Michael Watkins
April 05, 2024
Weekly Market Update
The cracks that had been emerging within the Canadian labour market suddenly got a lot wider. Employment edged down by 2K in March, against consensus expectations for a 25K increase. While that admittedly isn't a large decline given the volatility of monthly labour market data, it came in contrast to a further sharp rise in the population. As a result, the unemployment rate spiked to 6.1%, from 5.8% and against expectations for a more modest increase to 5.9%, with labour force participation unchanged. Over the past 12 months the unemployment rate has now risen by 1%. Accommodation & food services and retail & wholesale led the employment declines by industry, suggesting sluggishness in consumer spending is impacting hiring plans. Offsetting those declines, health care saw the largest increase on the month. While markets had been pushing back expectations for a first Bank of Canada interest rate cut following strong GDP data to start the year, today's labour force data should see them pulling those expectations forward again closer in line to our expectation for a first move in June.
Data from S&P Global showed business activity in Canada contracted in March. Elevated inflation and high borrowing costs have weighed on consumer demand domestically and abroad, challenging Canada’s manufacturing and services sectors. However, as interest rates eventually fall and economic conditions potentially improve globally, business activity in Canada might benefit as a result.
- The S&P Global Canada Composite Purchasing Managers Index fell slightly to 47.0 in March from 47.1 in February. (A reading below 50 denotes contraction.) This marked the 10th consecutive contraction in Canadian business activity. Both manufacturing and services sector activity weakened in March, suggesting Canada’s economy might be a bit unstable amid still tight financial conditions.
- Activity in Canada’s services sector contracted in March, its 10th straight month of shrinkage. New orders continued to decline, while service providers were hurt by higher costs, which shrank operating margins. Employment growth also fell amid a slowdown in demand.
- Earlier this week, S&P Global reported Canada’s manufacturing sector contracted for an 11th straight month in March. The main drags on performance continued to be weak new orders and output.
- South of the border, US business activity expanded in March, but at a slower pace than in February. The slowdown was reflective of relatively weaker demand in both the US and globally over the month. Still, both the manufacturing and services sectors grew in March.
The data from S&P Global suggests the Canadian economy might not be on secure footing. The ongoing softening in inflationary pressures and relatively weak economic activity could nudge the Bank of Canada to start lowering interest rates. Global business activity remains relatively weak as consumers contend with tight financial conditions. Market participants expect lower interest rates to unlock stronger demand, which could improve business activity.
Looking at the States, the US Bureau of Economic Analysis released US personal spending and income details on Good Friday. The personal consumption expenditure price index (PCE), which serves as the preferred inflation gauge for the US Federal Reserve Board (Fed), was also announced. While the data reinforced the Fed’s recent decisions to hold rates steady, February’s results also point to a likelihood of the Fed lowering rates this year.
- Personal spending increased by 0.8% in February over the previous month. This marked the 11th straight monthly increase and largest since January 2023, suggesting US consumers remain relatively strong despite tight financial conditions.
- Spending on financial services and transportation services was relatively stronger over the month. Higher personal spending in February was aided by a rise in personal income. Personal income in the US rose by 0.3% in February. US consumers benefited from higher compensation, which offset a decline in income from personal assets.
- This takes us to the PCE, which rose by 0.3% in February, marking a slowdown from the 0.4% increase in the previous month. On a year-over-year basis, the PCE was 2.5% in February. While up from January, the general trend of PCE has been downward. PCE was 5.2% in February 2023.
- PCE and core PCE pressures remain elevated, resulting in the Fed holding steady at its two meetings thus far in 2024. However, inflation is creeping closer to the Fed’s 2% target, which could result in the beginning of interest-rate cuts this year.
In the bigger picture, yesterday’s session saw oil prices reach over US$85 per barrel, their highest level since October 2023. Oil prices have increased in 2024 largely in response to production cuts from the Organization of the Petroleum Exporting Countries plus allies (OPEC+), along with expectations for demand to tick higher. A further rise in oil prices could put added pressure on already elevated inflation in Canada and elsewhere.
- Earlier in 2024, OPEC+ announced it would extend its production cuts through the second quarter of 2024. The reduction of approximately 2.2 million barrels of oil per day might significantly reduce the supply of oil in the market. OPEC+ hopes its production cuts could help stabilize the oil market.
- Meanwhile, ongoing geopolitical tensions in the Middle East have increased uncertainty about the supply of oil from the area. The Middle East is a significant supplier of oil to the global market. Geopolitical tensions and supply chain challenges could put upward pressure on oil prices.
- The summer season could bring a rise in demand for oil. Historically, demand for oil has risen in the summer months as more people travel, both domestically and abroad. Furthermore, improving global economic conditions could bring about a rise in demand from businesses and consumers.
- The increase in oil prices has helped push energy stocks higher in Canada. The energy sector has been one of the top-performing sectors on the S&P/TSX Composite Index in 2024, helping to drive overall gains.
As always, if you have any questions, or if you’d like to get together for a portfolio review, please give us a call.
Source: CIBC Morning Market Brief