Jobs, policies and politics

The US jobs report for December was stunningly strong; Canada's, not so much.  What do the data tell us about the outlook for equity markets, monetary policy and politics in the two countries?

Let's start with the US.  The labour market added 312,000 jobs in December, far above market expectations.  Somewhat perversely, the unemployment rate ticked up to 3.9 percent, but that only happened because 400,000 people joined the workforce in the month.  That "encouraged worker effect" is usually taken as a sign of growing confidence.  One more positive aspect to the data: wage growth now stands at 3.2 percent year-on-year, comfortably outpacing the rise in CPI.

Donald Trump has been quick to laud the data as "great", which indeed they are.  He may not be so happy if the numbers persuade the Fed that it needs to continue tightening its policy settings, but Fed Chairman Jerome Powell seems to be signalling at most a moderate pace of tightening for the time being.

The jobs data, together with Powell's remarks, set the stage for a sharp rebound in the major stock indices in Friday's trading.  If the rebound is short-lived, as has been the case in the recent past, that could be taken as a sign that the nervousness in stock markets does not reflect concern over the economy per se, but rather worries about factors such as the trade tensions with China and the entirely pointless government shutdown -- both of which can directly blamed on Donald Trump.

Given the market's panicky reaction to Apple's earnings warning this week, and the likelihood that many other companies are facing the same problems as Apple, that seems like the way to bet.  However, if you want to put a more Trump-friendly spin on this, you could argue that the very robust jobs data show that the trade war is not having any negative impact on the economy -- may, indeed, as Trump would have you believe, be having a positive one.  That would defy anything in the textbooks, but that fact is unlikely to deter Trump and his supporters from depicting it that way.

Moving on to Canada, a key takeaway from today's numbers is, as ever, the extreme volatility in StatsCan's employment survey.  After a remarkable (improbable?) reported increase of over 90,000 jobs in November, the economy added a mere 9,500 positions in December.  The strongest job gains were seen in the manufacturing sector (good), but December featured an 18,000 loss in full-time employment (bad), with the headline gain entirely attributable to part-time positions. The national unemployment rate was unchanged at 5.6 percent, matching the lowest-ever reading for this series.

Given the month-to-month volatility in the data, it's best to look at the year-on-year numbers for an indication of the underlying trend.  The Canadian economy added 185,000 full-time jobs in the year to December 2018, with a negligible offsetting loss of part-time positions.  This represented slower growth than in either 2016 and 2017, unsurprising at this stage of the business cycle. Despite the evident tightening in the labour market, wage gains have been generally tame for at least the past six months, standing at just 1.5 percent in December, below the rate of inflation.

From a monetary policy standpoint the data, particularly the performance of wages, suggest the Bank of Canada need be in no hurry to make its next tightening move.  That implies that the exchange rate will remain under some moderate downward pressure this year, even if the Fed maintains a cautious stance.

And, as this is an election year, what are the political implications?  The Trudeau government will undoubtedly have its fingers crossed that the tepid December data do not signal how things will go in the new year.  In that regard, the fall in employment in Alberta that was seen in December may be an ominous sign.  The opposition Tories will no doubt focus on that regional employment weakness, but will also want to argue that even where employment is still growing, workers aren't actually getting any richer. As ever, differing narratives regarding the economy will be a major element in the election campaign as we head to the polls in October.