KIEV, UKRAINE – 2020/09/03: A man wearing a face mask with US dollar print as a preventive measure … [+] walk on the street. In Ukraine, 54 people have died from complications caused by coronavirus per day, which is the largest number of deaths from coronavirus since the beginning of the pandemic in the country, reportedly by media. (Photo by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images
It has now become clear, and mainstream, that the economy weakened significantly in November, and that such weakness will carry forward to year’s end, at a minimum. The weakness occurred primarily in the services sector as the virus’ resurgence caused some governors to mandate new or additional service business restrictions.
As a result, jobless claims have spiked, travel and hotel occupancy fell to even lower levels, and restaurant and other retail activity faded.
Yet, despite the economic weakness, and the inability of the Congress to craft a new stimulus package, inflation expectations are on the rise.
The Data
Jobless claims spiked +229K the week ended December 5th;
Open Table data show a falloff of -58.1% Y/Y in restaurant reservations (12/4/20);
TSA checkpoint data was off -71.0% in the three days ended December 10th (Tuesday to Thursday). For the same weekdays ended November 12th, that number was -67.5%; back in September (9/15-9/17), that was -64.5%. So, it appears that travel has been cut back;
Recent hotel data also show additional weakness in occupancy rates.
In addition, as of this writing, the Congress has been unable to produce a second stimulus package. The unemployment insurance programs of the CARES Act (Pandemic Unemployment Assistance and its emergency provisions (PUA and PUEA), all abruptly end on 12/31. This will impact more than 13 million recipients. The drop-off in assistance comes at a time when newly imposed business restrictions have intensified due the virus’ resurgence.
Then we have the continuing political drama over vote counting. On Friday, December 11th, the U.S. Supreme Court refused to hear Texas’ case regarding irregularities of vote counts in certain states, causing the Texas GOP to threaten what I will call “T-exit” (i.e., similar to “Brexit” which, by the way, is still impacting markets due to the inability to finally agree on how relations between Britain and the Continent will work). By the time you read this, Mr. Biden will “officially” be President-Elect as the Electoral College is scheduled to vote on Monday, December 14. He is going to have one heck of a job trying to “heal” the existing political scars, if, indeed, he even tries.
As always, basic economic trends are best seen through the lens of the labor market. Initial Unemployment Claims (ICs) in the state unemployment programs spiked in the first week of December. Using non-seasonally adjusted data, they spiked 229K, the largest uptick since the pandemic began in March! PUA claims also spiked by 139K, so together, the spike exceeded +368K. To put this in perspective, total new weekly unemployment claims have been higher than one million every week since March! The week ended December 5th saw 1.375 new claims (layoffs!), a significant rise from the awful 1.006 million the last week of November. Look at the right-hand side of the chart – no progress since early August!
Total State & PUA ICs
Universal Value Advisors
Resurgence of Inflation Expectations
The virus isn’t the only phenomenon experiencing resurgence. Inflation is too! And we see it in the Treasury yield curve. There are two theoretical parts to interest rates; the “real” rate, and the “inflation premium.”
The U.S. Treasury yield curve is the international standard which serves as a reference point when examining yields elsewhere, as it is considered “risk free” as far as the return of one’s principal. Nevertheless, despite the U.S. Treasury curve as the standard bearer, we see that in today’s world, because of the money printing policies of the Bank of Japan (BOJ) and European Central Bank (ECB), nearly one-third of fixed income assets, globally, have negative yields. Yes, you pay them to invest your money in their bonds! These negative yielders include junk credit rated Greek 2-year notes, Italian 5-year notes, and Portuguese 10-years. Indeed, if the latest U.S. CPI (-1.2% Y/Y) is any indication of U.S. inflation, then “real” rates (i.e., inflation adjusted) along most of the U.S. Treasury yield curve, are also negative.
In early August, the nominal yield on 10-year U.S. Treasury Notes hit a low of 0.52% (i.e. 52 basis points – abbreviated 52bps). In early November, as inflation expectations were awakened, that rate nearly doubled to 98 bps, and it was as high as 94bps on December 7th. The rise in this rate is attributable to market expectations that all the stimulus and money printing being contemplated will result in rising inflation. (And, no doubt, it eventually will!)
It does seem contradictory that rates are rising at the same time the economy is weakening! But, that’s exactly what we have. And it is based on the perception that the Congress can and will enact new stimulus, if not immediately, then soon after Mr. Biden takes office. In addition, there is a relatively new economic notion called “Modern Monetary Theory” (MMT) that postulates that a sovereign nation can print as much money as it desires, the only barrier being the nation’s inflation tolerance. And, if there is no “inflation,” then no harm, no foul. (In the case of the U.S., this isn’t exactly correct, as the country benefits greatly from the dollar’s status as the world’s reserve currency. We already see the dollar’s value weakening, and excessive money printing will have a huge impact there – but, I digress; this is a topic for another blog.) Of course, today’s politicians have happily glommed onto this “Theory,” as they will no longer have to defend deficit spending.
There are two other circumstances influencing the markets’ future inflation perceptions:
When the pandemic first hit in Q1/Q2 2020, prices initially fell. As the economy began to recover (Q3), they snapped back. But when we get to Q1/Q2 2021, comparisons will be to the lower prices of a year earlier and this will show up as a higher level of inflation;
If the vaccines are successfully deployed, there will be an initial shot in the arm (pun intended) for the economy, as there is a high level of pent-up demand in the population from being shut-in for such a long period of time. So, expect a period of high consumption, especially of services that the public has gone without for so long. We will likely see (temporary) price hikes along the way.
Both will contribute to what will appear to be “higher prices.” And the CPI and other such indexes will move higher as a result. Interest rates and yield curves will likely follow.
Treasury Yield Volatility
In November, Treasury Secretary Mnuchin told a very disappointed Fed Chair Powell that the Fed’s special credit line from the Treasury and its authority to lend to the corporate sector would be shutdown at year’s end. Markets, however, have a very high level of confidence that those or similar programs will be reinstated by incoming Treasury Secretary Yellen. So, we have a unique phenomenon – the yields on Treasury paper, reflecting market inflation fears, appear to have become more volatile than the yields on corporate debt which have enjoyed Fed support well down the quality spectrum. Since August, Treasury yields have drifted upward. At the same time, corporate spreads on much lower quality paper, compressed. I expect that Yellen will reinstate the Fed’s corporate lending line, the Fed will continue to support junk/near junk corporate paper, and that this unusual volatility phenomenon will continue.
Conclusions
The lack of a stimulus package in the “lame duck” session of Congress has caused the Treasury yield curve to move a few basis points lower since the election. But, even as the economy weakens, near-term, don’t expect a test of that 52bps 10-year T-Note low. Upward pressure on the Treasury yield curve has now appeared, especially given the likely deficits in a Biden Administration and the adoption of MMT as a convenient excuse. At the same time, the protection of a large swath of corporate America by the Fed and the expected continuation of that policy under the incoming Administration will keep corporate spreads to Treasuries at record lows. The continuation of the unique phenomenon of higher volatility in Treasury yields than in the corporate world is likely.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
