Market update

Another bumpy week for markets with Friday seeing a reversal of a mid-week recovery with U.S. job numbers suggesting the ‘painful’ hikes will continue from the FED.

Canadian employment grew in September for the first time in four months, but gains remained moderate in a sign the labor market continues to be near full capacity. 21,000 jobs were added last month, with both full-time and part-time work holding steady, Statistics Canada reported today. That’s in line with the median estimate of a 20,000-gain anticipated by economists in a Bloomberg survey.

The Canadian unemployment rate also fell to 5.2% as the labor force shrank, reversing part of a 0.5 percentage point jump to 5.4 % in August. Hours worked fell 0.6% in September.

In August, Canada's merchandise exports decreased by a greater amount than imports shrinking the trade surplus. Canada's trade surplus fell to the lowest monthly trade surplus observed to date in 2022.

U.S. job openings fell more than expected from 11.2 million in July to 10.1 million in August versus a forecast for 10.78 million. It is the lowest level since last fall, a sign that labor markets may be cooling off as interest rates rise and the economy slows.

U.S. manufacturing activity grew at its slowest pace in nearly 2.5 years in September as new orders tapered, due likely to rising interest rates which reduced the demand for goods. Some of the slowdowns in manufacturing reflect the rotation of spending from goods to services.

September U.S. Non-Farm Payrolls rose 263,000 below the expectations of 275,000. The U.S. unemployment rate fell to 3.5% from 3.7%.

The U.S. trade deficit fell in August fairly well in line with expectations. Imports declined by less than exports for the month.

The British pound rose after reports that the U.K. government withdrew plans to scrap the top 45% tax rate of income tax.

The U.K. government announced it would back down on reversing a tax break for top earners that formed part of a package aimed at boosting growth and plans to publish details on how to bring down the U.K. budget in October after previously saying he would wait until Nov. 23.

Euro zone business activity fell further than expected last month, increasing the likelihood of a recession in the Euro bloc.

Data showed German retail sales fell more than expected in August, while industrial production contracted as supply bottlenecks remain due to pandemic-related distortions and the war in Ukraine.

Oil prices jumped as OPEC considers reducing output by more than 1 million barrels per day, which would be its biggest supply cut since the start of Covid-19.

Japan's services sector activity grew slightly in September as demand recovered on declining COVID-19 cases and the prospect of easing restrictions on foreign tourism.

China bans residents from leaving Xinjiang after Covid-19 cases continue to climb.

 

Weekly change: TSX: 0.7%; DOW: 2.0%; S&P 500: 1.5%; NASDAQ: 0.7%; GOLD: 1.9%; WTI: 17.0%

 

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

Schwab Market Updates Podcasts - https://www.schwab.com/resource-center/insights/section/schwab-market-update

 

 

CIBC Economics Quick Take: Bank of Canada Governor Macklem speech by Avery Shenfeld

Governor Macklem’s speech had a fairly hawkish tilt to it overall. It highlights the turn in inflation from globally to domestically driven factors, which then underplays the importance of the softening he noted in some of those global factors, and he made his first mention of C$ weakness as dulling some of the benefits of a softening in US dollar prices for globally traded items. He concedes that interest rate hikes already in the books will take time to show their full effects, and they are starting to see some of them, but ends by saying that “there is more work to be done” and that “we will need additional information before we consider moving to a more finely balanced decision-by-decision approach”. That sounds like October is still a lock for a 50-basis point hike, and that the October language won’t say anything sounding like a pause. That said the “additional information” could be in place by the December decision date if, as we expect, economic growth signals in the next few months look quite soft. The BoC is going to focus on two of the three core measures for CPI, acknowledging that the common component measure isn’t working well. 

 

CIBC Economics:  Quick Take:  Canadian Employment (Sep) by Andrew Grantham

The Canadian labour market broke out of a three-month slump by posting a 21K rebound in employment during September. However, that only recovered approximately 20% of the jobs lost in the prior three months combined, so the gain was certainly no home run. As expected, job growth in September was driven by a rebound in education (+46K), which had shown a suspicious decline in the prior month due to the timing of new contracts for the coming school year. Outside of that area, there was also a gain in health care, but plenty of other sectors posted declines in a sign that higher interest rates and a cooling economy are straining the labour market. Manufacturing, information, culture & recreation and transportation & warehousing posted the largest declines on the month. Combined with a modest decline in labour force participation, the increase in employment during September took the jobless rate down to 5.2%, from 5.4% in the prior month. Wage growth was a little weaker than expected, but still strong at 5.2% year-over-year. The low unemployment rate and strong wage growth support the continued hawkish tone from the Bank of Canada Governor yesterday and a 50bp rate hike at the next meeting. However, signs that a growing number of sectors are slowing down should bring a more cautious approach from policymakers after that.

 

MacroMemo - October 4 - October 24, 2022 by Eric Lascelles Link to Article

Dollar strength

Some of the most notable recent swings in financial markets have occurred in the currency space. The pound, euro and yen have been particularly weak.

U.S. dollar strength is the result of several things:

1. During times of global economic uncertainty and heightened risk aversion, the superior safety and liquidity of the U.S. dollar makes it highly attractive.
2. The hawkish U.S. Federal Reserve – not only does the Fed have a higher policy rate than other developed countries, but its latest policy announcement revealed plans to tighten significantly further from here.
3. The U.S. economy has been relatively more resilient so far. We still expect economic weakness for the U.S., but the deceleration to this point has been milder. The nadir there is likely to be less extreme than in the Eurozone or U.K.

Looking a little further down the road, if one envisions fading risk aversion in 2023 and a return to economic growth by the second half of 2023, it seems reasonable to expect some reversal of dollar strength.

Labour market distortions

We have regularly mused about why the labour market is so tight today. Prominent explanations include:

1. The ferocity of the economic rebound over the past few years, to the point that many things in the economy are overheating, including the labour market.
2. A shift in sector preferences with regard to the desires of consumers and the supply of workers, each at odds with the other.
3. Significant early retirement during the pandemic (several million people in the U.S.).
4. Younger workers also dropping out of the labour force to a significant extent (a few million people in the U.S.).

The behavior of these final two groups has usually been attributed to shifting family priorities, fear of getting sick and surplus wealth built during the pandemic. At that time, financial markets and housing valuations soared and households were saving more than normal.

But there is another plausible answer for the reduced supply of workers: many people may still be sick. We refer to long COVID: having persistent symptoms for months or even indefinitely.

Another unrelated labour market distortion of a more temporary nature is that more people have been taking vacations than over the prior few years. This plausibly requires more backfilling by businesses and thus temporarily exacerbates the tightness of the labour market. Approximately 4.8 million workers took vacation or personal days during the reference week in June versus 3.7 million the year before. However, it is unclear if more people are vacationing versus the pre-pandemic norm due to accumulated vacation days, which is the real question.

 

Global Insights

OPEC+ agreed its deepest cuts to oil production since the 2020 COVID pandemic at a Vienna meeting on Wednesday, curbing supply in an already tight market despite pressure from the United States and others to pump more.

Reuters

Five days after Hurricane Ian cut a swath of destruction across Florida and the Carolinas as one of the strongest storms ever to hit the U.S. mainland, officials are still assessing the damage.

Reuters

The International Monetary Fund said on Monday that up to 20 countries, many in Africa, could need emergency assistance to cope with the global food crisis. IMF Managing Director Kristalina Georgieva, speaking at a conference in Saudi Arabia, also said that 141 million people across the Arab world are exposed to food insecurity.

Reuters

Liz Truss is standing by her Chancellor of the Exchequer Kwasi Kwarteng after the threat of a rebellion in the ruling party forced them into a humiliating reversal on a plan to cut taxes for the top earners in the U.K.

Bloomberg

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