May 07, 2021 | 13:10
After weeks of watching little market reaction to high-side economic surprises, we were handed a big low-side surprise on U.S. nonfarm payrolls for April. And, after a brief downdraft for yields, markets mostly brushed it off and got back to business. Make no mistake, the jobs report was a clunker, with few redeeming features: both payrolls (+266,000) and the household survey (+328,000) were a fraction of expectations, there were downward revisions, the unemployment rate rose for the first time in a year, and jobs fell in key sectors like manufacturing, retail, and temporary help agencies. Ouch. The April report would have been quite typical in the midst of an economic expansion; but, given that payrolls are still more than 8 million shy of pre-pandemic levels, the moderate gain is a big disappointment. Yet, 10-year yields dipped only briefly in the hours after the release, before ending just below 1.6%.
And now for something completely different. Canada’s jobs report lived down to expectations in April, with a 207,100 setback amid a wave of restrictions in the larger provinces last month. This is one of the rare times when it’s the U.S. jobs report that seems off kilter, while Canada’s looks perfectly reasonable. While the drop was a bit lighter than our low-end call, it was driven by the first decline in full-time jobs (-129,400) in a year. This cut hours worked by 2.7%, suggesting that GDP will struggle to post any growth in Q2 after the amazingly resilient Q1 performance. The unemployment rate also ticked up 0.6 ppts to 8.1%. And, yet, after the dust settled on April, we are left with Canada’s rate now up 2.4 ppts from the pre-pandemic pace, a bit lighter than the 2.6 ppt rise in the U.S. rate. Meantime, even with the April drop, Canadian employment is reportedly down “just” 2.6% since February 2020, versus -4.8% for the U.S. household report and -5.4% for U.S. payrolls.
The Canadian dollar was left in the odd position of having to deal with a big drop in domestic jobs, versus the U.S. gain, but where the latter was a much bigger disappointment. So, naturally, after a small stutter-step, the loonie’s big rally resumed post-payrolls, even in the face of one of the worst relative monthly performances by Canadian jobs ever. (Canadian employment fell 1.1% m/m, while U.S. payrolls rose 0.2%—the 1.3 ppt gap is the largest underperformance in the past 50 years, aside from two months in the pandemic.) The currency pushed above 82 cents, up almost another 1% for the week, and hitting its strongest level since 2017.
Broad-based commodity strength has been the biggest single driver for the Canadian dollar, and that overwhelming force is not going to be denied by one soft jobs print. This week’s resource rally broadened to three of the heavyweights, with WTI briefly pushing above US$66, gold forging well above $1800 and copper hitting a new record high. Besides the strength in resource prices, there is also the sense that Canada’s economy can rebound quickly from the third-wave restrictions, as shown by big gains earlier this year. Still, there is little doubt that the latest jobs setback will make a mark on growth. Total hours worked are on course to fall at roughly a 4% annual rate for all of Q2, while the U.S. is headed for a gain of more than 5%. This fits well with our call for a flat Q2 GDP read in Canada, versus a gain of over 8% stateside. Even so, we look for a second-half rebound to help power 6% growth for all of 2021 in Canada, not far below America’s 6.5% advance.
Equities also had no issue with the double-dose of disappointment in April jobs, with the Dow and S&P 500 cruising to record highs Friday morning. True, the Nasdaq stepped back a bit on the week, as high-multiple tech shares wobbled on the faintest hint of higher rates from Treasury Secretary Yellen (since recanted). But even the TSX forged to a record high, completely unfazed by the local loss of jobs, and benefiting instead from the sustained strength in commodities. The ability of investors to promptly dismiss the jobs data and still anticipate strong growth lined up perfectly with the Federal Reserve’s latest semi-annual Financial Stability report. Specifically: “With investors ebullient on expectations for a strong rebound, it is important to closely monitor risks to the system and ensure the financial system is resilient.”
Of course, the other explanation for why stocks responded so well to the soft U.S. jobs data is that it cools the heat on the Fed to even start thinking about, thinking about, reacting. After all, topic number one in the past week had been soaring commodities and associated inflation pressures. Thus, some signs of a calmer pace of recovery could be seen as good news. But, if that slowdown is simply due to supply constraints—and not any slackening of demand pressures—then this is no time for the Fed to relax. Arguably, it’s precisely the opposite message. That is, the punk jobs gain is the latest sign that supply can’t keep up with torrid demand—as also vividly displayed in the ISM reports this week—and inflation pressures remain squarely and absolutely on the high side.
The CEO of Redfin recently suggested that U.S. housing is currently like a “Soviet supermarket”—there’s nothing on the shelves. Note that years of sporadic mismatches between supply and demand behind the iron curtain often led to bouts of wild inflation as well as shortages. Poland, for instance, had triple-digit inflation in both the early 1980s and the early 1990s. Perhaps we’re not quite in such extreme shortages just yet in U.S. housing, but it’s more of an open question for Canada’s housing market.
Much of the commentary around the preliminary Canadian home sales figures for April was that conditions had “cooled” or “slowed” versus March. Technically, that may be true, but April still marked the second strongest month for sales ever in a variety of cities, and it is not at all clear that prices are truly “cooling”. And, it’s worth pointing out that April was in the middle of official “stay at home” orders in Ontario—and sales still managed to top anything seen before March. Just imagine what heights activity could reach under even semi-normal conditions.