Bram Houghton
February 11, 2023
Economy CommentaryBi-Weekly Market Update – February 10th, 2023
Wicks Houghton group BI-Weekly Market Update
Canada’s employment in January increased by 150,000 a multiple of 10 times expectations. The largest employment increases were in Ontario, Quebec and Alberta. The Canadian unemployment rate held steady at 5.0%, below forecasts, signaling the Canadian labor market remains tight.
Canada’s November Gross Domestic Product (GDP) came in at 2.8% year-over-year. Month-over-month, November GDP rose 0.1%, matching expectations. It will likely be flat in December.
Canada’s December trade deficit narrowed since November. Exports decreased 1.2%, on lower exports of energy products. Imports were down 1.3% by lower imports of consumer goods.
The unemployment rate in the U.S. inched lower to 3.4% in January, the lowest level since May 1969 and below market expectations of 3.6%. The U.S. economy unexpectedly created 517,000 jobs in January, beating market forecasts of 185,000.
December U.S. job openings rose above well above market expectations forecast, which suggests the labour market is still extremely tight.
U.S. initial jobless claims fell to a nine-month low and well below expectations. This is signaling that the U.S. labor market is still going strong despite more reports of corporate layoffs.
U.S. trade deficit rose 10.5% in December from November with both imports and exports softening. The trade gap rose to approximately US$100 billion which is double the size of the deficit 6 years ago.
The Bank of England raised interest rates for the 10th time in a row, by a half point. U.K. Gross domestic product (GDP) data showed the economy managed to avoid a recession at the end of 2022 with Q4 data flat at 0.0%, in line with consensus.
Data showed German retail sales unexpectedly fell in December, while French inflation rose in January on higher energy prices and the euro zone economy grew in the last quarter of 2022, which was better than estimates. German exports also fell more than expected in December with high inflation and market uncertainty.
Eurozone headline inflation eased for a third straight month in January, core inflation is unchanged at a record high. Britain and the European Union have struck a customs deal that could help end post-Brexit wrangling over Northern Ireland.
January Services PMI for the Eurozone topped expectations with the U.K. Germany, Italy and UK all beating preliminary readings. Purchasing Managers' Index (PMI) also showed a pickup in China and Japan services activity last month.
Oil prices are slightly down the last two weeks with a multitude of forces weighing in. These included the Earthquake in Turkey, Chinese demand recovery, Russia’s plan to cut March production by 500,000 barrels a day and U.S. oil inventories hitting their highest in months.
Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets
Schwab Market Updates Podcasts - https://www.schwab.com/resource-center/insights/section/schwab-market-update
Market Data | S&P/TSX | S&P 500 | DOW | NASDAQ | STOXX EU | WTI | GOLD |
This Week | -0.7% | -1.1% | -0.6% | -2.4% | +0.3% | +8.7% | FLAT |
Last Week | +0.2% | +1.6% | +0.2% | +3.3% | +0.4% | -7.9% | -2.4% |
CIBC Economics: A jolt from the JOLTS? (The Week Ahead) by Avery Shenfeld Link to Article
The U.S. Labour market had mixed news in January: while payrolls showed an increase in hiring, job openings showed a second consecutive monthly increase, creating a large number of unfilled jobs. This has raised the concern of employers being tempted to lure workers away from existing positions by offering higher pay, potentially leading to an inflation spiral.
However, there are signs that employers are not as willing to pay up, leading to speculation around the labour market's true impact on inflation. Today's payrolls data might indicate a rate hike in March, although if inflation remains low the Fed might not need as much slack in the labour market to reach their inflation objectives.
A reprieve or a stay of execution? (The Week Ahead) by Avery Shenfeld Link to Article
The Canadian and U.S. economies escaped a recession in the start of 2023, as evidenced by the significant job gains in January and a recovery in services consumption in the U.S. As such, U.S. and Canadian central banks might not need as much slack in the labour market to reach their inflation objectives.
CIBC Economics’ model to predict recession probabilities suggests that it is currently at a new high for the current expansion, indicating that the economy is still at risk. And a US recession in most cases is sufficient enough to generate a downturn in Canada.
However, there have been previous occasions where similar probabilities were reached without leading to a recession. When considering the most recent economic news with recession modeling, CIBC Economics’ believes there will be a stall in growth in 2023 leading to some labour market slack but there is the likelihood of a soft landing for the North American economies.
Quick Take: Canadian Employment (Jan) by Andrew Grantham
Another month, another blockbuster job print for the Canadian economy. Today's data showed a gain of 150,000 jobs during January, ten times the consensus forecast and an acceleration from the already-strong prior month. Most of the jobs this month were in full time and by sector wholesale/retail and healthcare led the way. The strong job figure was also accompanied by an increase in hours worked as sickness-related absenteeism was closer to seasonal norms, which is a positive for GDP and suggests that the economy certainly isn't on the verge of recession. Even though today's jobs figure was well above expectations, the unemployment rate held steady at 5.0%. Strong population growth, combined with an increase in participation, appears to have supported employment growth without making the labour market any tighter. Wage inflation actually decelerated, although that at least partly reflects the fact that average earnings were biased upwards a year ago as Omicron-related shutdowns led to temporary job losses in low wage sectors.
The Bank of Canada's conditional pause on interest rates was likely done partly so that policymakers didn't feel the need to respond to any single strong data print, no matter how strong, but rather assess how the economy is faring over the course of a few months. However, that won't stop markets reacting to today's strong data by pricing in a greater probability of further hikes, and pricing out rate cuts.
Global Insights
End of easy-cash era is going to hurt by Reuters Link to Article
The end of the easy-cash era is over and its impact is yet to be felt on world markets. U.S. and UK central banks are unwinding stimulus further by offloading bonds they hold, and the European Central Bank will join them soon. Nomura estimates the balance sheets of the three banks will shrink by $3 trillion this year.
There are several challenges that arise from the tightening in monetary supply we will continue to endure in 2023:
- Betting on High Growth? Even after a January bounce as higher rates make it more expensive to take punts on the potential earnings growth of early stage or speculative businesses.
- Default risk: Concerns about corporate defaults are mounting as rates rise, although recession worries have eased. S&P Global said Europe had the second-highest default count last year since 2009. It also expects U.S. default rates to rise by September 2023.
- Going Private: Private debt markets have ballooned since the financial crisis expanding by a multiple of 4 since 2010. The largely floating-rate nature of the financing appeals to investors, who can reap returns in high single to low double digits, as rates plunged post 2008.
- Real estate markets, first responders to rate hikes, started cracking last year and 2023 will be tough with U.S. house prices expected to drop 12%. European real estate is reporting distress levels not seen since 2012, according to data from law firm Weil, Gotshal & Manges.
Notable News
A Chinese spy balloon has been flying over the United States for a couple of days, U.S. officials said on Thursday, in what would be a brazen act just days ahead of a planned trip to Beijing by U.S. Secretary of State Antony Blinken.
Fighter jets were mobilized, but military leaders advised President Joe Biden against shooting the balloon out of the sky for fear debris could pose a safety threat, advice Biden accepted, U.S. officials said.
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