Jobs data here at home this week came in well below what was expected, with the Canadian economy shedding 2,200 jobs in March (the consensus estimate was a 25,000 gain). The bulk of the decline came from self-employed workers, while the private sector and public sectors added jobs in March. Unemployment also rose by 0.3%, rising to 6.1% and up 1.3% from post-pandemic lows. Canadians are also having a hard time finding a job, and layoffs increased by 40% from February. Given the increased downward trend in the labour market in Canada, the potential of maintaining the recent positive trend in GDP growth is unlikely. Despite the decline in the health of our labour market, it has been a gradual change. We do not anticipate this will force the Bank of Canada to begin quickly cutting rates to support economic growth, especially given inflation remains above target. (Canadian unemployment rate rose again in March)
The opposite story is unfolding in the United States, as Friday’s non-farm payroll data for March surprised to the upside with a 303,000 gain versus a consensus estimate of 205,000. The U.S. economy appears to remain on sure footing, even with sticky inflation and the risk that rates stay higher for longer as the Fed maintains tighter monetary policy. As of today, there remains a 58.2% chance that the Federal Reserve will deliver its first rate cut of 0.25% in June, with a stronger case being made for the July meeting. Unemployment in the country has also declined by 0.1% month over month to an annualized rate of 3.8% (U.S. job gain remains larger than expected in March) Yields on U.S. fixed income rose considerably this week, as concerns that the conflict in Israel will spread to involve Iran and negatively impact the energy market in the months ahead. Furthermore, oil prices have risen considerably in recent weeks as producers have maintained cuts as the global economy continues to recover and the demand for energy resources increases.
Though there continues to be optimism and investment opportunity in Europe, February factory orders data out of Germany reflected continued weakness in the region’s largest economy with a marginal MoM increase of 0.2%. (Weak rise in orders points to more gloom for German industry) The automotive sector experienced the greatest decline in new orders, and this was not helped by a continued decline in German PMI (Purchasing Managers' Index) which reached a 5-month low of 41.9 (Below 50 indicates contraction). Across the English Channel, the UK retail sector remains weak as indicated by a recent BDO survey which reflected a 2.2% monthly decline in in-store and online sales. A mixture of headwinds has been blamed for the result, primarily bad weather, an early Easter weekend, and continued weakness in consumer confidence. Fortunately, the UK construction sector ended six months of decline, which supports signs of an improving economic backdrop as inflation has meaningfully declined and businesses appear to have an increased appetite to spend once again. (UK Economy Is Growing Again in All Major Sectors, Survey Shows)
In Asia this week, the Bank of Japan continues to manage above-target inflation. BoJ Governor Ueda indicated in an interview earlier this week that a rate hike is not off the table as the year progresses. It is worth remembering that from 2001 to 2023 Japan experienced a prolonged period of deflation, the monetary policy steps they take now differ greatly from what markets expect out of Europe and North America. The country has enjoyed a steady recovery post-pandemic and despite normalizing inflation the NIKKEI 225 this year has posted a YTD return of 19.74%. (Bank of Japan hints at near-term rate hike, pushing yields higher) The earthquake this week in Taiwan is expected to have a short-term impact on the global supply of semiconductors, however, a day after the quake the majority of the sector was back up and running. (Taiwan Begins Recovery From Quake as TSMC Resumes Production)
For a look at what’s upcoming for the week ahead read Forward Guidance: Our Weekly Preview - RBC Economics.
| Summary Markets continue to remain resilient, despite a short-term pullback in equities and the expectation that interest rates may remain elevated past June as inflation remains sticky. To that point, we have come a very long way from the post-pandemic inflation crisis investors and advisors fretted about daily. If anything, there remains ample opportunity and value in both equities and fixed-income securities depending on where you’re looking to invest your money. Current valuations in the U.S. tech sector remain high, and I would urge patience before adding further exposure to your portfolio. There are still many other sectors that are undervalued, as well as opportunities in fixed income given the potential for a decline in rates. If you or anyone you know would benefit from having a review of their portfolio and would like to understand the strategies we implement here at RBC Dominion Securities, I would be more than happy to - please contact me by clicking here. |