Employment market gets a jolt

Patrick O’Toole, Adam Ditkofsky and Pablo Martinez - 10/07/2022

Economic Data

Today’s employment reports continued to show that the job market remains healthy in both Canada and the U.S. However, there are signs that leaner times are coming in some of the leading indicators. The weekly jobless claims report in the U.S. spiked higher, and the JOLTS (Job Openings and Labor Turnover Survey), which has been closely monitored by the Fed, showed the biggest one month drop (-10% month/month) in job openings since April 2020. However, they remain elevated as there are still 1.7 jobs available for every unemployed worker. The Fed will welcome this news as it is trying to eliminate available jobs in its quest to reduce wage pressures.

It's not only the employment market that is showing signs of slowing. The purchasing managers’ index moved closer to the level of 50 that differentiates expansion with contraction. The good news is that supply chain disruption indicators have improved markedly, but the key new orders component did move below the 50 mark; that’s not good for future GDP, nor was the news that construction spending stayed in the red for the second consecutive month. And although vehicle sales improved, they are still sluggish, even though inventory levels are improving.

In Canada, there was some improvement in new building permits led largely by a big boost in multi-family residential permits. We need it, given elevated immigration levels. But key real estate markets are still declining: Vancouver sales are down 46% year/year with prices off 8.5% from the March peak, and Toronto home prices have declined for 5 straight months with prices down 16% since March. On the trade front, our balance took a hit as energy prices declined and agricultural exports contracted. Both are expected to improve in coming months. The highlight of the week, though, was Bank of Canada Governor Macklem’s speech on Thursday, where he reiterated that the Bank has more hikes up its sleeve, stating “there is more to be done”. No pivot is on the horizon yet.

Bond Market Reaction

Any time we see the market start to think the Fed will be cutting rates in 2023, Fed Governors rush out to quash those rumours. That has certainly hurt the bond market as it has tried to rally to reflect the increasing consensus that a recession is coming in 2023, or sooner. In the U.S., we’ve seen the benchmark 10-year Treasury yield rise for the past 10 weeks (longest stretch since 1984), leaving the futures market expecting a 0.75% hike at the Fed’s November 2 meeting, and the Fed Funds rate peaking around 4.5%-4.75% by March. In Canada we’ve seen the 10-year yield more resilient, and the futures market expects a 0.5% hike at the Bank’s October 26 meeting, with the rate peaking at 4.25% after the turn of the year.

The corporate bond market held in well this week, despite the weakness in the equity market. Investment grade credit spreads were stable, but the high yield sector saw some strength as spreads moved about 0.5% lower as investors responded to all-in yields that were above 9% early in the week.

Stock Market Reaction

Equity markets spiked higher from oversold levels to start the week, only to settle back down following continued hawkish comments out of central bankers. The only lesson to glean here is in the perils of market timing and a reminder that no one knows when the turn arrives. Chances are we haven’t seen the ultimate lows this cycle, but missing out on the best days when the turn does occur can permanently diminish long-term performance. Energy was the big outperformer this week, as OPEC+ demonstrated a commitment to place a floor under the price of crude with a greater than expected 2 million barrel per day quota cut. The backdrop for the large Canadian producers, with long-life, low decline assets, fully repaired balance sheets, cheap valuations and a commitment to return excess capital to shareholders is quite attractive for the foreseeable future. The Canadian Banks had a volatile week, starting strong, only to give back most of their gains. There was excitement within the tight Canadian bank oligopoly when rumors surfaced of HSBC “reviewing strategic options” for its Canadian subsidiary. Most banks will kick the tires, although the $10 billion expected price tag will be tough to digest for most.

?What to Watch Next Week

We’ll see the existing home sales report in Canada next week along with manufacturing sales. The U.S. sees the latest inflation report, producer prices, retail sales, and consumer sentiment.

Disclaimer

Patrick O’Toole is Senior Portfolio Manager, Global Fixed Income; Adam Ditkofsky is Senior Portfolio Manager, Global Fixed Income; and Pablo Martinez is Portfolio Manager, Global Fixed Income.

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