ON DECK FOR WEDNESDAY, FEBRUARY 5
KEY POINTS:
- Markets focused upon US, Eurozone labour markets
- Eurozone wage tracker points to coolest pressures since 2021Q3…
- …but with substantial caveats
- US ADP, ISM-services on tap and may further inform nonfarm expectations…
- ...but be very wary of attaching much significance to what they show
- Canada to update trade figures
- Trump’s latest stunningly ignorant remarks roil the Middle East
Light overnight developments were primarily focused upon further evidence of wage disinflation in the Eurozone, albeit with strong caveats. EGBs were already richer perhaps in anticipation of soft wage figures that reaffirmed the move down in yields. The dollar is broadly softer. Equities are on their backfoot with broad but mild declines across US futures and most of Europe and flat TSX futures.
THE ECB’S ‘WAGE TRACKER’ SLOWS, WITH STRONG CAVEATS
The ECB’s experimental ‘wage tracker’ recorded an estimated growth rate for 2025Q4 of 1.456% y/y (chart 1). That’s the lowest reading since 2021Q3 and hence it continues to crash from the pandemic-era peaks. This measure merely takes known information on collective bargaining agreements to date and maps out the path for y/y wage growth one year ahead.
One obvious caution is the role of year-over-year base effects. The 2025Q4 prediction is based off of the record peak that was set in 2024Q4 at 5.3% y/y.
Also note that the employee coverage ratio for the latest readings reached a low of 34.8% and may not be indicative of broader wage pressures.
New collective bargaining agreements could change the picture.
There are also other wage measures to consider. Contrast the ECB’s wage tracker against, say, Indeed’s wage growth tracker that measures wage gains across new job postings (chart 2). It peaked in late 2022 and those base effects have shaken out by now while continuing gains of 3¼% y/y.
Contrast the ECB’s measure against growth in unit labour costs (chart 3) that distill what’s happening to labour costs and productivity (chart 4) in one all-in measure. Trend growth in that measure has skyrocketed and labour productivity is tumbling with one solitary exception possibly being Q3 of last year which requires much more evidence in order to believe that the Eurozone is suddenly some great productivity miracle.
US DEVELOPMENTS
Data risk will dominate over Trump’s latest totally ignorant remarks, this time about plans for ‘the Gaza thing’ as he put it and that are sparking widespread condemnation across the Middle East.
The main calendar-based focal points today will be US ISM-services for January including the employment subindex (10amET), US ADP private payrolls in January (8:15amET), and Canada’s trade figures (8:30amET). The US releases will be warm-ups for Friday’s nonfarm payrolls. See my Global Week Ahead for a preview of it.
ADP matters only if there are large deviations from expectations for private nonfarm payrolls and even then it’s a stretch. I’ll update the probability of surprise estimates based on past initial ADP and private nonfarm readings after we see what the random number generator spits out.
Little change is expected for ISM-services. The employment component of ISM-services matters more than the one from the manufacturing survey given the weight on services in the US economy, but in all cases, the advance indicators don’t perform very well individually as predictors nonfarm payrolls. They are very, very rough guides at best.
That’s true of ISM-services-employment (chart 5), ADP and the large deviations that routinely arise (chart 6), consumer confidence jobs plentiful (chart 7), JOLTS (chart 8), NFIB-hiring that doesn’t arrive until next week, claims and mass layoffs that we get tomorrow. Taken together, if they paint a similar picture then they can be helpful, along with SA factors that will begin to add renewed upside in subsequent months after January, knowledge of nonfarm’s methodological quirks, and special factors.
And of course. a high degree of humility around the estimates is always required given the massive degree of statistical noise in nonfarm payrolls. I rank 5th out of about 70 nonfarm payroll forecasters and yet always make a habit of pointing out the +/-130k 90% confidence interval around estimated m/m changes in payrolls.
The coming payrolls report is also complicated by two sources of revisions to the levels. One is the final annual benchmarking revision to what state tax records indicate which affects the level last March which may affect the level but not the change for months after March. Attempts at mapping what the state records show onto nonfarm payrolls are fraught with many perils, not least of which being different methodologies. Second is the quarterly re-estimation of the birth-death model that seeks to capture changes in openings and closings not well captured by payrolls which could affect the level and the December hand-off to January.
In short, the coinciding two sources of revision risk on top of the regular monthly revisions make for more uncertainty into this one for the level and change. I went with +205k subject to a high bar set for new information to matter (consensus 170k).
We will also hear from FOMC officials including Barkin (7:30am & 9amET), Goolsbee (2:30pmET), Bowman (3pmET), and Jefferson (7:30pmET). The ECB’s Lane speaks at 9amET.
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