Historically, the month of September has results in negative performance for equity markets – and so far, we appear to be in line with this trend.  The probability of recession in the U.S. and globally remains normal and our outlook remains in line for our economy here at home and the U.S. economy to manage a soft-landing.  Inflation globally has come down close to or at the target of most developed central banks, and when looking both here at home and in the U.S. the focus has shifted in recent months labour market concerns as the driver for monetary policy decision over the inflation story. 

 

Looking here at home this week, the Bank of Canada cut the overnight lending rate for a third time by 0.25%.  In the press conference that followed the decision, Tif Macklem maintained his dovish stance and highlighted concerns around a weakening Canadian economy stating that it is “reasonable to expect further cuts” if inflation data continues to reflect its current downward trend.  The Canadian economy is currently in a state of excess supply, with Q2 quarterly GDP growth annualized to 2.1% which is well below the BoC’s expectations for 2024 of a 2.4% result.  The demand for labour has also declined, while the labour force itself continues to grow which will continue to have a dampening effect on wage growth.  If you recall, one result of the pandemic was the fact labour was in short supply while demand for labour was high.  Canadian labour markets continue to soften  The result was companies offering higher wages to attract talent from a smaller pool of workers, which ultimately helped to support the higher inflation environment we have slowly exited over the balance of this year.  I recommend taking the time to listen to my colleague Joseph Nye and his commentary on the BoC’s rate cut and what lies ahead: Bank of Canada cuts again in September. Here’s what to know.

 

Moving to the U.S., the labour market story is relatively the same especially after July’s jobs data reflecting a notable increase in the unemployment rate and decline in labour force participation.  On Friday non-farm payrolls released for the month of August reflected a reversal of the sharp increase in layoffs that were seen in July with the number of permanent job losses remaining unchanged at 1.7 million.  Payroll employment rose in August by 142,000 which was below market consensus of 160,000 and continues the downward trend seen over the last three months.   As you may recall, the August pull back in markets was a direct result of the rather abrupt drop in July’s payroll numbers and fears that the job market in the U.S. was collapsing, not softening.  Growth in payroll employment has slowed, the number of permanent job losers is still edging higher slowly, and leading indicators, such as job openings, are still declining into July. Overall, we think that the Fed will start cutting interest rates in September, with risks tilting to more cuts after that than our current assumption for just one follow-up this year in December. The current probability of a 0.50% rate cut this month by the Fed is sitting at 40%, with a 60% probability of a more modest 0.25% cut.  No signs of stopping in a gradually softening U.S. jobs market

 

Overseas, the focus is also on the labour market and wage growth.  In Europe, Q2 GDP growth was revised down to 0.2% (initially 0.3%), indicating softer economic expansion.  Wage growth has also eased to 4.3% in Q2 from 4.8% in Q1, which has now fallen below the European Central Bank’s (ECB) projection of 5.1%.  Like the story in the U.S. and here at home, the moderation in wage growth provides some reassurance to ECB officials contemplating interest rate cuts as data supports disinflationary trend. (Key ECB Measure of Wage Growth Slows Before Likely Rate Cut)  Another reason for the substantial short-term volatility in August was the inflation story in Japan.  Whereas the rest of the developed world has experienced a disinflationary trend since 2023, Japan has experienced inflationary pressure that has brought them first past, and then above, the Bank of Japan’s inflation goal.  The story in Japan has been improving with disposable household incomes rising 7.3% in August, the third such lift in as many months.  Furthermore, wage growth has continued to persist.   Overall initial activity at the beginning of Q3 2024 appears to be improving, despite the higher inflation backdrop – albeit the July 2024 CPI print for Japan came in at 2.8% so I am using the term “higher” rather loosely here.  BNN Bloomberg