With glowing hearts, we see thee rise. Canada released its much-anticipated (in Canada anyway) August employment data this morning, showing that the country created 26,000 new jobs during the month and the jobless rate rose to 7%, reflecting an increase in the number of people entering the labour force. This handily beat market expectations around the 20,000 mark, but did little to support the loonie – in a somewhat baffling development, the currency fell immediately following the headline print. We’re frankly at a loss to explain this, but things like a momentary weakness in the oil market, a broader change in risk sentiment, or a short squeeze could have played a role.
Given that Canada’s construction sector employs four times as many people as the entire resource extraction industry, August’s weaker-than-expected housing starts had given us a sinking feeling going into the release, only to be happily surprised when the headline was printed. On a deeper read however, it was clear that Trudeau’s stimulus spending had an effect – just not one that many taxpayers would be happy with. Private sector employment remained effectively flat during the month, but the public sector went on a hiring spree, adding 57,000 positions and helping to reverse damage suffered through the summer.
Overall employment growth remains extremely lackluster, tracking well below historical trends, even as debt continues to skyrocket higher. Statistics Canada is due to release second-quarter data on household leverage next week, with the average debt-to-income ratio likely to top 166%. As the Parliamentary Budget Office put it in January, “Households in Canada have become more indebted than any other G7 country over recent history”. Given this backdrop, we believe that a rise in Canadian dollar volatility over the next few months is a near-certainty.
More broadly, yield curves are steepening in the United States as investors position ahead of what is increasingly seen to be a December rate hike, and in Europe, where the European Central Bank has decided to stay on autopilot. Further complicating the outlook, commodity market speculators are once again acting like Chihuahuas suffering from attention deficit disorder, switching between long and short positions even as long-term fundamentals remain unchanged.
Oil prices jumped dramatically yesterday, with the West Texas benchmark leaping almost five percent when the US Energy Information Administration released data showing that crude inventories had fallen almost 14 million barrels over the last week. We’re baffled, given that most professionals in the market are well aware that Tropical Storm Hermine simply delayed shipments into the Gulf Coast – temporarily forcing refineries and end-users to draw down existing stockpiles. To put this in context, Very Large Crude Carriers (VLCCs) typically move between 1.5 – 2 million barrels at a time, meaning that a weather-related delay only has to impact seven or eight ships to have an outsized effect on American import numbers.
We have difficulty believing that this move will be sustained over the next week – the stage has seemingly been set for a larger-than-normal inventory build as crude carriers make landfall in the coming few weeks, and a meaningful production cut at the Organization of the Petroleum Exporting Countries meeting in twelve days remains extremely unlikely. It appears that other foreign exchange traders are equally unconvinced, with correlations between crude and the Norwegian krone or Canadian dollar falling apart over the past few days. As always, we would urge our readers to remember Warren Buffett’s guiding dictum – “be fearful when others are greedy, and greedy when others are fearful”.
Have a great weekend!
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