Commentary
The unemployment rate in Canada rose to 5.5 percent in July, up from 5.4 percent in June. The rate continues to trend higher than what seems like the trough of 5.0 percent at the end of 2022 and beginning of 2023, but below the pre-pandemic period.
The consensus forecast for job growth was 25,000. Instead, the figure came in at a net job loss of 6,000, confirming that the Canadian economy is relatively slow. The construction industry lost 45,000 jobs, down 2.8 percent. Educational services and agriculture had net gains. The unemployment rate has increased for three consecutive months.
Average wages rose a healthy 5.5 percent year over year, which was above headline Consumer Price Index. The employment picture looks lethargic, neither robust nor weak. Overall, the general economy remains in a low growth phase. The Bank of Canada may refrain from raising rates in September as inflationary pressures subside. However, wage growth continues to be higher than some economic observers would like given a 2 percent inflation target. The published data seems to be at odds with average Canadians who are currently struggling financially.In contrast to Canada, the United States saw job gains of 187,000, which was below the consensus of 200,000 to 225,000. The unemployment rate dropped to 3.5 percent in July from 3.6 percent the previous month. The rate comfortably remains in the 3.4 percent and 3.7 percent range of the last year and a half.
Canadian 10-year yields declined about 0.07 percent to 3.68 percent after the release of the data. U.S. 10-yield fell from 4.20 percent to 4.14 percent. This indicates that bond market participants view the data as positive with respect to inflation pressures easing and that central banks appear less likely to raise rates. The market appears to be expecting a scenario of less inflation without a recession.
Interest rates may very well be peaking, affording bond investors to adopt a positive outlook. However, caution is advised with respect to the outlook for stock markets that remain expensive in terms of valuations. Earnings seem to be weakening and, in general, corporate balance sheets are looking weaker while those refinancing their debt are looking at significantly higher interest costs.
Unemployment rates are a lagging indicator of the economy. They tend to rise once a recession has begun, and given that recessions are not officially labelled as such until GDP data comes in months later, they do not provide an effective tool to predict recessions. Furthermore, economic growth remains lethargic. The economy may not be in a recession in North America, but it is certainly not in a boom.
Leading indicators are still negative and the yield curve remains inverted. Both are excellent economic downturn indicators. Europe and China remain weak, and together they have a bigger share of the world economy than North America. Also, the yield curve indicator inverted at the end of 2022. Typically when this happens, recessions occur six months to two years later, so those contending that this indicator no longer works are premature, just as many were before the 2008 Global Financial Crisis.
The total magnitude of the effect of rising rates has yet to be felt.
