Unemployment data released Friday shows a contrast between a labor market that has become erratic again in Canada and surprisingly strong in the United States. Is this going to result in a “decoupling” with a Federal Reserve continuing to raise interest rates on its own and fueling a decline in the Canadian dollar which would cloud the issue?
Statistics Canada tells us that employment in the country only increased by 10,000 in November, when it surprised the previous month with an unexpected surge of 108,000 jobs. Thus, the strong growth measured in Quebec, with a gain of 28,000 jobs last month, was offset by declines recorded in five other provinces. Quebec’s performance marked a third increase in four months and allowed the unemployment rate to set a new record low, at 3.8%. These increases observed in November were concentrated in the Montreal area, where employment increased by 25,000 and where the unemployment rate was unchanged at 4.2%. Among the other regions of Quebec, it varied from a low of 2.7% in Sherbrooke to a high of 5.4% in Saguenay.
Average employee hourly wages
Another sensitive indicator, the 12-month growth in average employee hourly wages, up 5.6%, or $1.71, to $32.11, remained above 5% for a sixth consecutive month in november. In Quebec, it continued to hover around 6% for a fourth consecutive month. “Consumer price growth, which had been 6.4% in October, could once again approach wage growth in November (when the data will be published)”, highlighted the Institut du Québec. .
Despite the strength in Quebec, the labor market in Canada has once again become rather shaky, when it surprised again south of the border last month. In November, 263,000 jobs were created in the United States, well above the 200,000 expected by analysts, but less than the 284,000 jobs in October.
Thus, even if the Chairman of the Federal Reserve, Jerome Powell, spoke this week of a slowdown in the rate of growth of his key rate, the trend remains bullish. From this side, and given the greater vulnerability of the Canadian economy to the real estate market and the level of household debt, there is no doubt that the vigorous tightening cycle of the Bank of Canada is closer from the end than from the beginning. It must. “The economy just can’t take much more,” said Royce Mendes, managing director and head of macroeconomic strategy at Desjardins Group.
In a blog, the Financial Post echoed the findings of TD economists, who estimate that the cost of servicing household debt at the end of the year will be 30% higher than in the first quarter of 2021.
Risk of monetary “decoupling”
Currently, the Bank of Canada’s overnight target rate is 3.75%. Expectations range for a 25 or even 50 basis point hike on December 7, followed by a break. In the United States, the overnight rate is in the range of 3.75-4%. James Bullard, president of the St. Louis Fed, had estimated Tuesday that this final rate could reach 4.9%. Analysts believe that it could, at its peak of the current bull cycle, exceed 5% somewhere next year.
If so, the gap between Canadian and US rates would grow, which could only have repercussions on the exchange rate and shine the spotlight on foreign trade. We saw a manifestation of this in the latest Canadian GDP figures, with an annualized growth of 2.9% in the third quarter, clearly higher than expected and strongly fueled by an increase in exports.
In its Monetary Policy Report, the Bank of Canada devoted a chapter or two to the appreciation of the US dollar against major currencies. “Rapidly rising interest rates in the United States and increased movements into safe havens on concerns about a global recession have contributed to a significant appreciation of the US dollar. The U.S. dollar then jumped 16% from its summer 2021 level. The Canadian dollar moved from US81¢ in 2021 to fall to US0.72¢, a decline of 11%.
In its fall forecasts, the central bank is now counting on the dollar at 74¢US, or 4¢US less than in its July forecasts. “The rapid increase in the policy rate in the United States and the surge in the US dollar have both had a significant impact on global financial conditions. The appreciation of the US dollar is also increasing inflationary pressures in many countries,” she added.
For TD, the Canadian dollar should flirt with 70¢US if the Federal Reserve persists, on its own, in testing the limits of the current bull cycle in interest rates.