Employment fell 9.4K in June according to the Labour Force Survey

Week in review

Canada – Employment fell 9.4K in June according to the Labour Force Survey, as gains in the West were more than offset by the sharp decline in Ontario. As a result, the unemployment rate rose one tick to 7.1%. The decline in June employment was due to losses in the private sector (-21K) and in government (-12K) which dwarfed increases in selfemployment (+23.4K). All in all, paid employment i.e. total employment excluding self-employeds, slumped 33K. The goods sector lost 3K jobs (fourth decline in a row) as losses in agriculture, resources, utilities and manufacturing, more than offset gains in construction. Services sector employment dropped 6K driven by the slump in business services, accommodation and transportation. Full-time employment rose 34K, while part-time employment was down 43K. Hours worked, however, fell 0.4%. Hourly earnings were up 1.9% on a year-on-year basis (from a multi-year low of 1.4% in May). All told, aside of the rebound in full-time employment, June’s LFS report was generally weak with declines in private sector and paid jobs. The LFS continues its choppy sequence, i.e. the report hasn’t had back-to-back gains (or losses for that matter) since November last year. In light of this volatility, it’s best to look at the 6-month moving average for a more reliable picture of the Canadian labour market. On that measure, Canada is creating on average roughly 9K jobs/month, mostly selfemployeds and in government, i.e. not a stellar performance by any means.

Building permits expanded a consensus-topping 13.8% in dollar terms in May. The soaring permits were driven by the non residential sector (+20.8% helped by solid gains in commercial permits, yet again), complemented by a solid 9.5% jump in the value of residential permits (+4.6% for singles and +16.1% for multis). In real terms, residential permits rose 11.8% with a 17.3% jump for multis and a 2.8% increase for singles.

Housing starts rose 0.6% in June to a consensus-topping 198.2K (from a downwardly revised 197K in the prior month). The increase in starts was due to an increase in both rural (+3.7%) and urban areas (+0.3%). Urban starts were supported by singles (+0.9%), while multis saw a marginal increase (+0.1%). On a regional basis in urban areas, gains in the Prairies (+37.4%) and Atlantic provinces (+8.1%) offset declines in Ontario (-16%), Quebec (-13.3%), and BC (-5%). Overall, June’s housing starts were better than expected. As in the prior month, starts were tilted towards singles. That’s good news not only because of the apparent stabilization of multis after the earlier overbuilding in that category, but also because singles contribute more per unit to GDP and that bodes well for the contribution of housing to Q2 GDP.

The Summer edition of the Bank of Canada's Business Outlook Survey showed a modest improvement in sales growth over the past 12 months. Firms expect a further improvement over the next year. Intentions to invest in machinery and equipment improved further, with the related balance of opinion rising three points to 24. One has to go back to 2011Q2 to see a better reading. Part of that uptick is due to exporters who are planning to increase capacity to cater for foreign demand which they expect to be robust. Hiring intentions remain positive albeit less so than in the spring, with the balance of opinion falling to 28, the lowest since 2012Q3. The proportion of respondents facing labour shortages dropped a bit to 22% (from 23% in the spring), and firms said that capacity pressures eased a bit, with just 34% of respondents, versus 45% in the spring survey, stating either some or significant difficulty in meeting an unexpected increase in demand. Expectations of input price inflation fell sharply, with the corresponding balance of opinion dropping to -8. It’s the first time since the recession that more firms expect input price inflation over the next 12 months to be lower than in the preceding year. That’s because many firms have already adjusted to a much depreciated Canadian dollar, and so expect input price inflation to now be lower than last year. Similarly, firms do not expect output price inflation to be hot, with the balance of opinion falling to just 6, the lowest since 2013Q1. The reason given was the strong competition in the marketplace and tepid domestic demand. That’s reflected in inflation expectations as almost two-thirds of respondents expect inflation to be in the bottom half of the BoC’s 1-3% target range. The balance of opinion on credit conditions improved further as it moved deeper into negative territory at 27, the best on records. Similarly, the separately-released BoC Senior Loan Officer's survey for Q2 showed further easing in lending conditions with the overall index moving from -10.9 to - 12.8 in Q2, the best since 2013Q3. The improvement was due to both the price and the non-price aspect. All categories of borrowers seemed to have benefitted from the overall easing in lending conditions.

United States – The National Federation of independent business index (NFIB), a measure of small business confidence, fell 1.6 points to reach a 3-month low of 95 in June. Businesses felt less optimistic about the economy and the sales outlook as both related indices dropped. Businesses were, however, more keen to hire than in recent months.

Weekly jobless claims data for the week of July 5th showed initial claims falling to 304K (from an unrevised 315K in the prior week). The more reliable 4-week moving average fell to 312K. Continuing claims for the prior week rose 10K to 2.58 million. The persistence of relatively low claims suggests the extension of the current employment uptrend, i.e. non-farm payrolls’ over 200K net new jobs/month.

The Fed meeting minutes provided some additional information about the thinking at the FOMC. According to the minutes, the Fed expects to end QE by October with a $15 bn reduction in the pace of purchases in that month compared to the usual $10 bn/month cut since tapering started. Normalization of policy will be done primarily using interest on excess reserves while the overnight reverse repurchase agreement should play a supporting role by helping to firm the floor under money market interest rates. The fed funds rate was discussed and most participants agreed that it still has a role to play in the operating framework and communication.

With regards to when the Fed should end its practise of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency MBS in agency MBS, Fed staff models suggest timing doesn’t really matter, with limited implications for the economy, the Committee’s statutory objectives, or remittances to the Treasury. Many FOMC participants agreed to ending the reinvestment at or after the time of the first rate hike while others opted for a more graduated approach with respect to the pace of the wind-down. It was noted that there was a wide dispersion of the participants’ projected appropriate fed funds rate by the end of 2016. Yet most participants saw the target rate significantly below the longer-run level in that year. About half of these participants attributed the low level of the federal funds rate to inflation well below the 2% objective, while others cited some combination of a lower equilibrium real interest rate, continuing headwinds from the recession, and a desire to raise the federal funds rate at a gradual pace. As far as the longer run level of the fed fund rate, some participants revised down their estimates due to a lower assessment of the longerrun level of potential output growth.

World – The Bank of England left monetary policy unchanged at its meeting. The Bank rate was maintained at 0.50% while the size of the asset purchase program was kept at £375 bn. In China, June data showed exports rising 7.2% on a year-on-year basis, with imports up 5.5% from year-ago levels. The consumer price annual inflation rate, also for June, fell two ticks to 2.3%. May industrial production slumped 1.8% in Germany and 1.7% in France. The disappointing German data is largely a result of weak exports, the latter falling 1.1% in the month. Still, the current account balance in the eurozone’s largest economy remained well in surplus territory at €13.2 bn in May.