Canada’s Trade Commissioner Service offered via Twitter this week to help executives struggling with this question: What is a free trade agreement?
In that spirit, let’s revisit the subject of how one should interpret Statistics Canada’s monthly Labour Force Survey. The lesson is mostly for currency traders, who made some weird bets after StatCan on Friday reported that employment declined by 2,200 positions in June and the jobless rate increased to 5.5 per cent.
The Canadian dollar dropped about half a cent after the data were released, which probably had something to do with traders wanting assets to purchase U.S. dollars, since the value of the greenback jumped on the news that the U.S. economy in June added 224,000 jobs — more than most analysts expected. Wall Street rethought the likelihood of interest-rate cuts this summer, causing stock markets to tumble. The calculation: monetary stimulus is better for equities than full employment. (Because it’s 2019.)
But if part of the calculation is that the latest Canadian numbers will trouble the Bank of Canada, then some traders are likely going to lose some money. “I think currency markets totally missed the partly offsetting narrative that this is a very strong report,” Derek Holt, a Bank of Nova Scotia economist, told clients in a note.
The jobs report was good, not bad.
Few of us listen, but StatCan encourages readers of the labour survey to pay attention to the trend, not the month-to-month change, which always comes with a huge margin of error.
The decline from May was too small on its own to say anything more than employment had plateaued at a high level. The jobless rate was the second lowest recorded in the data set that goes back to 1976, so that’s hardly a sign of weakness. StatCan’s measure of the trend in hiring, based on a calculation of the current month and the previous six months, increased by almost 22,000 positions in June.
Earlier this year, when headline employment increased by an incredible 106,500 positions, the trend reading rose by only 34,800. The economy is rarely as strong or as weak as the headlines and tweets on Jobs Day suggest.
Canada’s economy is essentially at full employment, a situation where most people who want a job can get one. The jobless rate rose because StatCan counted more new people in the labour force than newly employed workers. Many economists interpret a growing workforce as a sign of confidence in the overall economy.
“With the average pace of job growth still very strong in 2019, we do not see the modest pull-back in employment as a sign of labour market softness,” said Victoria Clark, an economist at Citigroup Inc.
The hiring numbers are the last significant indicator that Bank of Canada leaders will receive before they reset policy on July 10, and they cement the central bank’s position as an outlier.
Australia’s central bank has been cutting interest rates, the European Central Bank has made it clear that it is thinking about doing so, and almost everyone assumes the U.S. Federal Reserve will lower its benchmark rate later this month. In Australia, the unemployment rate has been climbing higher, while inflation in Europe and the U.S. remains weak. The data warn that something is wrong.
It might seem odd, but the Bank of Canada has been presented with little reason to follow its peers. Non-energy exports surged 4.5 per cent in May, the biggest monthly increase since July 2016. Scotiabank’s model of real-time economic growth predicts gross domestic product will expand at annual rate of 2.7 per cent in the second quarter, much faster than the BoC assumed in April.
“We see reasons for the bank to leave open the option that the next move might be a hike,” David Watt, an economist at HSBC in Toronto, told clients on July 5.
Watt’s analysis has the BoC leaving the policy rate unchanged through next year, when weakness in the global economy will eventually force Canadian policymakers to join the path taken by the Australians, Americans and Europeans.
But that would require a significant shift in domestic conditions.
The best information in the Labour Force Survey is below the headlines. The BoC watches more granular indicators such as wage growth, long-term unemployment and the youth participation rate for signs of inflation pressure.
StatCan said average hourly wages increased 3.8 per cent from June 2018, the biggest year-over-year increase since May 2018. The number of Canadians in the labour force who reported being unemployed for more than 26 weeks shrunk to 155,400, the least since December 2008. And the youth participation rate climbed to 69.4 per cent, the highest since August 2018 and above the historical average.
Other central banks are worried about the outlook, so the Bank of Canada will also be worried. But few of the gauges on BoC Governor Stephen Poloz’s dashboard are flashing warning signs. The traders betting on lower interest rates in Canada this year have set themselves up for disappointment.
• Email: klibin@nationalpost.com | Twitter: kevinlibin
