11 Sep

Dr Coopers latest thoughts on job numbers

General

Posted by: Victor Bokrossy

The Bank of Canada told us just this week that they would be closely monitoring the employment data to assess the need for further tightening in monetary policy. The August jobs report confirmed that the Canadian labour market remains strong, moving closer to full employment.

The country added 22,200 jobs in August, the ninth consecutive month of employment gain, beating expectations once again. The unemployment rate fell to 6.2%, its lowest level since the financial crisis. Tighter labour markets pushed average hourly wage gains up 1.8%, the highest since October 2016. The 1.8% rise in earnings in August compares to 1.2% in July and a low in April of 0.5%. Also, hours worked were up 2.2%, the biggest gain in two years. Indications of increasing wage pressure provide validation of the Bank of Canada 25 basis point hike in the overnight rate to 1.0% that followed a similar increase at the policy meeting in July.

Provincially, Ontario was the only province with notable jobs gains in August. Employment declined in Nova Scotia and was little changed in the other provinces (see table below).

Employment has been rising at its fastest pace in almost a decade, boosting incomes and helping to fuel what many consider to be a consumer spending binge. Household debt-to-income continues to rise–a prolonged concern of the Bank of Canada and the federal government. With second-quarter GDP growth at a whopping 4.5%, Canada’s economy is the fastest growing in the Group of Seven.

The Bank of Canada meets again on October 25th. By that time, they will have seen the September employment report as well. Another strong report may increase the BoC’s resolve to continue to raise interest rates, particularly if wage gains accelerate further.

The details of today’s report were not as strong as the headlines suggest. The overall job gain masks a sharp drop in full-time work, which was down by 88,100. Part-time employment, which is less desirable, was up 110,400. Most of the decline in full-time employment occurred for youth aged 15 to 24. The overall employment decline for youth was accompanied by a notable decrease in their labour force participation as fewer young people looked for work. But job numbers in this age category are often distorted this time of year by back to school and summer job factors.

Another negative, self-employed workers, including unpaid workers in family businesses, were responsible for the full increase in total employment. Also, goods-producing industries posted a 13,700 decline, ending their five-month run of job gains. That was due to an 11,100 drop for manufacturers.

If we continue to see above-potential growth in the economy, as I expect, and consumer price inflation starts to trend closer to the 2% target, the Bank of Canada is likely to continue to tighten. I expect the benchmark overnight interest rate to rise 100 basis points to 2.00% by the end of 2018. To reach the 2% level implies four more rate hikes by the end of next year.

 
6 Sep

Dr Sherry Coopers take on the new interest rate hike

Latest News

Posted by: Victor Bokrossy

The Bank of Canada raised the target overnight rate another 25 basis points to 1.0% making it two hikes in a row following seven years of increasing monetary stimulus. The outsized 4.5% growth in GDP in the second quarter precipitated this action, despite two offsetting factors: the recent surge in the Canadian dollar, up more than 8% in the past three months, to over 81 cents U.S.; and the continued below-target rate of inflation.
Today’s monetary tightening comes at the same time that Federal Reserve officials are suggesting that another rate hike in the U.S. next week is unwarranted–adding further upward pressure on the loonie. The economic and political uncertainty in the U.S. has put considerable downward pressure on U.S. bond yields, while in Canada, interest rates are rising.

The Canadian economy is on a tear, dramatically outperforming the U.S., and the battering by both Hurricanes Harvey and Irma will only widen the disparity. The growth in Canada is becoming “more broadly based and self-sustaining,” according to the Bank’s press release. Last week’s Q2 GDP release showed that consumption is robust, supported by “solid employment and income growth”. Business investment and export growth have also picked up. The central bank does, however, expect a more moderate pace of economic growth in the second half of this year.

The housing sector has slowed in some markets–particularly around the GTA–in response to recent changes in tax and housing regulations in Ontario. But this is a change welcomed by the Bank and government authorities concerned about the continued rise in household debt. Tighter monetary policy portends further increases in mortgage and other lending rates. The Bank suggests that “given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.” You can’t get more transparent than that. The Bank of Canada welcomes a slowdown in housing and borrowing activity.

Questions remain regarding the potential growth of the economy, which was earlier estimated by the Bank’s economists to be about 1.7%. While the economy is closer to full employment than earlier forecasted, the Bank believes there remains excess capacity in the jobs market. This statement possibly suggests that the economy can grow at a faster pace than the Bank initially thought without triggering inflation.

Inflation does not currently appear to be of primary concern. While inflation remains below the target rate of 2% and wage pressures are subdued, there has been a slight increase in the consumer price index and the Bank’s core measures of inflation, which is “consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack.”

Once again the Bank of Canada reminds us the path of further policy decisions is not predetermined but will be dependent on incoming economic and financial data. This cautionary note is consistent with the “significant geopolitical risks and uncertainties around international trade and fiscal policies.”