Tough Job

Tomorrow morning at 8:30 am will be a very pivotal moment for a lot of people in finance. Tomorrow morning at 8:30 am EST we see the release of the March employment reports in both Canada and the US.

The reason I say tomorrow is a biggie is that there is a lot riding on what numbers get revealed. Tomorrow will decide if we see a rate cut in the first half of the year, or if we wait until the second half for rate relief.

Today we saw a massive mid day move in stocks, bonds, currencies – pretty much everything. Stock markets were flying high this morning, bond prices were down ( yields up ) and the Canadian dollar was gaining some strength. Then, around 1:30 pm EST everything changed. There wasn’t really any announcements, or news, or data that came out, but stock sold off, CAD dropped vs. the USD, and bonds started picking up price ( yields down ). Trader talk at the water cooler says that the market is worried that tomorrows job numbers could be a blowout to the upside.

Now, normally a great jobs number should be a positive thing, however, more jobs equals more money, which equals more inflation which ultimately equals no rate cuts. If we see a great employment number, a June rate cut is almost impossible. As of right now, markets are pricing in a 78% chance for a June rate cut of 25 bps. To give you some context, that was almost 100% only a few weeks ago. If we see a great jobs number, specifically in Canada, then look for 78% to drop a lot close to 50%.

Let’s also remember that the Liberals have pre announced billions and billions of dollars of spending for the April budget this week alone, commodities are up, a new carbon tax just came in, and some real estate is starting to heat up. All of that equals inflation. Not to say that inflation gets really going or anything, but this is the key thing that people need to remember: Inflation is still above 3%. Inflation needs to come down from 3% to 2% before Tiff and Co are comfortable cutting. Even if inflation stops increasing, it is still too high for a rate cut. Even if the factors described above had a neutral impact on inflation – that means it would hold where it is at, which is still too high. 3% down to 2% isn’t 1% either. Getting inflation from 3% down to 2% requires about a 33% drop in inflation.

The jobs report tomorrow will give us a pretty clear picture of where Q3 goes, but it won’t help much for the end of Q2, unless we see a really horrible report. And by horrible, I mean that Canada would have to lose 35,000 jobs, hourly earnings would have to be down, average hours worked down, and a revision to previous months numbers to the negative. Consensus estimate are calling for growth of 25,000 jobs, but looking for the unemployment rate to tick higher to 5.90% due to population growth. If for some reason we blow the doors off with 50,000+ jobs created in Canada, I wouldn’t be surprised if the bond market prices in a 25 bp hike in June.

While the jobs report tomorrow will be a glean to our futures, it will be our jobs to figure out where we go from here, and how we best help our clients.