The latest job numbers out of Canada and the U.S. have fired up speculation about what is going to happen with interest rates.
The employment stats for May appear to be telling the story of two economies heading in different directions. Canada’s numbers came in well above expectations last month with nearly 28,000 new, full time positions created. (Part time numbers did not change.) That follows the record setting creation of more than 100,000 jobs in April. In the United States the economy generated 75,000 new jobs in May; a dismal showing compared to the forecast of 185,000.
The American numbers have served to heighten expectations the U.S. Federal Reserve will have little choice but to bend to the will of President Donald Trump, and cut rates. Trade disputes instigated by the Trump administration against China, Mexico, Canada and Europe appear to be having negative consequences for the U.S. The bond market has already priced-in a quarter-point drop for the Fed’s July setting and traders are forecasting a 75 basis point reduction by the end of the year.
In Canada, on the other hand, many analysts see the strong job numbers as the Bank of Canada’s main argument for holding the line on rates in the face of American reductions. Our central bank is maintaining its optimistic outlook for growth in the second half of this year.
Canadian bond traders do not appear to be as confident as the BoC though, citing a decline in the worker participation rate in May’s job numbers. They also point out that Canada’s oil industry remains unstable; that the full economic impact of the Bank’s previous rate increases has yet to be felt and that higher rates here would strengthen the Loonie, which would be bad for exports.