U.S. – Labor Market Tilting in Favor of Workers

U.S. equities managed to make gains this week, shrugging off turmoil in emerging markets and the threat of additional tariffs. Meanwhile, the selloff and pressure on emerging market currencies eased a bit, and the U.S. dollar softened a touch as foreign central bankers took center stage (Chart 1).

First up was the central bank of Turkey. It hiked its policy rate to 24% from 17.75% in the hope of retaining and attracting new foreign capital. The lira rallied, but still remains down 38% relative to the U.S. dollar since the end of January. Further rate hikes may yet be needed to help facilitate the rebalancing of Turkey’s economy, weaning it off from its reliance on foreign financing. But, these are likely to be resisted by President Erdogan, suggesting that Turkey may be unable to avoid the economic cost of high inflation and capital flight.

In neighboring Europe, both the Bank of England (BoE) and the European Central Bank (ECB) held monetary policy unchanged this week. With Brexit looming, the BoE is likely to hold interest rates at 0.75% until May. We anticipate a withdrawal agreement with the EU to be signed by year end, but there is still a small chance that the UK could make a chaotic exit from the EU next March. Such an event would prove detrimental to the UK economy, highlighted in recent discussions between Governor Carney and the UK government. Easy monetary policy would be unable to mitigate the economic damage from the negative supply shock that would result. Nor would it be able to offset the real income and spending drag resulting from a surge in inflation.

As largely anticipated, the ECB confirmed that it will taper its asset purchases to €15bn a month starting in October, with the program slated to end this December. Moreover, it signaled that, so long as risks to the economic outlook remain broadly in balance, interest rates may rise as early as September 2019. While the outlook for growth and inflation was revised down a touch, markets reacted positively to the ECB’s conviction that core inflation will near 2.0% by 2020, spurring a bid for the euro.

On the domestic front, data this week confirmed that a robust economic expansion is underway. Small businesses remained jubilant even as labor shortages and tariffs start to bite. The tightness of the labor market was underscored by July’s JOLTs data that recorded an uptick in the quits rate. Workers are increasingly being rewarded for quitting their current jobs for higher paying ones (Chart 2). Rising wages should continue to stoke prices pressures in the months ahead. That said, August inflation softened a touch to 2.7% (y/y), but we don’t view this as lasting given rising business cost pressures. Lastly, retail sales disappointed in August, but consumer spending is expected to remain healthy this quarter, buoyed by gains in wages and jobs. All told, the data this week suggest that this expansion has more room to run.

Fotios Raptis, Senior Economist | 416-982-2556

Canada – Rising Rates Eating Into Household Incomes

The major economic data this week was by and large housing focused. Housing starts disappointed expectations, dipping to a 201k annualized pace in August (from 205k in July). This tends to be a volatile series, and as it stands, there is little to be concerned about in the recent data. The modest slowing in the summer months comes after a robust June figure, and the trend remains comfortably above the 200k mark we associate with demographic fundamentals (Chart 1). Indeed, it remains the case that the trend is likely to drift back towards this anchor with time. With permit issuance still solid, there is little cause for alarm.

Statistics Canada also gave us an updated snapshot of Canadian household finances. The picture is pretty much what you’d expect. The closely watched measure of household debt to income rose to 169.1% (i.e. $1.69 owing for each dollar of disposable income). Reported on a non-seasonally adjusted basis, this ratio has risen in Q2 every year it has been published, but it is noteworthy that this year’s increase was the smallest since the year 2000. This moderation is likely a reflection of softer mortgage borrowing activity post B-20 implementation. With home sales already coming back late in the quarter, and further increases expected in the August data (watch for our commentary Monday), this respite may prove short-lived.

Of course, rising borrowing costs should act as a countervailing force as we move further through the year and into next. Elevated debt levels have left households more sensitive to rising interest rates than in the past. Evidence of this can already be seen in the household debt service ratio (Chart 2). The cost of servicing debt hit 14.2% of disposable income in Q2. This is a 0.4 percentage point increase over just 3 quarters, as the Bank of Canada raised its policy interest rate three times (75 basis points). July’s rate hike is not captured in this data, and with another likely to come in October, borrowing costs appear set to eat up a growing share of household income in coming years.

Finally, away from the data, there were mixed messages this week on the NAFTA front. Progress does appear to be continuing, but one clear point of contention is U.S. access to Canadian markets for dairy and other protected products. The good news is that there is recent precedent suggesting that Canada could yield some ground in this area, perhaps using it as a bargaining chip to achieve other goals. Both the TPP and CETA trade deals included at least some opening up of Canadian markets to foreign competition, indicating that there is scope for agreement as part of a broader deal. Of course, there also remains the issue of dispute resolution, another sticking point for Canadian negotiators. With two more weeks of negotiations remaining before any proposed text (with or without Canada) goes before Congress, there is still much ground to cover. Watch this space.

Brian DePratto, Senior Economist | 416-944-5069

Canada: Upcoming Key Economic Releases