Canadian Highlights
- Canada’s labour market took a step back in July after June’s job surge. Despite a sizeable job loss, the unemployment rate remained steady.
- Canadian exports recovered modestly in June, but the trade damage in the second quarter has been done.
- This week’s data inches the Bank of Canada toward a rate cut in either September or October.
U.S. Highlights
- As of August 7th, dozens of U.S. trading partners face significantly higher tariff rates, pushing the U.S. effective rate to roughly 19%.
- July’s reading of ISM services provided further evidence that the U.S. economy is stagnating, with employment, new-orders and business activity all turning lower.
- Following last week’s employment report, Fed officials appear to be pivoting their communication. A September cut is more likely than not.
Canada – Trade Tensions Weighing on Labour Market
Canada’s labour market found itself in choppy waters in July. The nation shed around 40k jobs, coming in well below consensus expectations for a modest gain and unwinding around half of June’s hiring surge. A similar drop in July’s labour force growth kept the unemployment rate steady at 6.9%, a silver lining in an otherwise weak report. Markets reacted by pushing yields on the 2 and 10-year bonds down around 5 bps, while the Loonie depreciated three-tenths of a cent against the U.S.
The labour market is showing clear evidence of loosening in response to U.S. tariffs and broader uncertainty. This is even more pronounced in the performance of more trade-exposed sectors. Of the 180k jobs created since Trump won the presidency, highly export-exposed industries accounted for only 10% of the gain, despite accounting for around a third of total employment (Chart 1). Notably, trade-exposed sectors like manufacturing, natural resources, agriculture, and transportation have experienced outright job losses over the last six months. The path forward is a little less clear, but we expect hiring sentiment to remain weak through the third quarter as firms navigate trade-related headwinds.
We also received Canadian trade data for June this week. Exports managed to edge forward for a second consecutive month, but levels remain depressed compared to March. The slight advance in imports was skewed by a near $2-billion high-value import of equipment for an oil project in Newfoundland. All told, Q2 GDP growth–due out at the end of the month–will likely see a contraction as exports tumbled. Mirroring the trend in labour markets, exports of tariff-impacted sectors are showing signs of underperformance. Chart 2 illustrates that exports of steel, aluminum, copper and energy have suffered more than the rest of the Canadian export basket over the past six months. Encouragingly, shipments to the U.S. as a share of total exports have dropped sharply in recent months, suggesting Canada may be slowly diversifying trade away from the U.S.
Elsewhere, the federal government stepped up its support for the ailing softwood lumber sector. In total, the lumber industry will receive $1.2 billion in financial supports ($700 million in loan guarantees and $500 million in grants and contributions). The lumber industry now joins the automotives and steel/aluminum sectors in receiving direct federal government supports meant to address negative impacts from U.S. trade policy.
We think this week’s events only marginally move the BoC in the direction of a cut at their meeting in September. Markets agree, having re-priced the probability of a 25% bps cut to north of 40% (30% probability prior to the jobs report). Inflation data later this month will be more telling and could move the needle further toward a September cut should core inflation pressures show any signs of easing. Taken altogether, we think there is a strong argument for further rate easing later this year.
U.S. – U.S. Economy Stagnating Just as Tariff Rates Reset
It was a quiet week on the economic data calendar, but with earnings season in full swing, further trade announcements, and several Fed officials out speaking, there were no shortage of developments for investors to sift through. To say this earnings season has gone better than expected would be an understatement. At this point, over 80% of companies included in the S&P 500 have reported second-quarter earnings. According to Reuters, after factoring in analysts’ forecasts for the remaining 20%, profit growth is tracking close to 12% annualized. That’s more than double what was expected just one month ago, and has without question been a driving force sustaining the recent strength in equities. At the time of writing, the S&P 500 is up 2% on the week and 8.5% on the year. Meanwhile, term-yields climbed a bit higher on the week, even after President Trump appointed Stephen Miran to complete Adriana Kugler’s brief remaining term on the FOMC, and more dovish leaning Governor Waller was reported to be the frontrunner for Fed Chair.
But we would argue that the run in equity markets this year is built on a shaky foundation. Inventory stockpiling and a haphazard rollout of the administration’s tariff policies meant that many businesses were able to circumvent or significantly limit tariff exposure last quarter. But that’s not going to continue. As of August 7th, dozens of trading partners now face significantly higher tariffs as per the Executive Order released by the White House on July 31st. By our estimates, the current effective tariff rate in the U.S. is around 19%, or the highest level since 1933 (Chart 1).
Over the near-term, it’s very likely that the U.S. tariff rate pushes even higher. The Trump administration singled out India this week, threatening an additional 25% tariff on August 27th and hinted at further tariffs on semiconductors – potentially as a 100% – and pharmaceuticals over the coming weeks.
While the economy had demonstrated unwavering resilience earlier in the year, more recent data has shown that ground is starting to shift. This week’s ISM services report provided further evidence that the economy is slowing, with the services index slipping to 50.1 or just barely remaining in expansionary territory. Details of the report came with plenty of ‘stagflationary undertones’, with new-orders, business activity and employment all turning lower, while the prices paid sub-component remained near its cyclical high.
The shift in economic data has led Fed officials to pivot on their communication, with regional Fed President’s including Neel Kashkari and Mary Daly – neither of whom are voting members – to suggest that rate cuts are coming in the months ahead. Meanwhile, Governor Cook characterized last week’s tepid jobs report as ‘concerning’ and noted that the significant downward revisions to the May/June figures, which were some of the largest on record, are ‘typical of turning points in the economy’ (Chart 2). Next week’s CPI inflation data will shed more light on the extent of tariff passthrough, but even that is feeling somewhat backward looking given this week’s reset on tariff rates. Ultimately, the weakness in the labor market cannot be ignored and (in our view) solidifies the case for a September rate cut.
