Although GDP growth in Canada was positive in April, up 1.1% YoY and 0.3% MoM, other economic indicators are pointing to a continued slow down. Notably manufacturing output continues to decline, and Canada’s GDP per-capita remains negative. Another key data point to indicate the health of our economy is the jobs data released on Friday, which saw employment growth turn negative in June – down 1,400 jobs from May and unemployment jumped to 6.4%. Markets were expecting a modest jobs gain of 25,000, with unemployment coming in at 6.4%. A higher interest rate environment continues to be a drag on the Canadian economy. There is little relief in sight, as last week’s upside surprise CPI print for May has resulted in the probability of a rate cut at the BoC’s July 24^th meeting declining to 45% (from 70%). Despite lackluster economic activity, this does not mean you should discount your Canadian investments within your portfolio. Canadian short-term bonds (2.5-year duration) have seen a YTD increase of 1.45% and the TSX Composite Index is up YTD 6.3%. (BNN Bloomberg)

 

Jobs were also front and center this week in the U.S. A slew of U.S. jobs data came out this week for June. On Wednesday, ADP private payrolls reflected a slowing job market, as the private sector added 150,000 jobs. That was down from 157,000 in the month of May and below the consensus estimate for June of 163,000. The downward trend certainly reflects the impact a higher-for-longer interest rate environment has impacted U.S. business operations. Furthermore, initial jobless claims rose slightly in June from May, coming in at 238,000. Context is key here, though jobless claims have been rising in the short run they remain in line with pre-pandemic levels during the post-Great Recession years once the U.S. jobs market had successfully recovered in 2015. (BNN Bloomberg) Finally, June non-farm payrolls came in on Friday reflecting an increase of 206,000 new jobs, down from 218,000 in May.  A more notable surprise was unemployment increasing to 4.1% in June, from an expected 4.0% and up 0.1% from May.

 

What does this mean for U.S. markets? Short-term this should have a negative impact on markets should the trend continue, however a cooling in the labour force is exactly what the Federal Reserve was looking for to justifying easing financial conditions and beginning to cut its overnight lending rate. The odds of a Fed Rate cut in recent weeks has improved, with the likelihood of a 0.25% rate cut in September increasing from 47% at the end of May to 63.4% as of market close on Friday.

 

Finally, after 14 years of the Conservative Party at the helm in the U.K. they suffered a dramatic election defeat on Thursday and passed the reins on to the Labour Party. European and U.K. markets reflected positive sentiment on the news as the FTSE 100 was up on Friday and yields on Gilts (U.K. Government Bonds) declined. On the question of Brexit, the Labour Party throughout its campaign maintained that they would not be scraping the current framework put in place, nor entertaining the prospect of rejoining the EU. They have formed a majority government and is pro-free trade relative to the Conservatives, a fact that could bode well for future discussions with both the EU and other trading partners – especially Canada. Markets had anticipated this result, so the resulting positivity is not surprising. Moreover, the Labour Party throughout its campaign clearly stated a focus on improving housing affordability and has pledged to enact policies that would result in the construction of 1.5 million new homes. Funding this endeavour could prove difficult given the state of the government’s balance sheet. Fortunately, a disaster such as Lizz Truss’ mini budget which crashed the U.K. Gilt market in 2022 is still fresh in both investors and political leader’s heads so a repeat of those events is unlikely. (Reuters)