Storm clouds may be gathering but so long as good times persist markets seem to expect the Bank of Canada, and even the Fed, to wait a little longer before cutting rates.
It seems there are few things central bankers like more than a good weather metaphor for the state of the economy.
In that case, this week Bank of Canada’s Stephen Poloz may want to add gathering storm clouds to the “headwinds” he has used in the past, expanding on the meteorological euphemism of “crosscurrents” recently employed by his opposite number at the U.S. Fed.
On Wednesday, Poloz and his chief deputy Carolyn Wilkins meet with the business media to present their latest take on whether your interest rates should go up, go down or stay the same.
Despite heavy weather that has been widely predicted for the coming year, so far neither the Canadian nor the U.S. economy seems in dire need of interest rate cuts.
In fact, a whole flurry of economic indicators, plus the resolution of trade conflicts with our biggest trade partner, seem to be saying the short-term forecast is mainly sunny.
Clear sailing?
Statistics Canada’s Labour Force Survey showed a slight cooling on Friday, with the predicted small rise in the unemployment rate and the loss of about 2,000 jobs. But beyond those headline numbers the latest jobs report was far from gloomy.
Alberta and Saskatchewan saw significant job increases in June. The slight decline in jobs in the month comes after a year when the economy churned out more than 400,000 new positions.
Also this past month, permanent jobs replaced lost part-time work, a sign employers may be anxious to lock in their own stable of employees instead of depending on the gig economy. People who have those full-time jobs saw wage gains well above inflation.
Most important, the trend in the unemployment rate seems clear, with Friday’s small rise possibly just a zig in a zigzag downward slope.
But perhaps an even more significant economic indicator for Poloz and Wilkins on Wednesday will be last Friday’s U.S. jobs data that put Canada’s in the shade. There, a slight uptick in recent record low unemployment rates was overwhelmed by a tornado of job creation exceeding forecasts that had already been considered optimistic.
With the economy generating more than 200,000 jobs in the month, all of a sudden the idea that the Fed’s Jerome Powell would slash interest rates by as much as half a percentage point next time around seems to have evaporated. If so, expect a frosty reaction from U.S. President Donald Trump.
Loonie reacts to U.S. economic strength
As often happens, markets, soaring on the prospect of rate cuts to boost a sagging economy, suddenly declined from their stratospheric heights when it looked as if the economy was doing well.
That was not because Bank of Canada watchers thought Poloz would alter his predicted no-change interest rate policy, but merely because those jobs numbers showed no sign that either the U.S. economy or the greenback was about to fall behind.
A confluence of economic good news is having positive effects on business, according to Francis Fong, chief economist at the Chartered Professional Accountants of Canada.
Fong says a recent survey of high-ranking Canadian corporate accountants shows renewed optimism.
“It’s actually the first increase in optimism we have seen in our survey since 2017,” said Fong.
That considered, it seems unkind to rain on their parade, but in Wednesday’s meet the press, Poloz may be asked to look past the latest clear patch to signs of worsening conditions ahead.
Unstable conditions ahead?
Fong points out his survey’s optimism is tempered by continued fears about trade. And while Canada and Mexico seem out of Trump’s tariff spotlight, worries continue about the repercussions of his battle with Beijing. There are some concerns the Democrats in Congress will stall passing the new NAFTA, with unknown effects.
But perhaps most ominous for 2020 is the continuing and lengthening of the yield curve inversion, a technical but until now foolproof warning of a change in the prevailing economic conditions.
US yield curve is still inverted, still worrying https://t.co/ul7NsP9qOa
The exact mechanism of the yield curve signal is much disputed, some saying it is a cause, others a result of recessionary activity in the economy. Some take the view that the distorting effect of the recent long period of rate cutting by central banks means it’s different this time.
Even if the warning is accurate, like the extended outlook from Environment Canada, the exact timing of when the tempest will hit remains uncertain. Previous instances show there is a lag of many months, and in past cases, interest rates begin heading back toward normal — that is, long rates being higher than short rates — before recession strikes.
The other great uncertainty is how severe the disturbance will be if it occurs. Experience cannot tell us if the longest North American economic boom in recorded history will end with an economy-flattening depression or a brief period of turbulence before heading back to growth.
Central bankers must consider plans for both contingencies, even if for now the sun is shining and the birds are chirping.
Follow Don on Twitter @don_pittis
