Kathleen Biggs’ Post

Notes From the Desk: Today’s Employment Data - Bolstering the Case for Lower Rates By the numbers. US Ø June employment 206k (190k expected). The slightly higher number is offset by the 111k downward revision to the previous two months' data. Ø Unemployment rates moved up a notch to 4.1% (4% expected), Ø YoY wage growth meets consensus at 3.9%. Canada Ø Loss of 1.4k jobs (25k expected). The mix is slightly worse, with 3.4k full-time jobs lost and 1.9k part-time jobs created Ø Unemployment rate 6.4% (6.3% expected) Ø YoY wage growth 5.6% (5.3% expected) Implications Ø The high domestic wage growth will raise some eyebrows. However, we believe this is a lagging indicator, as wage settlements are playing catch-up with inflation. Ø The steady increase in unemployment should cause concerns that Canada is heading towards a harder-than-anticipated landing. This should keep the Bank of Canada on course to steadily lower rates. Ø Yields are 8-10 bps lower as traders price in two more cuts this year. A July cut remains a coin toss as there is still a CPI number (July 16) to digest before the next meeting (July 24). Ø The US labour market is becoming more balanced, but the downward trend in job creation will cause some at the Federal Reserve to be worried about overshooting on the downside.  Ø We think Chairman Powell will not want to let a soft landing slip through his fingers and will deliver some monetary easing this year. US yields are 5 -6 bps lower as the bond market moves to price in 25 bps in September and December.

Notes From the Desk - CAD May CPI - A Thorn in the Side Canadian May CPI was well above expectations, halting the trend of falling prices. The Numbers. - YoY headline CPI - 2.9% (2.6% expected) - YoY CPI Median - 2.8% (2.6% expected) - YoY CPI Trim – 2.9% (2.8% expected) Food, travel tours, hotel prices, and rent were the most significant contributors to the increase. On a positive note, mortgage interest costs continued to moderate. Implications. The Bank of Canada will not be happy with today’s data, which suggests that further progress on reaching 2% in inflation might be uneven. Yields are 7-9 bps higher as traders lower the odds of a July cut to around 40%.

Last week, the Bank of Canada (BoC) became the first of the G7 central banks to cut rates.

  Notes From The Desk: The Fed Announcement - Give & Take. As expected, the Federal Reserve (Fed) left rates unchanged, but they did adjust their projections on the timing of cuts, pushing them further into the future. The dot-plot thickens. - 2024: Shifted from 3 cuts to 1 cut. - 2025 & 2026: From 3 cuts to 4 cuts. - Neutral revised higher from 2.6% to 2.75%. The takeaways. The most important takeaway is that the Fed remains on track to cut this year and is not looking to hike further. Their language shifted from ‘a lack of progress’ to ‘there has been modest further progress’ on the inflation front. The neutral or long-term projection has been revised twice, from 2.5% to 2.75%. We see the potential for further upward revisions. The market impact. After this morning’s lower-than-expected inflation numbers, US rates dropped 14-16 bps. After the announcement, yields gave back around half of that move and are now 6-8bps above today’s lows.

Notes From the Desk: North American Jobs Data - A Ball of Confusion Divergence remains the theme for the Canadian and US economies. The labour market remains strong south of the border but continues to soften in the great white north.   The numbers. Canada. - 26.7k jobs created (22.5k expected). However, the mix is poor, with a loss of 35.6k full-time positions and a gain of 62.4k part-time jobs. - YoY wage growth 5.2% (4.8% expected). - Unemployment rate rises 0.1% to 6.2% as expected.  US   - 272k jobs created (185k expected). - YoY wage growth 4.1% (3.9% expected). - Unemployment rate 4% (3.9% expected). The implications.   The Canadian economy continues to struggle as job creation lags behind the growth in available workers. That said, the Bank of Canada (BoC) should be concerned about the hotter-than-expected wage growth.  Today’s numbers should not materially alter the BoC’s thinking, as we still have two CPI prints before the July meeting.   The US economy shows little sign of cooling as the pace of hiring remains strong. Although the unemployment rate rose to 4%, the upward pressure on wages is likely more of a concern for the Federal Reserve (Fed). Today’s data provides no compelling reason for the Fed to cut rates, allowing them to sit on their hands. Yields are rising in both markets. The US is higher by 10-15 bps, helping push Canada out by 5-7 bps.

Notes From the Desk: Bank of Canada Rate Announcement - Let's Enjoy The Moment The Bank of Canada (BoC) became the first G7 central bank to cut rates this morning, lowering the overnight rate from 5% to 4.75%.   Reading the tea leaves. The accompanying statement and press conference were decisively more 'dovish' than anticipated. - Governor Macklem stated, 'It is reasonable to expect further cuts' with the timing being data-dependent.' - He noted the drop in CPI from 3.4% in December to 2.7% was substantial progress on underlying price pressures. - He stated that the economy was clearly in 'excess supply.' Inflation usually falls when the economy is in this condition. Overall, the tone indicated the Bank expects to be on a steady path of rate cuts. The loonie and Fed divergence. For those skeptical that the BoC could go ahead of the Fed, Macklem stated there are limits, but we were 'not close to those limits.' Implications. We expect them to cut again in July and see it as reasonable for the overnight rate to reach 4% by year-end.

Notes From the Desk: US Inflation - Holy Relief Trade Batman After three months of surprises to the upside, April's US inflation data was in line (to a touch softer) with the consensus expectations. By the numbers.   Ø MoM Headline CPI 0.3% (0.4% expected). Ø MoM Core CPI 0.3% (0.4% expected). Ø YoY Headline CPI 3.4% (3.4% expected). Ø YoY Core CPI 3.6% (3.6% expected). The implications. Ø Interest rates dropped ~ 8 bps as traders moved to price in two cuts from the Fed this year. Ø A single data point a trend does not make. We suspect the Fed will want further evidence of inflation cooling before making their first move.

Notes From The Desk: CAD Employment - Strong But Not Strong Enough. In the 30 years that we have been following Canadian employment data, it seems that the monthly forecast is always somewhere between 10-20k jobs created. The dirty little secret is that no one can forecast the number, so they just submit a similar estimate every month.   But it is safe to say that today’s numbers exceeded most people’s expectations.   By the numbers. - 90.4k jobs added (20k expected). - 40k full-time jobs. - 50k private sector employment. - Virtually all the hiring occurred in the service sector. - Unemployment rate holds steady at 6.1% (6.2% expected). - YoY wage growth 4.8% (4.7% expected).   Under the hood. - On the surface, the data appears strong; however, the unemployment rate did not move. This suggests that the pace of hiring remains below what is required to absorb all the new entrants to the workforce (graduates and new arrivals).  - Wage growth remains uncomfortably high for the Bank of Canada but does show signs of moderating. Also, wages likely trail moves in inflation, given the lag in salary negotiations and adjustments.   The bottom line. - The numbers do not change the odds of a rate cut this year. Instead, they slightly lower the chances for June while increasing the probability that the first move comes in July or September. As a result, yields have only moved higher by 5–6 bps. - CPI (May 21st) and GDP (May 31st) are still to come, with CPI likely the number that decides whether a June cut is in the cards or not.

Notes From the Desk: US Payrolls - Soothing Nerves   After a few months of strong data, today’s payroll numbers will offer central banks a touch of relief.   By the numbers.   - The US added 175k jobs versus expectations of 240k. - Unemployment rose one notch to 3.9% versus a consensus of 3.8%. - Wage growth slowed one tick to 0.2% m/m versus 0.3% expected.   The implications.   The rise in unemployment and cooling wage pressure supports the narrative that the next move is a cut and opens the door wider to the Fed beginning later this year.   On the back of this report, bond markets rallied with yields moving ~10 bps lower.