June 04, 2021 | 13:03
Future (Supply) Shock
After a week filled with key economic data, financial markets were largely unmoved on balance. Bond yields ended slightly lower, mostly owing to yet another dull U.S. employment report, while currency markets barely budged. But while the reflation trade may have been dealt a small blow by U.S. jobs, there is some serious fuel in the pipe from commodities. In particular, oil prices are now rapidly approaching $70, after starting the year below $50. In turn, this helped drive the TSX to a record high above the 20,000 level, maintaining its modest outperformance versus the S&P 500 so far this year. Notably, the Canadian dollar did not benefit from the latest run in crude, held back by soggy domestic data as the restrictions grind on.
The initial read on May suggests that the U.S. economy firmed, but hardly knocked it out of the park—despite many anecdotes of booming activity. Payrolls again disappointed with a 559,000 advance, or about 100,000 below expectations. Of course, at any other time, that would be a massive gain, but not when stacked up against a 7.6 million shortfall versus pre-pandemic employment levels. Somewhat more encouraging was a dip in initial jobless claims in the latest week to 385,000, at least within sight of “normal” levels (they were in the low 200k range in Feb/20). As well, both ISM surveys strengthened last month from already lofty levels, and hours worked churned out a solid 0.5% advance. Overall, look for GDP to fire up this quarter and next from the 6.4% pace in Q1, yielding growth of close to 7% for the year as a whole.
The recent downside misses on jobs are overwhelmingly seen as a supply issue, and certainly not a lack of demand for workers. The NFIB, for one, is reporting a record share of small businesses are having difficulty filling positions. This is naturally putting upward pressure on wages, even at a time of a 5.8% unemployment rate. Even with a shift in hiring back to lower wage workers, average hourly earnings rose 0.5% in May, with a 1.3% pop in the hospitality sector. Notably, both ISM releases revealed red-hot price pressures, with the services index hitting a 13-year high.
This all sets up next week’s CPI release for May, which has taken on outsized import following the April blow-out. While we don’t anticipate another huge set of figures, both headline and core are expected to print well above trend, ballooning the annual readings further. The overall inflation rate will be close to 5%, a figure seen in only two months in the past 30 years (summer of 2008, when oil was near $150). Arguably, an even more telling U.S. release in the coming week will be the JOLTS report for April on Tuesday; given the widespread talk of worker shortages, job openings almost certainly hit a new high above March’s 8.1 million.
Canada is in a very different place, at least for now. While job openings are also abnormally high, given a lofty unemployment rate, they are not nearly as pressing an issue—yet. In contrast to the U.S. position, employment fell further in May, with the economy shedding a meaty 68,000 jobs. The setback was no big surprise, given yet more restrictions through the month, but the details were generally worse than expected. Full-time positions fell again, and goods-producing industries were caught up in the weakness in the month. Also notable was a sag in the participation rate to its lowest ebb since last August. Canada’s labour force has held up much better than stateside over the past year, but the part rate is now down 0.9 ppts since Feb/20, versus a 1.7 ppt U.S. drop. While the job market is expected to bounce back over the summer as restrictions ease, the recovery is likely to be stunted by many of the same factors as those holding back U.S. jobs.
Looking ahead, Canada’s CPI report isn’t set for release until June 16, so next week will be dominated by the BoC’s decision on Wednesday. This is a non-MPR meeting, and is unlikely to reveal any big changes in view. However, the Bank is expected to tone down the optimism since its late-April meeting, as the prior effort largely preceded the third-wave restrictions (or at least didn’t fully account for them in their surprisingly upbeat forecast at that time). This week’s Q1 GDP report came in shy of expectations at 5.6% (BoC was at 7.0%, we were 6.5%). And, its Q2 estimate of 2.5% GDP growth looks high, as we are calling for a flat result, with the risks tilted to a small outright decline.
And yet, Canada is also dealing with very real inflation pressures. It’s an extreme example, but the GDP deflator soared at a 12.2% annual rate in Q1, the fastest since 1982 (i.e., the last year the economy saw double-digit consumer price inflation readings). The deflator surge was fired up by soaring commodity prices, and scorching home prices, both of which are still very much a “thing” in Q2. Yes, home sales are moderating—somewhat—from the sky-high Q1 levels, but prices are still gathering steam. Here are a few factors that suggest the inflation pressures may be a bit more than just transitory:
Bottom Line: While we do believe that, ultimately, the current hot inflation pace will simmer down, we are more in the camp that the pressure could last longer than many expect, and the risks remain squarely on the high side.
The title of course references Alvin Toffler’s Future Shock, a book that was penned just over 50 years ago. While it thus qualifies as ancient history, it’s still staggering how current its main theme remains. To quote that paragon of scholarly discourse, Wikipedia, the book deals with how society was grappling with “too much change in too short a period of time” (in 1970!). Further, Toffler “argues that the accelerated rate of technological and social change leaves people disconnected and suffering from “shattering stress and disorientation”—future shocked. Toffler stated that the majority of social problems are symptoms of future shock.” And, he also “popularized the term “information overload.”