Friday’s non-farm payroll report in the U.S. delivered an upside surprise as the economy added 254,000 jobs in the month of September, while the market was expecting 142,500 new jobs.  Alongside the strong jobs report, unemployment in the U.S. also came in below consensus at 4.1% which was down from 4.2% in August.  Moreover, average hourly earnings rose by 0.4% in the month of September, pushing the yearly reading in September to 4%.  With such a strong result in the labour market, the probability of a soft landing in the U.S. continues to rise and odds that another outsized rate cut from the U.S. Federal Reserve in November have dropped as markets are now pricing in a 61.7% probability of a 25 basis-point rate cut in November.  As of now, the market expects another 0.25% in cuts in November, December, January, and March, in line with a more pragmatic decrease in monetary tightening.  What does this mean for you?  If you have not already, I strongly recommend reviewing your U.S. fixed income positions and considering adding to your short-term exposure as yields have increased in the last several weeks, so prices for short-term fixed income remain attractive and I expect investment in this asset class to provide meaningful growth opportunity as rates decline.  US Labour Market

 

Here in Canada this week it was rather uneventful when it comes to the markets and economic activity, despite some political drama in Ottawa and the fact Ontarians may get to drive faster on 400 series highways.  Looking into the month of October, the big question is how large of a cut the Bank of Canada will deliver on October 23^rd.   Next week we’ll have a clearer picture of how the economy managed through September, with the September job’s report and the Bank of Canada’s Business Outlook Survey.  We expect the unemployment rate to have increased once again to 6.7% in September from August’s 6.6% - which would be nearly 2% higher than the post-pandemic lows we experienced as the economy came back to life.  We do also expect that the economy to have added 15,000 jobs in September which reflects a modest slowdown, however given labour demand continues to be low we could see a contraction in labour force activity and higher unemployment.  A key thing to remember is that inflation has come back into target here in Canada, though I’m sure you do not feel that when you’re checking out at the grocery store or making your monthly mortgage payment.  As the Bank of Canada continues to cut interest rates, we expect the pressure on shelter costs to decline as we move into 2025. The potential for a soft landing here in Canada remains on the table, though it is an appropriate time to ensure you have some defensive equity and fixed income position for the portion of your portfolio allocated to Canada.   Forward Guidance: Our Weekly Preview - RBC Economics

 

Finally, in international news this week it is worth discussing the escalating conflict in the Middle East.  Since the death this week of Hezbollah leader Hassan Nasrallah in an Israeli airstrike, Iran has taken a more active role in the conflict between Israel and Lebanon launching a barrage of missiles at Israel mid-week.  This prompted the Israeli government to announce intentions to attack oil fields in Iran, which were followed by off-the-cuff comments from President Biden that the U.S. would be in support of such an action before walking back those comments on Friday. (BNN Bloomberg)  The prospect of escalating conflict in the Middle East has resulted in increased volatility in the energy sector and a notable lift in the price of oil, for example West Texas Intermediate Crude (WTI) was up 7.2% and future markets are pricing in $100 USD per barrel.  Though it is difficult to look past the toll this conflict is having on those directly affected, from an investment perspective the conflict does provide the opportunity for potential upside in the Canadian and U.S. energy sector.  It is important to note that the energy sector globally has changed dramatically in the last several decades, from the US becoming the largest oil producer globally in 2024 thanks largely to fracking technology and the emergence of alternative energy resources, which has somewhat diminished the impact of negative events to OPEC producing countries, though they still have considerable influence on global economic activity especially as it relates to China’s economy.  Reviewing your energy sector exposure in both the U.S. and Canada would be wise and if you’d like to have a discussion on that front, you can connect with me here.