September 10, 2021Money Education Financial literacy Economy Commentary In the news News Trending Weekly update
What's Happening Today
They say that close only counts in horseshoes, but it counts in Canadian elections as well. When the polls are neck and neck between the two parties that have historically governed the country, it’s not just about how close they are to each other, but what’s happening to the third and fourth ranked parties, in a way that many who aren’t used to the ins and outs of a parliamentary system could easily miss. Projections from CBC’s poll tracker again have neither the Liberals nor Conservatives positioned for a majority, with the former in a slight lead in seat counts. But in those projections, the Liberal’s lead would be too narrow to be able to pass a bill with only the help of the Bloc. The NDP have enough of a lead over the Bloc at this point that they might be decisive in determining who forms a government. That could end up giving the NDP more sway than they had during the prior government. So it’s worth at least a look at the NDP platform to judge what some of their top priorities might be, and where they intersect or contrast with other parties, particularly the Liberals who are most likely to benefit from their support.
In economic news, summertime in Canada showed again just how strong the labour market can be when there's a lull in Covid cases. The economy created another 90K jobs in August, which topped consensus expectations and came after even stronger gains in the prior two months. The easing of restrictions continued to allow for more employment in services sectors. Most of the hiring showed up in the private sector and were for full-time jobs. That said, there were a few flies in the ointment, with hours worked essentially unchanged and the participation rate falling. The latter helped push the unemployment rate all the way down to 7.1%, the lowest since the pandemic began. Moreover, the economy is still a long way from being fully healed. While employment according to the Labour Force Survey is only 0.8% below its pre-Covid level, other indicators of the economy suggest more weakness. The country is also now in the midst of a fourth wave which will restrain growth this fall. So, while today's employment reading might nudge the Bank of Canada to taper asset purchases again in October, rates are likely to remain on hold until late next year.
Yesterday witnessed two central banks underlining their policy strategies. While both the European Central Band and the Bank of Canada were intent upon communicating future policy direction to the market, both were intent upon making sure that the adjustments were not seen as remotely hawkish. The challenge for the central bank community, or at least those looking to move away from ultra-easy policy, is the gradual reduction of the liquidity punchbowl without creating an outsized asset market reaction. In this regard communication remains key.
The ECB President was keen to underline that the recalibration in bond purchases, from a ‘‘significantly higher pace’’ to ‘‘moderately lower pace’’ is not tapering, rather a mere ‘‘recalibration’’. However, the thorny issues such as the process to wind down the PEPP programme, including decisions upon transferring policy flexibility into the open-ended APP, have been delayed until the December meeting, notably when the ECB will have 2024 forecasts for the first time.
BoC Governor Macklem used his speech, ahead of the key MPR decision next month, to underline plans for the next phase of his central bank's quantitative easing programme. The so-called reinvestment phase will see the central bank reinvesting the proceeds of maturing bonds, with purchases of between CAD4-5bn per month in both the primary and secondary market. While not giving an exact timeline, Macklem stated that continuing to add stimulus will be unnecessary as the recovery extends through H2. In terms of that recovery narrative we anticipate a continued improvement in August labour market activity. However, our colleagues in CIBC Capital Markets Economics expect a gain of 50k compared to the median assumption of 67.5k.
- the US, the Biden administration has attempted to facilitate a strategic dialogue with the Chinese, based upon converging interests. On the domestic agenda the battle to up the US vaccination rate continues to heat up, this comes as the administration looks to mandate that all executive branch employees and federal contractors be jabbed. Due to ongoing vaccine hesitancy the proportion of the US population who have had one jab, let alone be fully vaccinated, stands at around 62.5%, below even Brazil. Low vaccination rates allied to the spread of the delta variant, daily Covid cases remain around 60% of the January peak, continue to threaten the recovery narrative. While vaccine hesitancy continues to challenges the recovery we are yet again facing a debt ceiling challenge. Last night Treasury Secretary Yellen convened a meeting of the Financial Stability Oversight Council to warn that there may be implications for financial stability if Congress fail to address the debt ceiling. The Treasury may soon be dusting off contingency measures from a decade ago should the debt ceiling issue not be addressed in a timely manner.
Meanwhile in the UK, data earlier today showed Britain’s economy unexpectedly slowed to a crawl in July, as the Covid-19 Delta variant spread rapidly. Since peaking back in late May we have seen the UK economic surprise index slump from above to 150 to now just above -50. July GDP data advanced by just 0.1%, well below the 0.5% median. The gain represents the slowest pace of activity since January, when the UK was in lockdown.
Finally, the Germans go to polls in a little over two weeks. As the election race heads into the final straight the SPD continue to retain a solid poll lead. The latest Politico poll of polls puts the SPD four points ahead of the Conservative CDU/CSU grouping, 25% to 21%. Such an outcome, even if the Greens were to poll around 16%, would require a third party to join any governing coalition. As a consequence we can expect a period of fraught political negotiations post the vote. Last time around it took six months to form a government, albeit the market still had the reassurance of Merkel’s presence.
As always, give us a shout if you have any questions, or if you’d like to chat.