00 the day before. These moves are the market's way of pricing in a new reality: central banks are preparing to loosen their grip, and the long period of high rates may finally be ending.
Citas Notables
Financial markets have responded robustly in North America, with equity markets and bond yields falling— Andrew Buntain, portfolio manager at Fiduciary Trust Canada
This is a very pleasing report to the Fed, in that it's not too cold, not too hot— Andrew Buntain
La Conversación del Hearth Otra perspectiva de la historia
Why would weak job numbers make the stock market happy? Shouldn't that be bad news?
Because investors have been waiting for the Federal Reserve to cut interest rates, and the Fed won't move until it's confident inflation is under control. A weaker job market signals that inflation pressure is easing, which gives the Fed cover to start cutting.
So the market is betting on lower rates?
Exactly. Lower rates mean cheaper borrowing for companies and consumers. Stock valuations look more attractive when discount rates fall. It's also good for bonds. So you get a rally across both asset classes.
But doesn't a weak job market hurt corporate earnings?
It can, over time. But in the short term, the market is focused on the policy shift. The Fed cutting rates is seen as a bigger driver of returns than a modest slowdown in hiring.
What about Canada? Why would the Bank of Canada move faster?
The Canadian economy is more sensitive to mortgage rates because housing costs are a bigger part of household budgets and inflation measures. A weaker jobs report gives the Bank of Canada more room to cut sooner than the Fed.
So this report is a turning point?
It could be. For months, the market has been waiting for evidence that the economy is cooling enough for rate cuts. This jobs report provided that evidence. Whether the enthusiasm lasts depends on what comes next—if more data confirms the slowdown, the cuts happen. If the economy re-accelerates, the market's mood could shift quickly.