Good morning,
It has been a busy start to the summer, and I have never experienced the energy that the Calgary Stampede has brought to our city as this year. Across the country and South of border, the Bank of Canada (BoC) raised interest rates as expected and Inflation figures in the U.S. suggest pricing pressures continue to ease. Meanwhile, the second quarter earnings season has officially begun. We also recently received updates on the employment front in both Canada and the U.S. Overall, the labor situation in North America, despite marginal changes, remains healthy. We discuss this more below.
The Canadian economy added 60,000 jobs in the month of June, predominantly in the retail, manufacturing, health care and social services sectors. The unemployment rate increased from 5.2% to 5.4%, an uptick largely driven by a growing labor force as Canada’s population surpassed 40 million for the first time. Wage growth registered at a healthy 4.2%, but that represented the slowest pace in over a year. According to the latest outlook survey by the BoC, labor availability has become less concerning for businesses. This is a notable change from recent years when access to labor was a dominant issue for most businesses.
Meanwhile, the U.S. added 209,000 jobs in the month of June, led by the government, health care, social services, and construction sectors. While that figure was slightly lower than expected, it was offset by a near-historic-low unemployment rate of 3.6% and wage growth of 4.4% that exceeded expectations. The headline data suggest the job market remains tight, even with a slowing pace of job gains. The 6-month moving average of monthly new jobs, which was close to 445,000 a year ago, is now down to roughly 278,000. Layoffs across the technology sector and some larger companies have garnered a lot of media attention but appear to be contained as the trend of weekly initial jobless claims, which refer to claims for unemployment benefits filed by newly unemployed individuals, has only gradually been moving higher this year. All this suggests that like in Canada, the U.S. labor market remains healthy and stable, with pressures that are slowly moderating.
Much of the North American economy’s resilience to date stems from a strong employment backdrop. Consumer demand, particularly for services, continues to be strong despite elevated interest rates and prices, thanks to plentiful jobs and rising pay. Emerging signs suggest companies who were recruiting intensely just a few years ago have shifted their plans. Some have taken things further by announcing layoffs. We expect this trend may persist and potentially lead to broader deterioration in the employment picture as more interest rate increases work their way through the economy. This could strain consumer demand and force more companies to recalibrate their workforce. In other words, the pendulum of job creation may be beginning to swing the other way, albeit slowly. For these reasons, we maintain a cautious approach in managing our portfolios and are patiently waiting to take advantage of opportunities as they arise.
Lastly, we continue to receive many inquiries into the Canadian housing market given the resiliency in housing prices in the face of rate hikes. Housing is the most interest rate-sensitive sector of Canada’s economy, a fact that has been fully evident during the current tightening cycle. Our Fixed Income Team reported this morning that “home resales and prices both peaked in February 2022, the month before the BoC began its steepest tightening cycle in decades. A sizeable correction in both sales and prices ensued. However, the market found bottomed early this year when the BoC paused on its tightening cycle, and prices started rising in April and May. This rebound clearly made the BoC uncomfortable with its pause. In the minutes from their June policy meeting—which resulted in a surprise 25 bp rate hike—Governing Council expressed concern about strengthening resales as an indicator of momentum in the household sector, as well as the potential inflationary impact of rising home prices. Those concerns showed up again in justifying Wednesday’s rate hike.”
The question then leads one to ask will the BoC restarting its tightening cycle have an immediate impact? To answer this, we will get a better sense today with the release of national home sales and price data for June. Preliminary evidence from local real estate boards was mixed, according to RBC Economics, with a few regions (including Toronto and Vancouver) seeing buyers take a break in June while others saw further increases in resales. It could be that some buyers are still taking advantage of fixed-rate mortgage commitments secured before borrowing costs spiked in the past two months. As those commitments expire, potential homebuyers will find it more difficult to get into the market. The supply response—whether sellers anticipating a slower market move to the sidelines as well—will also determine how prices evolve. Lastly, one also need to consider the impact of Canada’s strong focus on immigration, as denoted by the chart below, and the demand this will place on home ownership.
As our Fixed Income Team also pointed out this morning, “falling home prices over the past year have been a factor in inflation slowing from 8.1% last summer to 3.4% in May, and a pullback in housing activity weighed on GDP growth for four straight quarters through Q1. If a nascent reversal of those trends continues, the BoC may have more work to do. For now, OIS markets are pricing in roughly 50/50 odds of another rate hike this fall.”
Please continue to call us as with any questions that you may have as Shannon, Tom, Brett and I are never too busy to help. We can also be made available to speak with any family members and friends that made need reassurance during these times.
Enjoy the last weekend of the Calgary Stampede.
Devin