Michael Watkins
March 15, 2024
Weekly Market Update
Data released last Friday showed Canada’s economy added jobs for a seventh straight month. While the labour market remains relatively robust, underlying data points to some slowing conditions in the labour market. Population growth has been helping to fuel the labour market recently, which might be inflating the headline figures.
- Canada’s economy added 40,700 jobs in February, adding to the 37,300 job gains in the previous month. February’s total was also above economists’ expectations, based on a Bloomberg survey of economists.
- The full-time sector added jobs over the month, while the part-time sector lost jobs. The accommodation and food services industry added a relatively high number of jobs over the month, as did the technical services industry.
- This was the seventh consecutive month of job additions. However, most economists caution that the growth in jobs is largely the result of population growth. There are more persons willing to take available jobs. Conversely, there hasn’t been a significant jump in new jobs available.
- Canada’s unemployment rate edged higher to 5.8% in February from 5.7% in January. Wages continued to advance at a quick pace, rising by 4.9% year-over-year in February. Strong wage gains have added to inflationary pressures.
- The US also reported its labour market data on Friday. The US economy added 275,000 jobs in February, but the unemployment rate rose to 3.9%. Many Americans started looking for work but were unable to immediately find a job.
While the headline figures appear rather appealing, there are some signs of Canada’s labour market slowing. A prolonged slowdown in labour market conditions, combined with lower inflationary pressures, could have the Bank of Canada considering a rate reduction this year.
Turning to the States, the Bureau of Labor Statistics reported that the US inflation rate accelerated in February, suggesting the US Federal Reserve Board’s (Fed) battle against inflation is not yet done. Many US households have been pressured amid still high inflation and rising borrowing costs. While the Fed appears poised to begin lowering interest rates, which might ease the pressure on many households, February’s data might point to the Fed holding steady for a bit longer still.
- The annual US inflation rate was 3.2% in February. This was slightly above the 3.1% year-over-year rate in January, which was also expected this month, based on a Bloomberg survey of economists.
- There were several categories of consumer prices that kept inflation elevated. Gas prices fell year-over-year but at a slower pace than in the previous month. Prices for transportation accelerated in February. Food and shelter prices remained relatively elevated.
- High core inflationary pressures persisted. The core inflation rate, which excludes more volatile items such as energy and food, was 3.8% year-over-year in February, ticking lower from the 3.9% rate in January. Consumer price pressures are broad-based, hindering consumers across several product categories.
- The Fed makes its next interest-rate announcement on March 20. The target for its federal funds rate currently stands at 5.25%–5.50%. Markets are currently expecting the Fed to hold steady, and this report likely reinforces that position given inflation remains well above its 2% target.
Despite ticking higher in February, inflation in the US has trended downward over the past year. Still, headline and core inflation haven’t declined enough to get the Fed to begin lowering interest rates just yet. The same environment persists here in Canada. Market participants are in a bit of a precarious position, knowing interest rates are going to come down but being uncertain about the timing and depth of those cuts. As a result, equity markets have seen bouts of volatility despite reaching new record highs in 2024.
Meanwhile over in the United Kingdom, the Office for National Statistics reported that gross domestic product in the UK grew in January. The UK economy, one of the largest in the world, fell into a technical recession in the fourth quarter of 2023 amid tight financial conditions, but it appears to be picking up in early 2024. Still, challenges remain, which could nudge the Bank of England (BoE) to begin lowering interest rates later this year.
- The UK posted economic growth of 0.2% in January over the previous month. The UK economy fell into a technical recession in the fourth quarter of 2023 as high inflation and borrowing costs weighed on consumer and business activity. January’s growth raises hope that the harmful effects from tight monetary policy might be over.
- January’s improvement was driven by a rise in construction output and retail trade. Construction output rose by 1.1% in January, its largest increase since June 2023. Home builders had a particularly robust month as they sought to increase supply housing to meet climbing demand over the past few years.
- Conversely, industrial production shrank over the month of January, falling by 0.2%. Manufacturing output was relatively muted over the month in response to weak demand with financial conditions remaining tight.
- While January’s data points to improving economic conditions, growth might remain relatively sluggish. Financial conditions remain tight, weighing on households and businesses. Relatively weak external demand might continue to impact the UK’s manufacturing and services sectors.
The UK economy is improving but doesn’t appear to be completely out of the woods yet. Tight financial conditions could continue to hamper economic activity in the months ahead. Combined with falling inflation, the BoE is expected to begin lowering interest rates later in 2024. The results could be good news for the British pound, which has performed well this year with the BoE expected to stay higher for longer and data pointing to improving economic activity.
As always, please give us a call if you have any concerns or questions, or if you’d like to book a portfolio review. Please note that while most of the tax slips and reports have been sent out, there may be a few slips left to come at the end of the month. By the first week in April, we should have all of the tax documents uploaded to the online portal.
Source: CIBC Morning Market Brief