#MacroMemo: Mar 13 – 17, 2017

This week I review U.S. payrolls and Canadian employment as well as give my thoughts on the upcoming FOMC decision and Dutch election. I hope you find it insightful.

U.S. payrolls review:

• The February jobs report provided yet another morsel confirming the well-nourished state of the U.S. economy, aligning with our above-consensus forecast. The 235K net new jobs created were paired with a further drop in the unemployment rate to 4.7%, and further supported by decent wage and hours worked figures.
• This result was quite heartening in that a mild concern of ours has been the extent to which soaring confidence and expectations over the last nine months have not been fully matched by increased levels of hard economic activity. These job numbers, at a minimum, are corroborating all of that optimism. The GDP figures remain another matter altogether, with first-quarter U.S. GDP currently tracking a sub-2% outcome according to several estimates.
• Of perhaps greatest significance, the success of this report provides the last major piece of confirmation necessary to get the Fed raising rates next week.

FOMC decision preview:

• A further Fed rate hike at the FOMC meeting on March 15th is practically pre-ordained. Markets have fully priced the outcome, Fed speakers have shouted it from the rooftops and the aforementioned job figures confirm the continuation of American economic vibrancy.
• The fed funds rate should increase by 25bps to the range of 0.75% – 1.00%. This takes U.S. monetary policy increasingly away from emergency levels, affording a bit of wiggle room for the next economic downturn, whenever that may be.
• Because this is a “major” Fed meeting, with press conference and updated projections, there will be plenty of opportunities for the Fed to signal if it still believes three total tightening efforts are still appropriate for 2017, with another three scheduled for 2018. There is a risk that they upgrade this plan given economic strength. But our suspicion is that they won’t, as the market already has a lot to digest given the sudden uptick in the pace of tightening from once per year to – for the moment – once per quarter.
• The Fed’s economic growth projections should inch a little higher, though the extreme uncertainty surrounding U.S. fiscal policy suggests that any such movement should be tentative.
• From a bond market perspective, rising inflation and a tightening Fed continue to put upward pressure on yields. But let’s not push that narrative too far: the market is already mostly positioned for Fed tightening this year and year-over-year inflation readings will probably peak in most countries over the next few months due to base effects. This is all to say, the increase in yields to date makes sense, but any further selloff should be mild.

Passing peak monetary stimulus:

• To briefly revisit a theme we have touched on in the past, further evidence is accumulating that the globe is moving briskly past the point of peak monetary stimulus.
• Not only is the world’s bellwether central bank raising rates (the Fed) and the cost of borrowing materially higher in many parts of the world relative to last summer, but the latest ECB forecasts and comments from Draghi reveal that Europe’s central bank is also feeling friskier than before.
• Growth and inflation forecasts were revised modestly higher, the risk assessment was tilted somewhat less to the downside than in past iterations, and Draghi left the market to speculate that a rate hike could theoretically come before the end of the central bank’s bond-buying commitments.
• We would caution that the ECB is unlikely to be in a hurry to reduce the extent of its monetary stimulus, but it is now seemingly entertaining hawkish rather than dovish thoughts.

Canadian employment recap:

• Canada’s February job numbers managed to exceed market expectations, as we had forecast. The headline 15K job gain was good if not extraordinary, but the mammoth 105K increase in full-time jobs was something to behold. Other strength came in the form of a lower unemployment rate (6.8% to 6.6%), decent private-sector job creation and a moderate bounce in aggregate hours worked.
• In the simplest interpretation, this rosy result confirms the strong trend visible in the job numbers dating back to last fall. However, this muscular rate of job creation has regularly been undermined by its low internal quality.
• How is Canadian job quality holding together? There was nothing whatsoever to complain about with regard to the February numbers specifically: the gains were all full time (and then some), it was the private-sector doing the hiring, wage growth improved and aggregate hours worked rose.
• However, Canada’s employment reports are renowned for its surreal volatility. It is far safer to examine the trend from several thousand feet up. Viewed this way, part of the quality criticism has been addressed in that full-time job creation is now up by a strong 1.6% over the past year, the same pace as part-time creation. However, annual wage growth is still anemic and aggregate hours worked are actually lower than they were a year ago. In other words, there may be more jobs, but they sum up to fewer hours worked relative to a year ago.
• As such, we celebrate this month’s report but recognize that the broader trend still isn’t quite as robust as it first looks. The Bank of Canada should be partially appeased in the context of its recent criticism of the labour market, but not fully.
• Optimists will hope that, with the worst of the oil shock over, high quality resource jobs may begin to trickle back and improve the quality trend further. Indeed, both Alberta and Saskatchewan managed job creation in February.

Dutch election preview:

• The starting gun is about to fire for Europe’s big election year. The Dutch go to the ballot box on March 15th.
• Polls are still very close between the Netherlands’ populist party and its centrist incumbent government.
• As we have noted in the past, the chance of another major populist victory in Holland is low if one defines said victory as a new populist government. This is in fact quite unlikely given the proportional representative system of government that prevails there. Even if the populist party gathers the most votes, it lacks the prospective coalition partners necessary to form a government.
• Much more likely is that a rather large (and thus potentially unwieldy) coalition of five or so centrist parties unite to form the next government. It is reasonable to expect this to take some time to congeal, and then hard to imagine much coherent policy being delivered thereafter.
• The Dutch election will provide a good barometer for the strength of populist sentiment and for whether pollsters are underestimating its appeal. But the true European populist threats come later, in the form of the French election in late April/early May and a possible snap Italian election.

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