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Canada posts hefty job gains, but outlook clouded by Omicron variant

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Canada‘s economy posted an unexpectedly large job gain in November, driving the jobless rate down and hours worked up to pre-pandemic levels, data showed on Friday, but economists say it is unlikely to change the Bank of Canada‘s guidance amid worries over a new coronavirus variant.

The Canadian economy added a net 153,700 jobs in November, well above analysts’ expectations of 35,000, while the unemployment rate dropped to 6.0%, beating a consensus estimate of 6.6% and edging closer to the February 2020 jobless rate of 5.7%, Statistics Canada said.

“I think the job market is tighter than the Bank of Canada has been letting on,” said Derek Holt, vice president of capital market economics at Scotiabank, pointing to wages gains, which accelerated to 3.0% on the year from 2.1% in October.

“We’re 186,000 jobs above pre-pandemic levels. So the Bank of Canada‘s narrative that we still have runway, in terms of a labor market recovery, is looking weaker by the moment,” Holt added.

The Bank of Canada in October signaled it could start hiking rates as soon as April 2022. Since then, massive flooding in British Columbia has hampered trade through Vancouver and the Omicron coronavirus variant has emerged as a new global threat.

Those factors create uncertainty for the central bank and it is unlikely to markedly change its tune in its rate decision next week, said economists.

“If we didn’t have the variant bringing some uncertainty over the outlook, I think it would be almost all systems go for the Bank to start teeing up tightening reasonably early in 2022,” said Doug Porter, chief economist at BMO Capital Markets.

Canadian employment increased in both the services and goods-producing sector, and gains were fairly evenly split between full and part-time work. Total hours worked climbed 0.7%, returning to pre-pandemic levels for the first time.

The Canadian dollar was trading 0.4% higher at 1.2760 to the greenback, or 78.37 U.S. cents.

 

(Reporting by Julie Gordon in Ottawa, additional reporting by Steve Scherer in Ottawa and Fergal Smith in Toronto;Editing by Toby Chopra and Richard Chang)

Economy

Pound Fights for Reprieve as Economy Flails: UK Weatherwatch – Financial Post

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By Alice Gledhill

(Bloomberg) —

The pound has pulled off a fighting comeback from a two-year low against the dollar yet the UK’s markets are looking more bruised as evidence of a sharp economic slowdown mounts.

The currency has gained for two weeks to end a month of losses, mostly thanks to ebbing demand for the dollar as a haven rather than positive local factors. The pressure on Britain’s companies is growing after an index of UK private sector growth unexpectedly slid in May.

For some strategists, much of the bad news is now priced in. For others, another period of reckoning for the pound is likely. Doubts are rife over just how much the Bank of England, which next meets in mid-June, can keep hiking borrowing costs given a cost-of-living crisis and collapse in consumer sentiment.

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“Overall the UK’s vulnerable position in terms of exposure to a slowing Europe and China, more dovish central bank and weak balance of payments suggests to us the path for pound-dollar is lower towards $1.20,” said Jordan Rochester, a strategist at Nomura International Plc. 

A recent Confederation of British Industry survey painted a gloomy picture of wilting demand and sagging profits. Inflation — already at a 40-year high — may not have peaked. And a new government levy on energy companies could weaken investor sentiment, with oil major BP Plc already warning it will reconsider its capital expenditure plans.

Read more: Gloom Engulfs UK Services Firms as Costs and Prices Soar

While the BOE’s outlook is becoming more murky after back-to-back rate increases, the European Central Bank looks set to start hiking soon, and that could also send sterling lower against the euro. Deutsche Bank AG strategist Shreyas Gopal recommended clients buy euros, pointing to a target of 88 pence by the end of the third quarter. It was at about 85 pence on Friday. 

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The pound only tells part of the story about the health of UK Plc. Bloomberg News will use a regular series of charts to show what rates, credit and stock markets are signaling.

No Upside

The weakness in the pound, still down nearly 7% this year, has bolstered the exporter-heavy FTSE 100 stock index, particularly in contrast to the more domestically-focused FTSE 250. Still, strategists in a monthly Bloomberg survey see no more upside for the benchmark this year, compared with a return potential of 9% for the Euro Stoxx 50. 

Read more: It’s Going to Get Harder for UK Stocks to Keep Outperforming

Commodities prices, an important driver behind the FTSE 100’s performance given firms such as Shell Plc and Glencore Plc, are stalling as Chinese demand shows signs of weakness. Energy company profits could also suffer given the so-called windfall tax. 

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A warning sign for the health of companies is a gauge of risk in the sterling junk bond sector, which comprises mainly local borrowers. That’s approaching 600 basis points for the first time since the pandemic’s early stages, meaning higher costs. It’s also thrown the market for new bond sales into disarray, with high-profile financing deals grinding to a halt. 

Bloomberg News reported this week that UK retailer Matalan Ltd. is facing challenges in refinancing its debt as a maturity deadline looms. Banks have struggled for more than six months in some cases to sell financing deals for high-profile buyouts including Wm Morrison Supermarkets Plc. 

There are some positives for the UK economy: it has a strong labor market and the government’s £15 billion ($19 billion) spending spree announced in recent days will help the hit to households from higher energy prices. Yet it’s unlikely to boost sentiment in UK data surveys or the path for lower growth ahead, according to Nomura’s Rochester.

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There are also warnings it could further stoke inflationary pressures, particularly as Chancellor Rishi Sunak hinted in an interview on Friday that another massive handout could follow in 2023. That’s led bets on the number of BOE rate hikes to tick up again for 2022.

Money markets are pricing five 25 basis points hikes by December, though that’s still below the 150 basis points seen earlier in May. Forward prices drive home the bleak longer-term outlook, showing traders expect the BOE to end up cutting rates in two years.

“It still looks very likely that the UK economy will fall into recession, or at least experience a period of extremely weak growth,” said Standard Bank strategist Steven Barrow.

©2022 Bloomberg L.P.

Bloomberg.com

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Charting the Global Economy: Export Limits Worsen Food Security – Bloomberg

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India and Malaysia are among several Asian countries restricting exports of certain key commodities as nations try to safeguard supplies over concerns of food security and inflation.

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U.S. economy kicks off second quarter on strong note; rise in inflation slowing – The Globe and Mail

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U.S. consumer spending rose more than expected in April as households boosted purchases of goods and services, and the increase in inflation slowed, which could underpin economic growth in the second quarter amid rising fears of a recession.

The economy’s near-term prospects were also brightened by other data from the Commerce Department on Friday showing the goods trade deficit narrowed sharply last month. A record trade deficit caused a contraction in output in the first quarter.

“The economy can always turn on a dime, but at this point in the economic cycle, consumers are still spending their hearts out, keeping the recessionary winds at bay,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.9 per cent last month. Data for March was revised higher to show outlays racing 1.4 per cent instead of 1.1 per cent as previously reported. The strength in spending is despite consumer sentiment being at its lowest level since 2011.

Goods spending increased a solid 0.8 per cent, driven by new motor vehicles, clothing, footwear, recreational goods as well as furnishings and household equipment. Demand for goods remains strong even as spending on services is picking up.

Services outlays rose 0.9 per cent as consumers frequently dined out and traveled. There was also increased spending on housing and utilities, and recreation services.

Economists polled by Reuters had forecast consumer spending gaining 0.7 per cent. Spending is being supported by massive savings as well as strong wage gains, with companies scrambling to fill a record 11.5-million job openings as of the end of March.

Personal income rose 0.4 per cent, with wages accounting for the bulk of the increase. The saving rate dropped to 4.4 per cent, the lowest since September 2008, from 5.0 per cent in March. That suggests households have been tapping into the more than $2-trillion in excess savings accumulated during the COVID-19 pandemic.

The reduction in savings could mean slower consumer spending down the road, especially given the rising borrowing costs.

“High- and middle-income households still have some savings amassed,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Households in the bottom quintile have now tapped what little they had in excess reserves.”

The Federal Reserve’s hawkish monetary policy stance as it fights to quell high inflation and bring it back to its 2 per cent target has fanned worries of a recession. Fears of an economic downturn have also been exacerbated by Russia’s dragging war against Ukraine as well as China’s zero COVID-19 policy, which have further entangled supply chains.

The U.S. central bank has raised its policy interest rate by 75 basis points since March. The Fed is expected to hike the overnight rate by half a percentage point at each of its next meetings in June and July.

Strong consumer spending offered some reprieve for risky assets like equities after a recent sharp sell-off. Stocks on Wall Street were higher. The dollar was steady against a basket of currencies. U.S. Treasury prices were mixed.

Although inflation continued to increase in April, it was not at the same magnitude as in recent months. The personal consumption expenditures (PCE) price index rose 0.2 per cent, the smallest gain since November 2020, after shooting up 0.9 per cent in March.

In the 12 months through April, the PCE price index advanced 6.3 per cent after jumping 6.6 per cent in March.

The annual PCE price index increase is slowing as last year’s large gains drop out of the calculation.

Excluding the volatile food and energy components, the PCE price index gained 0.3 per cent, rising by the same margin for three straight months. The so-called core PCE price index increased 4.9 per cent year-on-year in April, the smallest gain since last December, after rising 5.2 per cent in March.

It was the second straight month that the rate of increase in the annual core PCE price index decelerated. This inflation measure is the most followed by economists and policymakers.

“We need to see the monthly increases cool more meaningfully before the Fed can breathe,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

The moderation in inflation bodes well for GDP growth this quarter. When adjusted for inflation, consumer spending increased 0.7 per cent in April after rising 0.5 per cent in the prior month.

There was more goods news, with a second report from the U.S. Commerce Department showing the goods trade deficit dropped 15.9 per cent to $105.9-billion in April. The narrowing reflected a 5.0 per cent decline in imports.

While weak imports are good for the top line GDP number, they could be flagging a slowdown in consumer spending and business investment. Imports of both capital and consumer goods fell. Motor vehicle imports, however, rose. Good exports increased 3.1 per cent, boosted by shipments of food products.

Wholesale inventories increased 2.1 per cent last month, while stocks at retailers advanced 0.7 per cent. Following Friday’s data, Goldman Sachs raised its second-quarter GDP growth estimate by two-tenths of a percentage point to a 2.8-per-cent annualized rate.

The economy contracted at a 1.5-per-cent pace last quarter because of the massive trade deficit and slower inventory accumulation relative to the fourth-quarter’s robust rate.

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