Memo 1: Strong job numbers could challenge rate hold plans
Central banks have been toiling for the past year to reign in stubbornly high inflation – and their fight didn’t get any easier this week, with several unexpected economic events that could threaten that hard-won progress on CPI.
First up was the Monday announcement that OPEC+ producers would cut oil output; the surprise move shook markets, with the WTI price per barrel shooting up 8%. Rising oil prices will only prove to put a boil under the already-sticky energy component of the CPI basket, adding upward pressure on inflation when central banks need it the least.
Further fuel was added to the inflation challenge Thursday morning, on the news that Canadian job numbers smashed expectations in March; Statistics Canada reports a total of 34,700 positions were added to the economy last month, well outpacing the 7,500 that had been anticipated by Bloomberg economists. Hourly wage growth also held above the 5% mark, rising 5.3% from last year to $33.12. The unemployment rate remains at 5%.
March’s labour numbers, while largely flat from February, follow booming growth in January, when a whopping 150,000 jobs were added to the market, and the 69,000 added in December.
While a robust job market is good news for Canadian workers, it presents a challenge to central banks, which need the overall economy to cool before they can truly ease up on rate hikes. Given Canadian GDP also had a stronger-than-expected showing in January, growing 0.5%, that’s only heaping pressure on the Bank of Canada’s decision to hold its trend setting rate in the months to come.
“Canada’s economy is rebounding from all of the temporary drags that drove overreaction to Q4 softness. On net, the economy over Q4 and Q1 is outpacing the Bank of Canada’s forecasts and continuing to showcase trend resilience,” writes Derek Holt, Vice President and Head of Capital Markets Economics at Scotiabank.
“What that means is that the economy is not making the BoC’s expected progress toward opening up disinflationary slack. At least not yet. Postponed. Again. And again. And again. And on both sides of the border.”
Memo 2: BoC expected to hold rates in April 12th announcement
Whether this latest data will disrupt expectations that the Bank of Canada will lower its Overnight Lending Rate by this fall remains to be seen; in fact, markets are currently pricing in the possibility of a quarter-point cut by October, with another potential one in December. However, it seems set in stone that next week’s announcement will be yet another rate hold.
As Holt adds, “Markets are pricing a quarter point BoC rate cut by September or October of this year and smaller probabilities of a cut before then that have been tamped down from recent peaks. I don’t dismiss the risk of accidents driving market turmoil while nervously awaiting how developments like political dysfunction in the US debt ceiling fracas might cast a pall over summer, but accidents are not a foundation for a forecast and at least thus far the tools at the hands of regulators and central banks have been sufficient to contain the flares that we have observed to date.”
Meanwhile, south of the border, a key measure of inflation watched by the US Federal Reserve ticked higher, stoking fears the US central bank may need to hike again. The “PCE core services” measure which broadly measures the cost of living for Americans, increased by 3.8% in February. According to Holt, “It is not yet posting enough material progress toward slowing back to the Fed’s 2% PCE inflation target.”
As a result, markets are pricing in a 55% chance that the US Federal Reserve will also hold its rate in its next May 3rd decision.
Memo 3: BoC business survey reveals recession fears
While the latest data points to a stubbornly strong economy, it would appear Canada’s business owners don’t share in that sentiment. A first-quarter business survey conducted by the Bank of Canada finds a growing share – two-thirds – anticipate a recession by the end of this year. Overall business sentiment has plunged to 35% from 60% recorded the same time last year.
According to RBC Assistant Chief Economist Nathan Janzen, this could show the true state of labour conditions, and give the BoC the impetus it needs to commit to its rate-hold stance.
“Labour markets have gotten off to an exceptionally strong start in early 2023. Still, early cracks have been forming under the surface – even as hiring has remained very strong, job openings have been edging lower and the BoC's Q1 Business Outlook Survey showed the intensity of labour shortages easing,” he writes in an economic update note. “The labour market itself is a lagging economic indicator and headwinds from aggressive central bank interest rate hikes over the last year continue to build. The BoC is widely expected to hold the overnight rate at 4.5% at next week's policy decision and we expect it to stay there for the rest of this year.”