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Canadian Job Creation Engine Stalls in July

Karl Schamotta August 9, 2019

Canada sheds 24,200 jobs in July

Canadian dollar loses 50 basis points in seconds after the release

British economy contracts, putting renewed pressure on the pound

Canada shed more private-sector jobs last month than it has outside a recession, losing 69,300 positions, while the unemployment rate rose. Statistics Canada’s Labour Force Survey, released this morning, showed 24,200 jobs were lost and the unemployment rate rose to 5.7% in July – well below market estimates set at 15,000 and 5.5% respectively.

In a positive sign, wage growth jumped sharply, hitting a post-crisis high at 4.5% on an annualized basis, but with base effects and the lagging impact of early-year market tightness playing a role, this may not reflect a sustainable rise in underlying price pressures.

Overall employment is up 353,000 positions over the year prior, with full-time, private-sector jobs contributing the bulk of the gain.

With oil prices down roughly 5% on the week and yield differentials widening against it, the Canadian dollar is consolidating its losses.

Canadian consumers – who drive roughly two-thirds of economic activity – have remained remarkably unaffected by a change in sentiment that has thrown global financial markets into turmoil through the early part of the year. Rising home prices, strong credit growth, and sustained increases in household spending have helped to keep growth expectations aloft.

But as employment uncertainties rise, this could change. Canadian housing and consumption corrections tend to be triggered by weakness in jobs markets – not by rising interest rates, as is popularly assumed.

In other market developments, the British pound is trading near its lowest levels against the dollar since 1985 after new numbers showed the economy unexpectedly contracting in the second quarter. Gross domestic product fell 0.2% in the three months to June, meaning that the country is flirting with recession.

Uncertainties related to the United Kingdom-European Union divorce process are unquestionably sapping economic momentum, but temporary factors – namely inventory-building ahead of the March Brexit deadline – may have skewed results. Business investment fell 0.5%, but consumer spending rose 0.5%, and a sharp narrowing in the trade deficit helped flatter the overall number – suggesting that (barring a disastrous exit process), growth could rebound into positive territory in the third quarter.

With the People’s Bank of China acting to stabilize the yuan, and Trump administration officials making conciliatory noises, risk appetite is improving across the currency markets – and position-squaring could unwind some of this week’s sharper moves as liquidity dissipates ahead of the weekend. Prepare for modest reversals in the hours ahead…

Karl Schamotta
Chief Market Strategist
@vsualst

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