Jobless Claims Data Continue to Suggest Soft Employment Conditions
Initial jobless claims increased 12,000 to 321,000 during the week ended November 18. The four-week moving average at 317,000 is the highest since August 16, 2006. The year-to-year change in seasonally unadjusted initial jobless claims has been positive in two out of the last four weeks. Continuing claims, which lag initial claims by one week, rose 14,000 to 2.454 million and the insured unemployment rate held steady at 1.9%.
The main message is that initial jobless claims data point to soft labor market conditions. The nature of the employment report of November, to be published on December 8, holds the key to whether the FOMC will change the tone of the policy statement. Payrolls increased only 92,000 in October and the unemployment rate was 4.4%.
Canada: Falling Energy Prices Lower Both Retail Sales and CPI
Retail sales fell an unexpected 1.2% in September on the back of soft auto sales and an 18.7% year-on-year decline in gasoline prices. On a quarterly basis the sales growth rate slid to 1.4%, a full percentage point lower than the 2.4% increases reported in the previous two quarters. Plummeting gas prices have forced a revision to third-quarter GDP growth estimates and have also spurred a divergence in headline and core inflation (see the October 20th Daily Global Commentary).
Today’s October CPI report showed a modest uptick in both all-items and core prices, but data were largely in line with expectations. The 12-month all-items rate edged upwards (0.9%), but remained below 1.0% for the second straight month. The central bank’s preferred measure of core inflation, CPI-ex 8 volatile components & Indirect Taxes, remained well-anchored within the 1-3% targeted range, but inched up to 2.3%.
Gasoline prices fell 14.3% on a year-over-year basis in October. This fall was a deceleration from last month’s 18.7% decline, but was enough to help mitigate housing-related price pressures. Given the fact that gasoline station sales amount to approximately 10% of total retail trade in Canada, it seems likely to expect weaker spending again in October. With Canada’s export and manufacturing markets are already hurting, if consumer spending slows, growth prospects will start looking a little dismal. (While we do not place a lot of stock in the Canadian index of leading economic indicators as a predictor of economic growth, it is worth noting that it rose at its slowest rate in 19 months in October).
The retail trade and CPI reports add some inexpensive fuel to our forecast for measured policy easing in the first half of 2007. In its latest Monetary Policy Report Update, the Bank of Canada identified demand-side inflationary pressures as the greatest risk to its outlook. With consumers starting to show some chinks in their armor and housing activity slowing, however, it might not be too long before the Bank of Canada identifies lack of demand-side pressures as the greatest risk. The Bank of Canada will meet on December 5th to set interest rates. We expect no change in its 4.25% policy rate.
