The economy continues to create jobs… unfortunately. I never thought I would write such a thing, but at the point where we are, job creation is not really desirable.
Why is that ? Because the Bank of Canada is doing everything to slow down the economy and thus curb inflation, by raising interest rates. However, the job creation in Canada reported on Friday tells us that the institution’s measures are slow to make themselves felt, which raises fears of further interest rate hikes… and stronger mortgage payments.
Despite seven increases in the Bank’s rate in 10 months in 2022, to 4.25%, the Canadian economy continues to be rather robust, as indicated by the creation of 104,000 jobs in December reported by Statistics Canada.
However, several indicators showed that the economy was shaken by these interventions by our central bank. The residential real estate market is slowing markedly across Canada. And at 3e quarter of 2022, i.e. during the summer, Quebec’s GDP fell by 1.9%, on an annualized basis. Another negative quarter, and it could have been called a recession, if we go by the technical definition.
But now, since September, the job market has been strong from coast to coast.
On average, the employment rate reached 61.8% in Canada in December, up from 61.3% in September. And in Quebec, the employment rate increased between July and December as much as it had fallen between March and July. The employment rate is the proportion of people aged 15 and over who are employed.
This strength in employment causes the average annual unemployment rate to reach historic lows in 2022.
The consequence is quite predictable. Once again, the Bank of Canada is in danger of raising its key rate in its next release, on January 25. Two other important indicators are expected before the Bank’s decision, namely the one on inflation for the month of December, on January 17, and the one on the outlook for businesses, on January 16.
But already, many economists are wet: the Bank will raise its key rate again on January 25, they predict, this time by 25 basis points (0.25 percentage points), to 4.5%.
At least that’s the opinion of economists from Desjardins Group, BMO and CIBC following the release of Canadian employment data.
For its part, the National Bank’s economic department notes that the financial markets are considering an increase in the key rate of 19 basis points, against 16 points before the publication of Statistics Canada’s employment figures. Although the minimum increase in the rate is 25 points, investors – who move the parameters of the markets – therefore believe that we are very close to another increase in the key rate.
… but the stock market is going up!
End of analysis? Well no. Normally, this jump in the probability of a Bank of Canada rate hike should have cooled the stock markets or at least had a neutral effect. However, stock markets are up sharply. The S&P/TSX index of the Toronto Stock Exchange even jumped 1.6% on Friday, and that of the S&P 500, 2.3%.
How can this apparent contradiction be explained? This is because the United States also released employment data on Friday. Here too, the data is not bad: creation of 223,000 jobs in December, more than the consensus of 203,000 jobs.
But this good job creation hides less glorious performances. The service sector is down, and while employment is up overall, the total number of hours worked per week fell to 34.3 hours, a 32-month low.
Importantly, the data points to significantly weaker wage pressures than economists predicted. Annualized wage growth in the United States (3-month average) thus fell from 4.7% to 4.1% in December, the lowest level for 8 months, according to an analysis by the National Bank.
This finding was seen as a sign that the US Federal Reserve’s hike in interest rates to curb inflation is paying off. And quickly, 2-year and 10-year bond yields in the United States reacted, falling 16 and 13 basis points respectively, reaching 4.29% and 3.59%. In Canada, the decline was much more modest (6 points and 3 points, at 3.11% and 4%).
This signal of a possible easing of inflation in the United States had repercussions on the stock markets, with a rise in the main indexes.
In short, nothing is decided yet. The only certainty – and you can bet big on this – is that stock markets will fluctuate, as a former colleague told me.