Bank of Canada surveys provided mixed messages

Week in review

Canada – Employment rose 12K in September according to the Labour Force Survey. However, the jobless rate rose one tick to 7.1%, the highest since February 2014, with the participation rate remaining unchanged at 65.9 %. The employment increase was largely due to self-employment (+31K), although the private sector (+10 K) also saw some gains. Those offset declines in government (-29K). Part-time employment rose 74K, while full time employment fell 62K, both reversing the prior month’s performance. Hours worked fell 0.8% as a result. The goods sector saw the first increase in headcount in four months (+3K) as gains in construction, manufacturing, and agriculture more than offset declines for resources and utilities. Services sector employment was up 9K driven by health, info/culture, business services, which offset large declines in education (-51K) and accommodation/food services. With the exception of Ontario and Newfoundland/Labrador, all other provinces saw employment gains in September.

All told, while the September LFS was in line with consensus expectations in terms of jobs created, the details of the report were not encouraging. The gains were largely due to selfemployment and part-time positions, i.e. not the type of jobs that will help boost consumption or purchase homes. The decline in government employment was expected after massive gains in prior months. It’s worth noting, however, that Statcan often struggles with seasonal adjustment factors for education employment at this time of the year. But the private sector gains were not enough to offset government job losses, leaving paid employment down for the second time in three months. Also disappointing is the second monthly drop in Ontario employment ─ there were losses in the manufacturing sector but gains in construction employment. Given how choppy the LFS can be, it’s best to look at the longer term trend for a more accurate picture of the Canadian labour market. On that note, Canada has averaged 14K jobs/month so far this year, with 4K coming from the private sector, 4K from government and 6K from self-employment. This isn’t a disaster, but it’s not a stellar performance either. Going forward, we’ll need to see further gains in cyclical sectors such as manufacturing and construction to assuage concerns of an economic relapse.

Housing starts jumped another 7.7% to reach 230.7K in September, the highest since August 2012. Consensus was expecting a decline to 202K. The increase in starts was due to both rural (+7%) and urban areas (+7.7%). The jump in urban starts was again largely due to multis (+10.5%) although there was also a 0.8% gain for single family homes. On a regional basis in urban areas, gains were reported in Atlantic Canada (+42%), Quebec (+26.5%), the Prairies (+13.4%), and BC (+7.4%). In contrast, Ontario starts were down (-4.1%), although that came after a massive surge in the prior month.

Building permits fell 3.7% in dollar terms in August disappointing consensus which was looking for a small increase. August’s decline was due to a 5.1% slump in the value of residential permits while the non-residential sector saw a milder 1.3% drop. In real terms, residential permits fell 4.6% due to a 5.6% drop for multis and a 2.4% decrease for singles.

The merchandise trade deficit widened to C$2.5 bn in August, from a revised C$0.8 bn deficit in the prior month. That was the largest goods trade deficit in three months. The deterioration was due to declining nominal exports (-3.6%) and rising nominal imports (+0.2%). Exporters saw declining sales of energy, aerospace, industrial machinery, consumer goods, and agricultural products, which more than offset increases for autos, electronics, metal ores and forestry. The increase in imports was largely due to agricultural products and industrial machinery among others, which offset declines for electronic equipment and energy. The energy trade surplus fell to just C$3.4 bn, the lowest in five years. In contrast, the auto trade balance (-C$0.7 bn) was the best in five years. That, however, didn’t prevent the non-energy trade deficit to widen to C$6 bn, the worst in three months. In real terms, Canada’s exports fell 1.4%, while imports rose 0.1% in August. Still, thanks to a strong handoff from June and a solid July, the third quarter is on track to see healthy growth in real exports, which contrast sharply with flat imports. So, trade is set to be a contributor to Q3 GDP growth.

The business outlook improved a bit according to the Autumn edition of the Bank of Canada Business Outlook Survey. While firms reported soft sales growth over the past 12 months, they were more optimistic about sales over the next year. Intentions to invest in machinery and equipment and to increase employment were the best since last year. However, capacity pressures fell sharply. Inflation expectations were up slightly but remained low ─ about 70% of firms expect the annual inflation rate to remain below 2%. Firms, particularly those involved in the energy sector, reported tightening in credit conditions compared to the previous three months. That was confirmed by the separately-released BoC Senior Loan Officer's survey for Q3 which showed lending conditions tightening from the prior quarter. With price conditions almost unchanged, the overall tightening was entirely due to non-price conditions for corporate and commercial borrowers, particularly in the oil and gas sector.

All told, the Bank of Canada surveys provided mixed messages. The good news is that firms were less downbeat than in the summer, with better intentions to hire and invest. That’s due to their expectations of better sales ahead thanks to an improved outlook for exports, courtesy of a more competitive Canadian dollar and a resurgent US economy. But it’s unclear if firms will actually invest considering the sharp drop in capacity usage. The same applies to hiring given that the proportion of respondents facing labour shortages fell to a 4-year low. But what’s more concerning in both of those surveys is the tightening in credit conditions. The SLO report showed a positive print for the third month in a row (a positive number suggests tightening conditions), something that hasn’t been seen since the 2009 recession. Much of the tightening is, not surprisingly, happening to borrowers in the oil and gas sector. The Bank of Canada will like that inflation expectations remain well anchored because that gives it the latitude to keep interest rates low for longer to reduce the odds of the observed credit tightening spreading to non-resource sectors as well.

United States – The non-manufacturing ISM index fell from 59 to 56.9 in September, the lowest in three months. The business activity index fell to 60.2, a 4-month low. New orders dropped to 56.7 (albeit still in expansion mode), while the prices sub-index fell into contraction territory, both measures at their lowest since February. On a positive note, the employment sub-index rose a bit to 58.3.

The trade deficit widened to US$48 bn in August from US$41.8 bn in the prior month. The deterioration in the trade deficit was due to rising imports (+1.2%) and falling exports (- 2%) in nominal terms. In real terms, exports were down 1.5%, while imports jumped 3.1%.

The weekly jobless claims report showed initial claims falling 13K to 263K in the week of October 3rd. The more reliable 4- week moving average dropped further to reach 268K. Continuing claims for the prior week rose 9K to 2.20 million.

The Fed minutes showed that FOMC participants were encouraged by improving US economic data. Still, the FOMC refrained from raising interest rates because of its concerns about emerging markets, in particular China. The Fed’s desire to hike rates soon was highlighted by the fact that most participants thought the conditions for policy firming had been met or would likely be met by the end of the year. Some participants thought that delaying hikes any further risked an undesired buildup of financial imbalances that could not only be costly to unwind but also have adverse consequences for economic growth. They believed a prompt decision to hike rates could provide a signal of confidence in the strength of the economy which would in turn spur economic activity. On the other side of the argument were the doves who were worried that a premature tightening might erode the credibility of the Fed’s inflation objective. They argued monetary policy was better positioned to respond effectively to unanticipated upside inflation surprises than to persistent below-objective inflation.

There were discussions about reducing the size of the Fed’s balance sheet by ceasing to reinvest principal payments from its securities whenever a threshold for the fed funds rate is reached. Several participants said those reinvestments were needed to help manage potential risks brought by rate hikes. In contrast, some participants pointed to the high costs of keeping such a large balance sheet and added that the FOMC could choose to resume reinvestments if macroeconomic conditions warranted.

World – The Bank of Japan left monetary policy unchanged at its meeting this week. The central bank maintained its policy of increasing the monetary base by 80 trillion yen per year. In a press conference BoJ Governor Kuroda supported the no-change decision by highlighting positive signs for the economy such as business investment plans, and also saying that inflation expectations remain stable. However, he didn’t rule out further stimulus if he felt the economy needed it. Still in Japan, August data showed labor cash earnings rising just 0.5% and machinery orders slumping 3.5%, both on a year-on-year basis. In the Eurozone, retail volumes were flat in August. Gains in France, Spain, Portugal, and Ireland offset declines elsewhere including Germany.

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