Breakdown on Jobs

With the highly anticipated unemployment reporting coming out yesterday, many people are left wondering what it all means. Lets take a look below the surface of the headline numbers.

Canada:

While the headline numbers were less than stellar reporting a loss of 6,100 jobs in July, it only gets worse from there. Consensus for July was that the Canadian economy would create 21,100 jobs. It doesn’t take a rocket scientist to figure out that the miss on jobs was bad. However, not only did we flip from an expectation of creating jobs, but we actually lost jobs. But wait – there’s more. Digging down a little deeper, lets take a look at the type of jobs, and job categories. The group of men age 25 to 54 lost a staggering 27,000 jobs in July. This is an important age demographic as men of that age tend to be the breadwinner of the house, and it is a very reliable yardstick to the economy in general. Employment by youth ( all sexes ) 15 to 24 was up 13,000, so basically a bunch of high school and university aged kids got jobs for the summer. Not really the type of employment you build an economy on. The next large disturbance would be by employment sector. Jobs in construction were down a whopping 45,000 in July. Construction jobs tend to be well paying jobs, so to see these drop so much in one month is concerning. Jobs were also down in IT, recreation, transportation, and warehousing. The bulk of job increases came in healthcare and social assistance ( government ). Without the government hiring, the jobs report for July would have been abysmal. Unemployment ticked up from 5.4% to 5.5%, marking the 3rd straight month of unemployment increases for the country.

United States:

The US also reported jobs on Friday morning, and it was slightly rosier, although still far from a shining report. Job creation for July came in at 187,000 jobs, just shy of the 201,000 expected by analysts. While a miss, it was far closer to expectations than the Canadian report. The unemployment rate held steady at 3.6%. Jobs continue to be created in the US, although not at the pace they were running earlier in 2023. The pace of creation has slowed, however when we look at what industries the jobs were created in, it gives us much more of a balance. Government only accounts for around 35% of all jobs created, well below Canada’s reliance on government creation. However, for the 6th straight month, there were revisions to previous jobs numbers. Employment for May was revised lower by 25,000 and June was revised lower by 24,000. The last time that US unemployment revisions were negative 6 months in a row was the fall of 2007.

What does it mean for markets:

We all know that bonds tend to react to forces like inflation reports, jobs reports, etc. More so than ever, the reaction of markets to every piece of data is fierce. Friday was no exception with the Canadian 5 year bond yield dropping 17 bps intra day in Canada, and the US 10 yr ( most followed ) dropping 15 bps. The Canadian bond closed well below the 4.00% number on the backs of the disappointing jobs report. The report in Canada and the US were not great, but they were also not so bad that I would have expected the rapid sell off. If the Canadian 5 year dropped by 17 bps on a slightly worse then expected jobs number, it would leave me to believe that we have pretty much topped out on yield. So many people were on the wrong side of the trade, and just a little bit of less than optimal news drove yields down. I anticipate the August reports will be worse than July, so unless the bond can climb substantially from these levels, we will probably be lower than where we are now in one months time. CAD also took it on the chin and was lower vs the USD on Friday, after initially spiking higher in the day. This could be due to multiple factors, but the widening gap between the Canadian and US economy is starting to show up. Even with the US debt downgrade this week, the USD still managed to edge higher on the CAD. Another big change was hike expectations for Canada going into the back half of the year. Analysts now peg the chances of another rate hike in September at 28% ( down from almost 80% in June ), and a 60% chance of another rate hike by the end of 2023 ( down from almost 90% in June )

It will be interesting to see where we are once we get the July inflation numbers and the August jobs report comes out.