This Friday morning, Canada’s September job report surprised to the upside, delivering 47,000 new jobs in addition to a downside surprise to the unemployment rate which came in at 6.5%.  Though this was a nominal change, reflecting a month-over-month decline of 0.1% from August, it is still the first such monthly decline since January of this year.  Full-time employment also rose substantially, relative to a pull back in part-time work – though it is these positions that are typically eliminated first when business activity begins to slow.   Complicating matters, Canada’s population continues to grow more than the demand for labour.  Wage growth also eased in September, declining to 4.7% YoY form August’s 5.1%, which is a good thing from the point of view of inflation as it means Canadians do not have the excess cash flow from higher wages to push inflation above its current level.  Moreover, this also helps to keep producer costs low, as labour costs are the greatest expense on any business’ balance sheet.  With a softening labour market in Canada and inflation recently coming into the Bank of Canada’s target, we expect a 0.50% rate cut next week and another in December.  Assuming the Canadian economy remains soft, but not in recession, we expect the Bank of Canada will reduce the size and pace of their cuts into 2025. (RBC Economics)

 

Thursday morning's September U.S. CPI print a mixed bag, with an upside surprise of 0.10% on an annualized basis to 2.4%, however coming in at the lowest level we have seen since early 2021 and down from August's 2.5%.  What is of concern is the month-over-month increase in CPI ex-food & energy which was up 0.3% monthly. This is the first time we have seen a monthly reading at this level since March of 2023.  U.S. inflation is still closer to target than it has been since the rate hiking cycle began and we do not see the Federal Reserve halting rate cuts. however, the pace at which they occur may be more gradual. Couple this data with the impressive jobs report for September that landed last Friday, and we are all but guaranteed that the Fed will cut just 0.25% in November.  Looking past November, these two data points cannot guarantee the pace of cuts will slow dramatically. If a trend continues whereby labour remains strong, while nominal wage growth and inflation maintain their current levels (4.0% and 2.4%, respectively) we can expect the Fed to take a more gradual approach to loosening their monetary policy.  (RBC U.S. Inflation Watch)

 

Overseas, conditions are beginning to improve in Europe, with the UK GDP growing 0.2% from August to July.  This comes after economic activity stagnated in the previous two months.  The scope of the slight expansion in activity was across all sectors of the economy, which is a good sign that this trend can continue given inflation has been under control in the country for several months.  The government is also aiming to bring GDP growth back up to 2.5% annually in 2024, supported through increased government spending, falling interest rates and continued real wage growth. (BNN Bloomberg)  On the mainland, downward pressure on the Euro is likely to force the ECB to cut rates next week by another 0.25%.  Deutsche Bank this week updated their forecast and expect that the ECB will cut rates to a neutral target of 2.25% as soon as April of 2025.  The ECB’s current overnight rate is 3.75%, so his would be another 1.50% in cuts over the next 7-months inclusive of next week’s meeting. 

 

Meanwhile in Asia, China continues with its path to deliver further stimulus to the economy.  Institutional investors are anticipating another stimulus package worth approximately $283 billion USD to be announced over the weekend.  Given how soft their economy has become over the last year, additional stimulus is welcomed and not anticipated to result in a substantial uptick in inflation – though an increase in government spending has historically resulted in higher inflation.  This has contributed to the expectation for a rebound in emerging markets equities, coupled by further rate cuts and a depreciating US dollar in the medium term.  (BNN Bloomberg)  Finally, the inflation story in South Korea has also improved, resulting in the Bank of Korea making its first 0.25% rate cut this week and bringing their overnight rate down to 3.25%.  The economy continues to be generating moderate growth, but the pace of growth is expected to slow.  This has been the case with other developed economies where restrictive monetary policy (i.e. higher interest rates) have been maintained, and current borrowing rates are at a 16 year high in the country. (Reuters)