Employment increased 45K in June according to the Labour Force Survey

Week in review

CANADA: Employment increased 45K in June according to the Labour Force Survey, well above consensus which was looking for a rise of only 10K. Thanks to this strong gain, the jobless rate dropped one tick to 6.5% despite the participation rate increasing from 65.8% to 65.9%. The increase in June employment was due to both paid jobs (+24K) and selfemployed (+21K). Among paid jobs, the private sector posted a strong 18K gain while government showed an increase as well (+6K). The goods sector rose by 16K and the services sector by 29K. Although not stellar, an 8K rise in full-time employment was still surprising as it followed a massive 77K increase in the prior month. Part-time employment, on the other hand, surged 37K. Furthermore, total hours worked were up 0.4% in the month, translating into a 4.6% annualised increase in Q2, the largest quarterly advance in 14 years. On a year-to date basis, the Canadian labour market has generated a massive 186K jobs (best performance in 7 years) thanks to a surge in full-time employment (best performance in 10 years). This has driven the unemployment rate down to its lowest level in the current cycle, indicating a labour market essentially at full-employment (i.e. at NAIRU). June's employment report was consistent with our view that the Bank of Canada will raise rates as soon as next week.In May, the merchandise trade deficit rose to C$1.09 billion from C$0.55 billion in April. The deterioration was due to imports (+2.4%) rising faster than exports (+1.3%). Most export categories saw increases in the month, with gains in metal products (+11.1%), industrial machinery (+9.0%), agricultural products (+7.6%) and aircrafts (+5.5%), among others, outweighing declines in energy products (-9.0%) and metal ores and non-metallic minerals (-7.5%). Imports, too, were up in several categories, led by aircrafts (+45.9%) and energy (+6.5%). The higher energy imports widened the energy trade deficit to C$6.2 billion from C$5.2 billion the month before. Alternatively, the non-energy trade deficit diminished to C$6.3 billion, its lowest figure in four months. In addition, the terms of trade deteriorated for a fourth consecutive month owing to soft energy prices and a sagging Canadian dollar. The trade balance picture was more favourable in volume terms, as real exports (+2.0% m/m) expanded at a faster pace than real imports (+1.7%) for a second month in a row. This suggests trade will contribute to GDP growth in Q2 after detracting from it the prior quarter.

Still in May, the value of building permit applications jumped 8.9% month on month in seasonally adjusted terms to C$7.7 billion, the third highest figure ever. The prior month, applications had edged up 0.5% (revised from -0.2%). The value of building permits issued in the residential segment spiked 10.8% as both the single-family and multi-unit sectors registered gains (7.4% and 15.0% m/m, respectively). Nonresidential permits, for their part, swelled 5.6% in value terms, boosted by strong showings in the industrial (+9.8% m/m) and commercial (+12.9% m/m) segments. At the national level, permit applications increased in 7 of the 10 provinces, led by Ontario, which registered a hefty 12.3% monthly gain. On a 12-month basis, permit applicationsnationwide were up 10.8%, driven by a 14.0% surge in the residential sector.

Markit's manufacturing PMI slid 0.4 point to 54.7 in June as new orders and employment expanded at a slower pace than previously. Despite dipping since hitting a six-year high of 55.9 in April, the overall index remained significantly above its June 2016 level of 51.8 and has now signaled growth in the manufacturing sector for 16 consecutive months.

UNITED STATES: The establishment survey showed nonfarm payrolls expanding a consensus-beating 222K in June. Adding to the good news were upward revisions to prior months that increased payrolls by 47K. The private sector added 187K jobs with gains in both the goods (+25K) and services (+162K) segments. Goods sector employment rose in construction (+16K) and mining (+8K) and stayed roughly flat in manufacturing (+1K). Private services sector employment was up in financial activities, professional services, leisure & hospitality, and education & health services. Meanwhile government added 35K positions. Average hourly earnings rose 0.2% in June, or 2.5% on a year-on-year basis (up one tick compared with May's print). In addition, the private sector employment diffusion index climbed to 59.6 (from 54.8 the prior month), indicating that job gains in June were distributed more evenly across sectors.

The other employment report, the household survey, showed employment increasing 245K in June after posting a -233K print in May. Full-time jobs were up a robust 355K on the month for a cumulative gain of 1.7 million so far in 2017. The increase in jobs during the month was offset by a one tick increase in the participation rate to 62.8%, causing the unemployment rate to add one tenth of a percentage point at 4.4%. Overall, the job reports support our view of abovepotential growth in the coming months and hint in the direction of another hike by the Fed in September.

In May, factory orders fell 0.8% on a monthly basis after sinking a downwardly revised 0.3% the prior month. Orders in the transportation segment were down 3.0% as bookings for defence and civilian aircrafts plummeted 30.8% and 11.6%, respectively. Excluding transportation, factory orders retreated 0.3%, ending a 15-month streak without a negative posting. Although total factory orders were still up a decent 4.2% on a 12-month basis, they have shown signs of weakening in the first two months of the second quarter. Indeed, assuming a flat print in June, orders will rise an annualized 1.1% in Q2, compared with 6.7% in Q1 and 11.1% in Q4 2016. Total shipments, for their part, inched up 0.1% on a monthly basis. Shipments of non-defence capital goods ex-aircraft, a proxy for business capital spending, nudged up 0.1% as well. Finally, the inventory-to-shipments ratio held steady at 1.38.

The ISM manufacturing index sprang 2.9 points to a 35-month high of 57.8 in June. This was its largest monthly upswing since January 2013. Several sub-indicators registered sizeable gains. For instance, the output tracker recorded its steepest jump since June 2006, climbing 5.3 points to 62.4. The new orders sub-index, for its part, progressed 4.0 points to 61.8. Job creation, too, accelerated in the sector as the employment gauge vaulted 3.7 points to 55.3. All of these sub-components, as well as the overall index, stood above their six-month moving average. For Q2 as a whole, the ISM manufacturing index has averaged 55.8, suggesting a more moderate—though still very healthy—rate of expansion relative to Q1 (57.0).

Separately the ISM non-manufacturing index moved up to 57.4 in June from 56.9 the prior month. The index was lifted by the new-orders subcategory, which soared to 60.5 from a six-month low of 57.7. The employment sub-index retreated from a 22-month high of 57.8 in May to a still convincing figure of 55.8

. In May, the trade deficit narrowed 2.3% to $46.5 billion as nominal exports expanded 0.4% to $192.0 billion (their highest mark in two years) and nominal imports retraced 0.1% to $238.5 billion. Exports were boosted by the automotive and consumer goods sectors. Coincidentally, imports were weakened by the same two segments. Interestingly, imports of capital goods were up 2.4% month on month and 8.4% on a 12-month basis, a good sign for business investment. Moreover, the goods deficit shrank 1.3% on a monthly basis to $67.5 billion while the services surplus expanded 1.0% to $21.0 billion. Excluding the petroleum deficit, which grew 13.7%, the overall trade shortfall narrowed 4.3% to $40.3 billion. In real terms, exports were up 1.0% while imports notched up 0.1%. With two months of data available, real exports are on pace to decrease by an annualized 0.9% in Q2. Alternatively, imports are on track to expand 1.8% on an annualized basis. Assuming nothing changes in June, trade will thus be a drag on GDP growth in Q2.

Construction spending was flat month on month in seasonally adjusted term in May after contracting 0.7% in April. The monthly decline was driven by the residential sector, which pulled back 0.5%. Alternatively, the non-residential segment advanced 0.3%, albeit after a significant drop the prior month (-1.5%). Meanwhile construction fell 0.6% in the private sector but expanded 2.1% in the public sector. Year on year, overall construction spending was up 4.5%, with the residential segment posting a sizeable 10.9% gain.

The minutes of the June 13-14 FOMC meeting, after which the Fed decided to raise interest rates 25 basis points, highlighted a division among participants as to when to begin the process of normalizing the balance sheet. Some favoured an announcement within a couple of months while others wanted to defer the decision until later in the year, fearing that progress towards the inflation target had slowed and that recent inflation softness might persist. Given that Fed Chair Janet Yellen stated in her post-meeting press conference that the timing of balance sheet normalization depended on the FOMC's confidence in the economic outlook, it appears unlikely to us that the Fed will decide to put off another hike while simultaneously announcing the start of normalization. If they did, it would send a mixed message concerning the Fed's assessment of the outlook. Instead, we expect a rate hike announcement to come with a notice that the phasingout of reinvestment will start the following month. Yellen might offer more clues on the Fed's approach next Wednesday when she delivers her semi-annual report on the economy and monetary policy before the House of Representatives Financial Services Committee.

WORLD: In the Eurozone, the seasonally adjusted unemployment rate remained at its lowest level since March 2009, pegging in at 9.3% in May, unchanged from the prior month. While the jobless rate stayed put in Germany (3.9%), it slipped a tick in Spain (to 17.7%) but added one in France (to 9.6%) and Italy (to 11.3%). While the situation has clearly improved since aggregate Eurozone unemployment peaked at 12.0% in 2013, gains have been unevenly spread across regions and age groups. For instance, the unemployment rate for Europeans under 25 years of age remains at a shocking 18.9%.

In China, the Caixin/Markit Composite PMI fell from 51.4 in May to 51.1 in June, signalling the slowest rate of business activity in a year. The decline was driven by the services sector, which saw its PMI decrease from 52.8 to 51.6 on slower job creation and softer new orders. Alternatively, the manufacturing index crawled back into expansionary territory, gaining 0.8 point to 50.4 as output and new orders expanded at a faster pace than a month earlier. On a less positive note, payrolls in the manufacturing sector continued to decline in June.

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