A word on May's U.S. & Canadian job reports

Remember how it was going to take years for hospitality to come back? People still want places to go and occasions to eat. The job numbers in Canada and the U.S. for May are multiples better than expected – it's not a "V" shape recovery, it is an "I"?

 

The U.S. May jobs report was published this morning, and the data suggests that this recovery is real. Economists were forecasting job losses of 8.5 million for the month. The report, however, showed an increase of 2.5 million jobs in the U.S. economy. Digging a little deeper into the numbers shows that the leisure and hospitality industry added 1.2 million, following losses of 7.5 million in April and 743,000 in March. Over the month, employment in food service rose 1.4 million, accounting for half of the gains in the May payroll report.

 

In Canada, we were surprised to see 290,000 jobs added in May. About three-quarters of the increase in Canada was in full-time positions, while the goods-producing sector snapped back for a 5% gain. Quebec accounted for 80% of the rise in May's employment numbers. Similar to the U.S. experience, going into today's job report, most of us were assuming Canada would experience another month of layoffs with economists forecasting a decline of 500K.

 

While there is still a lot of heavy lifting to be done here, directionally, the data continues to progress positively. As we have noted in our conversations with clients, the equity markets will move ahead of the real economy on the back of data that is "less bad" in nature.

 

Coronavirus update

A second wave of the coronavirus has been a concern since the beginning of this pandemic. Unfortunately, the risks of such an occurrence, particularly in the U.S., have increased. The mass protests across the country have resulted in a sharp unwind of the social distancing behaviour that had existed across many American cities in recent months. There is no guarantee of a rise in infections once the incubation period expires in a week or two. In fact, should no spike in new cases ensue, it could suggest the transmission risks have declined. This outcome might lead to further easing of restrictions and act as another positive catalyst for stock markets. But the mass gatherings have created multiple opportunities for the virus to spread and re-emerge as a more serious risk. While markets do not appear very concerned about this, we believe it is something that bears watching.

 

Meanwhile, new virus case counts in Canada largely remain on an improving trajectory in the two more problematic provinces of Quebec and Ontario. It is worth noting the latter has been plagued by sporadic increases in cases again this week. Meanwhile, in the U.S., overall levels have not changed much this week. There have been notable increases in cases across California, Arizona, and Alabama. While some of this may be attributable to increased testing, we will continue to monitor it.

In Latin America, Brazil continues to report more than 20,000 new daily cases per day, suggesting there is limited visibility around the potential for its peak in new cases. Elsewhere, there were meaningful developments in the Middle East and Asia. Iran appears to be experiencing a second wave, after having reported its most significant increase in new daily case counts since March. Meanwhile, Pakistan has also reported a surge. Both are notable as each country appeared to have their outbreaks well under control in recent months. Lastly, India recorded a high in new daily cases this week, suggesting it may still be a ways away from containing the virus.

 

The rise of the loonie or the fall of the U.S. dollar?

The Canadian dollar had quite the week, breaching the $0.74 level for the first time since the beginning of March. But, its move higher may have more to do with the global recovery than with what's transpiring domestically. While the U.S. dollar has fallen relative to the Canadian dollar, it has also depreciated against other major currencies too. And just as the U.S. dollar strengthens during periods of crisis as investors flock to it for its relative "safe haven" status, it can weaken as investor concern fades and risk appetite rises. We expect the weakness in the U.S. dollar may continue in the weeks to come barring any setbacks in the health crisis.

 

Canada's domestic challenges of high consumer debt loads, lack of pipeline capacity that exacerbates depressed energy prices, and weaker overall competitiveness levels remain structural headwinds that may limit any sustainable move higher in the loonie.

 

Overall, we are encouraged by the broadening rally across equities and currencies, which suggests growing confidence in the economic recovery. Its path and sustainability longer-term remain questions in our minds. A new near-term risk has presented itself in the form of the abandonment of social distancing across the United States. We will be watching closely to see if it results in a re-escalation of the health crisis.