LFS March Report: A much welcomed silver lining
The high-frequency economic data to be released during the next month or so could bring some disappointing news, reminding us that the Canadian economy is not out of the woods yet and still adapting to the new environment of cheaper commodity prices and a lower loonie. Investors staying up to date with breaking economic news will turn their attention to this week’s CPI and retail sales data. Both reports will be released on Friday at 8:30AM.
CPI: We expect total CPI to increase by a brisk 0.6% m/m in March (a notch above the 0.5% consensus). Several factors are supporting our call. Firstly, Canadians paid about 5% more at the pump to fill up their gas tank compared to the previous month. Secondly, the Ontario government’s decision to increase taxes on tobacco products in the late February budget will lead to an approximate 6% spike on the nation-wide tobacco CPI component. Thirdly, the month of March is usually marked by seasonal price bumps in clothing and recreational items, as retailers fill up their stores with brand new merchandise for the summer season.
Our call for a 0.6% month-to-month increase brings the total CPI inflation figure to 1.2%. We see the later as a short-term trough (see chart below). More precisely, two principal factors are leading us to think that total CPI inflation will slightly surpass 2.0% by 2016Q4, or 2017Q1 at the latest: 1 - during the last budget season, we learned that some provincial governments will implement increases in indirect tax rates between now and January 2017 in order to finance new green initiatives or to pay for usual operational expenses; 2 - we see WTI crude oil prices ending 2016 at US$68 per barrel, based on forthcoming reduction in non-OPEC output, stronger global demand and eventual production cut by OPEC and Russia.
All in all, our medium-term CPI inflation forecast should be supportive for Canadian real return bonds. As for the front end of the nominal yield curve, the implications are less clear. Granted, the BoC will “look through” indirect tax increases as having only a temporary effect on total CPI inflation. However, the eventual rise in inflation related to higher crude oil prices could be more problematic for the BoC because our petrocurrency is very likely to appreciate in tandem with oil prices. Such an event would reinforce the thematic of an already volatile currency and erode export competitiveness. This is one of the reasons why we do not forecast, as some market participants do, a rate hike in 2016 or even 2017.
Retail Sales: We expect a moderate retrenchment in the value of retail sales in February (0.8% m/m), right in line with consensus. Fundamentally, it is important to stress that the slower growth in disposable income and non-mortgage credit observed in recent quarters are unfavorable to the performance of retailers. It is more-than-offsetting the stronger influx of American tourists and fewer Canadians crossing the border to shop in the U.S. due to the low loonie. Also, the beginning of a shift in interprovincial migration flows, with Canadians now moving out of oil-producing provinces to non-commodity regions, could exacerbate the provincial divergence already observed (retail sales in Alberta: -8% since the fall of 2014; BC: +8%; Ontario: +7%; Québec: +3%; see chart below).
After the Canadian economy added only 30K jobs in the 6 month period from September 2015 to February 2016, employment rose by a brisk 41K in March alone. This surprise leap in job growth, well above the market consensus of 10K,suggests that the Canadian economy is gaining some traction –and echoing the solid real GDP report released last week.
The service-oriented sectors led the way, an emerging trend propelled by a weaker Canadian dollar allowing private companies to offer expertise abroad at a competitive price. For instance, net hiring in the well-paid professional/technical services industry was positive in March (+12K), a notable success story in Ontario which leads the Canadian provinces in terms of total job creation (+14K in March; +86K year-over-year). However, it we should not be expecting to see further robust job creation in the education and health care sectors. The March number (+32K) was simply a rebound from the poor performance registered during the previous month, reminding us to be cautious with the interpretation of granular monthly numbers.
Moreover, the broad picture of the labour market was far from being entirely rosy in March. Difficulties persists in the both cyclical manufacturing (-34K) and construction (-6K).
Finally, the most puzzling statistic of the month is the 19K employment surge recorded in Alberta,; by far the best monthly showing since the plunge of oil prices that started in the second half of 2014. Accordingly, Alberta’s unemployment rate figure fell significantly from 7.9% in February to 7.1% in March, inexplicably sitting at the same level as the national figure, below Quebec’s (7.5%) and barely above Ontario’s (6.8%) unemployment rates. We would not be surprised if this turns out to be a temporary blip since the most recent survey conducted by the Canadian Federation of Independent Businesses indicated that, within the next 3 months, there were 21% more SMEs located in Alberta that were planning to cut full-time staff than SMEs which were thinking of hiring full-time staff.
Bottom Line: Altogether, this constructive LFS report brings the 3-month and 6-month moving averages to 11K job created, the strongest figures observed since October 2015. This improvement is not inconsistent with the BoC’s spring edition of the Business Outlook Survey (BOS) indicating that the outlook on hiring intentions is modest but better than the pessimistic winter survey.
While the worse appears in the rear view mirror for the Canadian economy, it is premature for investors to contemplate a more upbeat tone from the BoC since the medium-term global outlook remains far from rosy. Accordingly, the BoC is likely to opt for a cautious message at its next policy rate deliberation on April 13th, taking the same view as Fed Chair Janet Yellen in the U.S. Yet, a rate cut does not appear to be in the cards either.
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