Key takeaways
- Job growth slows, but the labor market remains resilient
- USMCA enters its next phase of negotiations
- Yen weakness raises the prospect of intervention
Slower job growth, but a healthy labor market
The U.S. economy added 57,000 jobs in June, below consensus expectations of 110,000. However, slower payroll growth should be viewed in the context of moderating population growth, meaning the current pace of hiring remains broadly consistent with a healthy labor market.
The unemployment rate held at 4.2%, which remains low by historical standards. Despite downward revisions to April and May payrolls, the three-month average of monthly job creation continues to exceed 100,000.
Other labor market indicators also point to continued resilience. Private sector hiring data from ADP and Revelio Labs showed solid job gains in June, suggesting the official payroll figures could ultimately be revised higher.
With corporate fundamentals remaining healthy, we do not expect a broad wave of layoffs this year. Instead, our base case is for a labor market that remains solid without becoming overheated. Against that backdrop, we continue to believe the Federal Reserve is more likely to remain on hold than raise interest rates during 2026.
USMCA enters its next phase
The U.S. announced this week that it will not renew the U.S.-Mexico-Canada Agreement (USMCA), known as CUSMA in Canada, at this time.
The July 1 review marked a soft deadline rather than a hard expiry. The agreement now enters a series of annual reviews ahead of its scheduled expiry in 2036, and our base case remains that the three countries will ultimately negotiate a revised agreement.
We expect negotiations to focus on tighter rules-of-origin requirements, increasing the amount of North American content required for products to qualify for tariff-free treatment. On balance, these changes would raise the effective tariff rate on some Canadian and Mexican exports to the U.S. The ultimate economic impact will depend on the extent of the revisions, but we expect Canada to be more affected than the U.S., as the U.S. remains by far Canada's largest export market.
Yen weakness keeps intervention in focus
The Japanese yen fell to a 40-year low against the U.S. dollar this week, breaching 162 yen per U.S. dollar, fueling speculation that Japanese authorities could intervene to support the currency.
Part of the yen's weakness reflects expectations for a more hawkish Federal Reserve, buoying the U.S. dollar against other currencies.
Over the medium term, we continue to expect the U.S. dollar to weaken and the yen to strengthen. While a stronger yen could create headwinds for Japanese exporters, the relationship between currency movements and Japanese equity market performance is not as strong as it once was.
Against a backdrop of ongoing corporate governance reforms and the potential for additional stimulus, we continue to favor Japanese equities from a tactical perspective.