After a fairly rough September, markets are rallying late this week as we close out the first week of October. The Jobs reports came out this morning, and while September's gain in employment easily outpaced consensus expectations, there was some weakness within the detail which should limit the implications for the Bank of Canada. The 64K increase in employment during September was three times the consensus expectation (+20K), and broadly matched the pace of labour force growth to keep the unemployment rate steady at 5.5%. However, the increase in jobs was not exactly broad based, and instead largely driven by a 66K gain in education which can be volatile at this time of year. Apart of that outsized move, increases in other areas such as transportation & warehousing were broadly offset by declines in other, including finance, real estate & leasing. Overall employment growth was also tilted more towards part time than full time in September. Wage growth remained stronger than policymakers would like to see, ticking up slightly to 5.3% relative to consensus forecasts for a 5.1% rate, but that still reflects some of the previous tightness in the labour market as well as wage adjustments following last year's surge in inflation. With the unemployment rate off last year's lows and job vacancies continuing to fall, wage inflation could ease fairly quickly next year.

Looking at States, the September US jobs report is telling us the underlying resilience of the US economy is greater than many anticipated. Job gains surged to 336K, up from 227K the month prior. There were +455K in net positive revisions, making the consensus expectations of 170K job gains incomparable. But there were also some more mixed elements in the report as well. The unemployment rate was unchanged at 3.8%, one notch above consensus expectations. Nominal wage growth remained subdued at 0.2% m/m, below expectations of a 0.3% gain. The participation rate stayed firm at 62.8%, indicating that last month’s sharp increase in labour supply is unlikely transitory. Overall, today’s report makes things a little complicated for the Fed. The strong figures and upward revisions to previous months underscores that demand remains solid but slowing wage growth and firm labour supply still indicate the labour market is restoring balance, even if at a slower pace.

In September, the Ivey Purchasing Managers Index (PMI) in Canada fell to 53.1 from 53.5 in August, indicating a continued but slower expansion. The reading was higher than market forecasts of 50.8 and represented the second straight month of moderate expansion. In August, Canada also unexpectedly experienced a trade surplus, driven by a surge in exports of energy and precious metals.

• The survey from Ivey Business School showed that job creation increased to a half-year high. Delivery times from suppliers also shortened, while the price index increased from 66.7 to 67.3.
• Strong export growth led to a surplus. Higher crude oil prices contributed to exports, which surpassed the rise in imports. Total exports registered a 5.7% increase, while imports grew by 3.8%. The export growth was the most significant since October 2021.
• Exports of minerals increased to C$8.5 billion in August, according to Statistics Canada. The agency noted that higher exports of gold to the US contributed to the increase.
• Energy product exports increased by 14.6% in August. The largest contributor was crude oil. Imports also rose by 3.8%, driven by purchases of basic chemical products.

The trade balance recovery to a surplus in August comes after three consecutive months of deficit. Canada’s growth recently stalled in July, but strong trade could contribute to growth in the third quarter. Although an international investment mindset is important, Canada remains a top and attractive destination for foreign direct investment.

Confidence among Canadian consumers ticked lower at the end of September, contributing to a downward trend over the past five months. Economic uncertainty, high inflation and rising borrowing costs are weighing on Canadian households, bringing down economic activity in recent months. Consumer confidence remains relatively soft, suggesting spending could pull back.

• The Bloomberg Nanos Canadian Consumer Confidence Index fell to 50.7 for the week ended September 29 from 50.9 for the week ended September 22, which is down from a 2023 peak of 53.1, reached in June.
• The strength of Canada’s economy is a significant concern for consumers. Fewer Canadians believe Canada’s economy will be more robust in six months this week versus last. The Canadian economy shrank on an annualized basis in the second quarter of 2023, while data released by Statistics Canada showed it stalled in July.
• Compared to the previous week, fewer Canadians believe the value of real estate will be higher in the next six months. Sales of existing homes have softened in recent months, partly due to waning demand with mortgage rates at high levels. While the Bank of Canada held steady at its September meeting, rates will likely persist at higher levels for longer.
• Consumer confidence is not only subsiding in Canada but in the US as well. The Conference Board recently reported US consumer confidence slipped in September, with consumers concerned about the outlook for the US economy

It has been a challenging environment for Canadian consumers amid elevated inflation and higher borrowing costs. Still, Canadian consumers have proven relatively resilient, benefiting from a strong labour market and pent-up savings. Should confidence continue to weaken, spending could be reined in, hurting economic activity.

Zero gross domestic product (GDP) growth was registered in the Canadian economy in July on a monthly basis, according to the latest data from Statistics Canada (StatsCan). Economists were expecting marginal expansion of 0.1%. Weakness in the manufacturing sector led the decline in commodity producers and is indicative of some of the challenges facing the Canadian economy as new orders slow.

• The performance of goods and services-based industries diverged. Services grew by 0.1%. Conversely, goods-producing industries contracted by 0.3%, with manufacturing falling 1.5%, the largest decline in over 24 months.
• Despite the lack of GDP growth, the mining and oil and gas segments rebounded. Forest fires limited production in June. In July, however, mining activity expanded by 4.2% compared to the previous month.
• Consensus expectations are for still near-zero growth for August. StatsCan estimates that the Canadian economy grew by 0.1% in August. However, business surveys point to a contraction in September. In June, the economy contracted by 0.2% on a monthly basis.
• Population growth is expected to have an impact. Canada’s population grew by over one million over the past 12 months. As such, the related additional demand for consumption and supply in the workforce would typically be expected to boost the economy.

This environment of subdued growth and elevated interest rates poses a challenge for Canadian consumers and businesses. However, population growth has likely served as a buffer, preventing GDP from further decline.

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Source: CIBC Morning Market Brief