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The U.S. economy continued to crank out jobs in May, with nonfarm payrolls surging more than expected despite multiple headwinds, the Labor Department reported Friday.
Payrolls in the public and private sector increased by 339,000 for the month, better than the 190,000 Dow Jones estimate and marking the 29th straight month of positive job growth.
Oil prices rose on Friday after a U.S. debt ceiling deal averted a default in the world’s biggest oil consumer, while attention turned to a meeting of OPEC ministers and their allies at the weekend.
Brent crude futures were up $1.21, or 1.6 per cent, to $75.49 a barrel by 1134 GMT, while U.S. West Texas Intermediate crude (WTI) was up $1.19, or 1.7 per cent, at $71.29. Both contracts were headed for their first weekly loss in three weeks.
Markets were reassured by a bipartisan deal to suspend the limit on the U.S. government’s $31.4-billion debt ceiling, which staved off a sovereign default that would have rocked global financial markets.
Earlier signals of a potential pause in rate hikes by the Federal Reserve also provided support to oil prices, not least by weighing on the U.S. dollar, making oil cheaper for holders of other currencies.
U.S. employment data, watched for pointers for upcoming Fed decisions, is due at 1230 GMT.
Investor attention is also fixed on the June 4 meeting of the Organization of the Petroleum Exporting Countries and allies including Russia, collectively called OPEC+.
OPEC+ in April announced a surprise cut of 1.16 million barrels per day, but the gains from that move have since been retraced and prices are below pre-cut levels.
Sources told Reuters fresh output cuts are unlikely.
On the demand side, the U.S. Institute for Supply Management (ISM) said its manufacturing PMI fell to 46.9 last month, the seventh-straight month that the PMI stayed below 50, indicating a contraction in activity.
Meanwhile, manufacturing data out of China, the world’s second biggest oil consumer, painted a mixed picture.
Suncor Energy Inc. SU-T will cut 1,500 jobs by the end of the year, as new CEO Rich Kruger forges ahead with his mandate to reduce costs and improve the company’s lagging financial performance.
Employees were given the news Thursday afternoon, in a companywide email from Kruger, Suncor spokeswoman Sneh Seetal said.
She confirmed the job reductions are new, and not part of the company’s previously announced plan to reduce the size of its contractor workforce by 20 per cent in an effort to improve safety and performance at its oil sands sites.
“As a company we needed to make changes that will strengthen our company for the future, and that includes our overall cost structure,” Seetal said by phone, adding the 1,500 job losses will be spread across the organization and will affect both employees and contractors.
The reductions amount to about nine per cent of the 16,558 employees that Calgary-based Suncor had at the end of 2022, according to the company’s annual information form. However, that tally does not include contractors.
Suncor has been under pressure from shareholders — including activist investor Elliott Investment Management — to improve its financial and share price performance, which has lagged its peers.
The company has also been under fire for a recent spate of operational issues and workplace safety incidents, including a string of deaths.
Earlier this spring, Kruger, the former CEO of Imperial Oil Ltd., was enticed out of retirement to take the reins of Suncor and try to turn around the oil sands giant.
In an interview with The Canadian Press last month, Kruger declined to say whether that would involve layoffs or not. But he said he would “look hard and long at the work people do” to ensure that everything that is being done at the company adds value to the bottom line.
Seetal declined to say whether the bulk of the layoffs would take place at head office or in the field. Suncor employs people across the country, in the U.S. and internationally, with its corporate head office located in Calgary.
But she echoed Kruger’s theme of needing to ensure people are doing the work that provides the most value to the organization.
“Work that doesn’t necessarily support regular day-to-day maintenance and operations of assets would be considered (for layoffs), but it’s not necessarily solely office workers,” she said.
Seetal said Suncor is committed to treating its employees with dignity and respect throughout what will inevitably be a difficult process.
She also emphasized the company will not make any cuts that could affect worker safety.
In the first quarter of 2023, Suncor earned a $2.05-billion profit. On an adjusted basis, Suncor’s reported first-quarter profit was $1.81 billion, a 34 per cent decrease year-over-year.
Can we shop our way out of a recession? Consumers in Canada are giving it their best shot.
The strong first-quarter growth in GDP that caught economists off guard was powered by two sectors, exports and consumer spending, with the latter rising 5.7 per cent on an annualized basis.
That growth was twice as fast as economists expected, and it pushed consumer spending to its highest share of GDP since records began in 1961.
South of the border, resilient consumers have been credited for helping stave off recession. But Canadian shoppers are outspending even their counterparts in the United States, where consumer spending rose 3.8 per cent.
None of this is good news for the Bank of Canada as it tries to cool inflation by discouraging people from buying stuff. Instead Canadians defied rate hikes and recession warnings to fork out for goods such as vehicles and services, including restaurants and hotels, at a frenzied pace.
The boom in services spending will have been particularly troubling to the bank. Governor Tiff Macklem warned in early May “the biggest upside risk to our inflation forecast is that services price inflation could be more persistent than we expect.”
Which is why some economists believe the bank isn’t done tightening. “This is just the latest data point reinforcing the strength of the Canadian economy, particularly the consumer,” wrote Randall Bartlett, an economist with Desjardins. The shopping spree “substantially increases the odds of another rate hike.”
Fending off a U.S. default, the Senate gave final approval late Thursday to a debt ceiling and budget cuts package, grinding into the night to wrap up work on the bipartisan deal and send it to President Joe Biden’s desk to become law before the fast-approaching deadline.
The compromise package negotiated between Biden and House Speaker Kevin McCarthy leaves neither Republicans nor Democrats fully pleased with the outcome. But the result, after weeks of hard-fought budget negotiations, shelves the volatile debt ceiling issue that risked upending the U.S. and global economy until 2025 after the next presidential election.
Approval in the Senate on a bipartisan vote, 63-36, somewhat reflected the overwhelming House tally the day before, relying on centrists in both parties to pull the Biden-McCarthy package to passage – though Democrats led the tally in both chambers.
Senate Majority Leader Chuck Schumer said ahead of voting that the bill’s passage means “America can breathe a sigh of relief.”
Afterward he said, “We’ve saved the country from the scourge that is default.”
Biden said in a statement following passage that senators from both parties “demonstrated once more that America is a nation that pays its bills and meets its obligations – and always will be.”
He said he would sign the bill into law as soon as possible. “No one gets everything they want in a negotiation, but make no mistake: this bipartisan agreement is a big win for our economy and the American people,” the president said. The White House said he would address the nation about the matter at 7 p.m. EDT Friday.
Fast action was vital if Washington hoped to meet next Monday’s deadline, when Treasury has said the U.S. will start running short of cash to pay its bills, risking a devastating default. Raising the nation’s debt limit, now $31.4-trillion, would ensure Treasury could borrow to pay already incurred U.S. debts.
In the end, the debt ceiling showdown was a familiar high-stakes battle in Congress, a fight taken on by McCarthy and powered by a hard-right House Republican majority confronting the Democratic president with a new era of divided government in Washington.
Refusing a once routine vote to allow a the nation’s debt limit to be lifted without concessions, McCarthy brought Biden’s White House to the negotiating table to strike an agreement that forces spending cutbacks aimed at curbing the nation’s deficits.
Overall, the 99-page bill restricts spending for the next two years, suspends the debt ceiling into January 2025 and changes some policies, including imposing new work requirements for older Americans receiving food aid and green-lighting an Appalachian natural gas line that many Democrats oppose.
It bolsters funds for defence and veterans, cuts back new money for Internal Revenue Service agents and rejects Biden’s call to roll back Trump-era tax breaks on corporations and the wealthy to help cover the nation’s deficits. It imposes automatic 1% cuts if Congress fails approve its annual spending bills.
After the House overwhelmingly approved the package late Wednesday, Senate Republican leader Mitch McConnell signalled he too wanted to waste no time ensuring it became law.
Touting its budget cuts, McConnell said Thursday, “The Senate has a chance to make that important progress a reality.”
Having remained largely on the sidelines during much of the Biden-McCarthy negotiations, several senators insisted on debate over their ideas to reshape the package. But making any changes at this stage would almost certainly derail the compromise and none were approved.
Instead, senators dragged through rounds of voting late into the night rejecting the various amendments, but making their preferences clear. Conservative Republican senators wanted to include further cut spending, while Democratic Sen. Tim Kaine of Virginia sought to remove the Mountain Valley Pipeline approval.
The energy pipeline is important to Sen. Joe Manchin, D-W.Va., and he defended the development running through his state, saying the country cannot run without the power of gas, coal, wind and all available energy sources.
But, offering an amendment to strip the pipeline from the package, Kaine argued it would not be fair for Congress to step into a controversial project that he said would also course through his state and scoop up lands in Appalachia that have been in families for generations.
Defense hawks led by Sen. Lindsey Graham of South Carolina complained strongly that military spending, though boosted in the deal, was not enough to keep pace with inflation – particularly as they eye supplemental spending that will be needed this summer to support Ukraine against the war waged by Russian President Vladimir Putin.
“Putin’s invasion is a defining moment of the 21st century,” Graham argued from the Senate floor. “What the House did is wrong.”
They secured an agreement from Schumer, which he read on the floor, stating that the debt ceiling deal “does nothing” to limit the Senate’s ability to approve other emergency supplemental funds for national security, including for Ukraine, or for disaster relief and other issues of national importance.
All told, 46 Democratic senators and 17 Republicans voted for the package; 31 Republicans, four Democrats and one independent who caucuses with the Democrats opposed it.
For weeks negotiators laboured late into the night to strike the deal with the White House, and for days McCarthy had worked to build support among skeptics.
Tensions had run high in the House the night before as hard-right Republicans refused the deal. Ominously, the conservatives warned of possibly trying to oust McCarthy over the issue.
But Biden and McCarthy assembled a bipartisan coalition, with Democrats ensuring passage on a robust 314-117 vote. All told, 71 House Republicans broke with McCarthy to reject the deal.
“We did pretty dang good,” McCarthy, R-Calif., said afterward.
As for discontent from Republicans who said the spending restrictions did not go far enough, McCarthy said it was only a “first step.”
The White House immediately turned its attention to the Senate, its top staff phoning individual senators.
Democrats also had complaints, decrying the new work requirements for older Americans, those 50-54, in the food aid program, the changes to the landmark National Environmental Policy Act and approval of the controversial Mountain Valley Pipeline natural gas project they argue is unhelpful in fighting climate change.
The non-partisan Congressional Budget Office said the spending restrictions in the package would reduce deficits by $1.5-trillion over the decade, a top goal for the Republicans trying to curb the debt load.
In a surprise that complicated Republicans’ support, however, the CBO said their drive to impose work requirements on older Americans receiving food stamps would end up boosting spending by $2.1-billion over the time period. That’s because the final deal exempts veterans and homeless people, expanding the food stamp rolls by 78,000 people monthly, the CBO said.
Ottawa has backstopped $3-billion more in debt for Crown-owned Trans Mountain Corp.’s delayed and overbudget oil pipeline expansion, but the government maintains its guarantees do not amount to public funding.
According to Export Development Canada’s website, Ottawa is guaranteeing $1.75-billion to $2-billion of financing provided by commercial lenders in a transaction finalized at the beginning of May. That followed a guarantee for $750-million to $1-billion of debt in late March. The guarantees are listed within the Canada Account, which includes transactions that are too risky for EDC under its usual course of business because of risks related to deal size, markets, borrowers and financing conditions.
The government approved the loan guarantees after backstopping another $10-billion in financing last year.
In March, Trans Mountain Corp. reported the estimated costs for its expansion had ballooned to $30.9-billion, an increase of more than 300 per cent from the initial $7.4-billion that former owner Kinder Morgan Canada forecast in 2017.
Even before the latest overrun was disclosed, independent analyses, including one a year ago from the Parliamentary Budget Officer, had shown Ottawa would lose money on the project, which it purchased from Kinder Morgan Canada in 2018 for $4.5-billion.
Finance Minister Chrystia Freeland said in 2022 that Ottawa would not plow any more public money into Trans Mountain, which the government has pledged to sell eventually. She said the corporation would secure the funding necessary to complete the project through third-party financing, either in public debt markets or from financial institutions.
The additional government guarantees mean taxpayers are taking on the risk of default. But they are not footing more of the bill to complete the project, Marie-France Faucher, a spokesperson for Ms. Freeland, said in a statement.
“As confirmed in TMC’s first quarter financial statements, TMC continues to secure the necessary third-party financing to complete the project. As part of this process, the Government of Canada has provided a loan guarantee on behalf of the corporation,” Ms. Faucher said. “This is common practice and does not reflect any new public spending. The company is paying a fee to the government for this loan guarantee.”
Trans Mountain is Canada’s only pipeline system for transporting oil to the West Coast. The first phase was completed in 1953, and the line can currently ship 300,000 barrels of oil a day to Burnaby, B.C., from the Edmonton area. Prime Minister Justin Trudeau’s government bought the pipeline after Kinder Morgan Canada shelved plans for the expansion in the face of stiff opposition and court challenges from environmentalists and some Indigenous groups.
The expansion project, which is due to be completed early next year, will nearly triple the pipeline’s throughput to 890,000 barrels a day. Eighty per cent of the capacity of the expanded pipeline has been allocated to 11 Canadian and international producers and refiners, under 15- and 20-year transport contracts.
Energy companies have said for years they are looking to the expansion of the pipeline to boost the value of their oil production, which has at times suffered deep price discounts compared with other international crude types because of tight export capacity and reliance on the United States as the Canadian oil patch’s only sizable customer.
Years of delays and cost increases have raised concerns about the project’s long-term financial viability. Ms. Faucher said the government plans to start the process of divesting itself from the pipeline “in due course.”
“As assessed by BMO Capital Markets and TD Securities, the project remains commercially viable, and there is strong interest from investors in high quality, operational infrastructure assets like the Trans Mountain Expansion Project,” she said.
Several Indigenous groups have expressed interest in buying the pipeline, including Calgary-based Project Reconciliation; Nesika Services, a group that describes itself as an Indigenous-led not-for-profit; and Chinook Pathways, a partnership between Western Indigenous Pipeline Group and Pembina Pipeline Corp. But some would-be bidders have expressed fatigue after waiting years for a formal process to begin.
Private payrolls rose by 278,000 in May, well ahead of expectations, ADP says (cnbc.com)
https://www.theglobeandmail.com/authors/monica-rizk/
Canadian Tire CTC-A-Trallied from $67.15 in March 2020 to $213.85 in May 2021 (A-B) and then had a one-half correction within a falling parallel channel over a period of two years (dotted lines).
The recent rise above the top of this channel signaled the end of the correction and the start of a new uptrend toward higher targets (C). The stock is currently in the midst of a minor correction for a good entry-level.
Behaviour indicators including the rising 40-week Moving Average (40wMA) and the rising trendline (solid line) confirm the bullish status. There is good support near $164-165 and then again near ±$160; only a sustained decline below the latter would be negative.
Point & Figure measurements provide targets of $210 and $225. Higher targets are visible.
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Money markets and economists have grown more convinced that the Bank of Canada will make at least one more hike to interest rates this year in the wake of stronger-than-expected gross domestic product data Wednesday. Some even suggest the central bank could hike rates as soon as next week – and that might not be the end of them for this tightening cycle.
Canada’s economy grew at an annualized rate of 3.1% in the first quarter, exceeding analysts’ expectations as well as the Bank of Canada’s projection.
Real GDP was unchanged in March, and likely rose 0.2% in April, Statistics Canada said.
Analysts surveyed by Reuters had forecast annualized growth of 2.5% in the quarter and a decline of 0.1% in March.
The increase was more robust than the Bank of Canada’s 2.3% growth projection, and could pressure the bank to hike interest rates after other data this month also showed the economy was hotter than anticipated.
The central bank has hiked its key overnight rate by 425 basis points to 4.5% between March of last year and January. It has since kept rates on hold, but warned that rates could go higher.
The Canadian dollar is up about a quarter of a U.S. cent since the data was released, to 73.48 cents US, as money markets show greater conviction the Bank of Canada will take action once more to tighten monetary policy. (The loonie is still lower on the day, however, as weaker oil prices and soft Chinese manufacturing data weigh on the currency.)
Interest rate probabilities based on trading in swaps markets now show an almost 75% chance of a further Bank of Canada quarter-point rate hike by the end of this summer. They are currently placing 38% odds of a rate hike at the bank’s policy meeting next week.
Here’s a detailed look at how money markets were pricing in further moves in the Bank of Canada overnight rate just prior to the 830 am ET data, according to Refinitiv Eikon data. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
| MEETING DATE | EXPECTED TARGET RATE | CUT | NO CHANGE | HIKE |
|---|---|---|---|---|
| 7-Jun-23 | 4.5648 | 0 | 74.1 | 25.9 |
| 12-Jul-23 | 4.6499 | 0 | 48.9 | 51.1 |
| 6-Sep-23 | 4.7112 | 0 | 36.9 | 63.1 |
| 25-Oct-23 | 4.7097 | 0.2 | 36.9 | 62.9 |
| 6-Dec-23 | 4.72 | 0.2 | 35.4 | 64.4 |
And here’s where probabilities stood at 9 a.m. ET following the report:
| MEETING DATE | EXPECTED TARGET RATE | CUT | NO CHANGE | HIKE |
|---|---|---|---|---|
| 7-Jun-23 | 4.5958 | 0 | 61.7 | 38.3 |
| 12-Jul-23 | 4.6863 | 0 | 39.4 | 60.6 |
| 6-Sep-23 | 4.7708 | 0 | 26.1 | 73.9 |
| 25-Oct-23 | 4.779 | 0 | 25.2 | 74.8 |
| 6-Dec-23 | 4.7885 | 0 | 24.2 | 75.8 |
Similarly, economists are cautioning the Bank of Canada could soon lift its pause on moves in its trend-setting overnight rate. How’s how they are reacting:
Royce Mendes, managing director & head of macro strategy, Desjardins Securities
The facts on the ground have indeed changed, so a change to our Bank of Canada call is now necessary. We had previously believed that the 4.50% policy rate would be enough to cool the economy and rein in excess inflationary pressures. But, so far, it’s proven ineffective. The unemployment rate has been hovering at near-record lows for five months. Economic growth is outperforming expectations. And three-month annualized rates of core inflation are stuck between 4% and 5%.
We entered the year very bearish on the Canadian economy. Our work on variable-rate mortgages suggested a majority of borrowers with those products had already hit their trigger rates. However, somewhat surprisingly to us, many lenders began allowing those mortgage holders to simply add the extra interest owed to the principal loan amount rather than forcing borrowers to make any extra payments. That has materially blunted the potential non-linear impacts of higher interest rates and, therefore, has removed significant downside risk. As a result, we’ve become more bullish on the near-term prospects for the Canadian economy, even as we’ve become more bearish on the medium-term outlook given the risks at renewal for the many mortgages originated in 2020 and 2021.
The question now is one of timing. Central bankers will seriously consider raising rates next week. According to the Summary of Deliberations, they already did so before ultimately deciding to hold rates steady in April. Policymakers could, therefore, justify pushing rates higher a week from now by arguing that Canadians were adequately warned. Indeed, despite the market still pricing in less than a 50% chance of a move next week, the Bank of Canada’s penchant for surprising traders means that nothing can be ruled out. Still, there are valid reasons to expect that central bankers will want a little more time before restarting the rate-hiking engines.
Most importantly, after seeing the latest inflation numbers, Governor Macklem didn’t seem like he was in any hurry to push rates higher. That might have been because of the ongoing debt ceiling shenanigans in the US at the time. But, even now, there’s lingering uncertainty about how liquidity conditions will evolve in light of the US government’s actions to replenish the Treasury General Account. Central bankers in both Canada and the US might want to skip raising rates on their upcoming announcement dates to monitor liquidity for at least a brief period.
We’re, therefore, leaning towards a rate hike in July assuming liquidity conditions don’t deteriorate too much. That said, we certainly can’t rule out a move next week given the dataflow.Furthermore, after coming off of the sidelines in either June or July, the door would be wide open to a subsequent increase. It’s unlikely central bankers would see a single 25bp rate hike as the difference between controlling inflation and not. So expect a near-term rate increase to precipitate firmer pricing for another one. …
Canadians should expect a very hawkish-sounding central bank seven days from today and brace themselves for a further tightening in financial conditions this summer.
Stephen Brown, deputy chief North American economist, Capital Economics
As GDP growth and CPI inflation have both surprised to the upside of the Bank of Canada’s forecasts, we now judge that it will raise interest rates next week rather than wait until July.
Since announcing its “conditional pause” in January, the Bank has been clear that it is prepared to raise rates again if the data surprised to the upside or cast doubt on the idea that policy is “sufficiently restrictive to…return inflation to the 2% target”. ….
Admittedly, some of the arguments used to justify keeping policy unchanged in April still stand. The upside surprise to first-quarter GDP growth was partly due to temporary factors, including easing supply shortages and the unseasonably mild winter weather, which will soon fade. While growth should surpass the Bank’s forecasts this quarter, it will likely still be below potential and the forward-looking indicators continue to point to a further slowdown.
Labour market conditions have also eased. The job vacancy rate fell to a two-year low of 4.5% in March and the Indeed.ca job listings data suggest it has fallen further since then, boosting the Bank’s confidence that wage growth will ease later this year. The drop in the WTI oil price below $70 – compared to the Bank’s recent assumption that it would average $80 for the next couple of years – has also reduced the upside risks to headline inflation.
But the other key concerns for the Bank are the housing market and inflation expectations. House prices jumped by 1.6% m/m in April and the surge in the sales-to-new listing ratio implies that there are further large gains to come. As house prices feed into two components of shelter prices that make up 9% of the CPI, that will directly boost headline inflation. It also risks inflation expectations declining even more slowly, as the Bank’s research shows that consumers’ inflation expectations are heavily influenced by house prices.
While we will have to wait until July to see how consumers’ and firms’ inflation expectations develop in the Bank’s quarterly surveys (the Bank already has the results), the recent rebound in the CFIB Business Barometer measure of selling price expectation also suggests that they will remain elevated.
In short, while it is still possible to argue that “pressures on demand, inflation and labour markets” are “likely to ease”, it’s not clear that the easing will be enough to get inflation to 2%. ….
We judge that market pricing is underestimating the extent to which the Bank might raise rates. According to Refinitiv, overnight index swaps imply a 38% probability of a 25bp hike next week and show that 27bp of hikes are priced in by the September meeting. If the Bank hikes by 25bp next week, to 4.75%, and presents a hawkish statement, we assume the Bank will follow with another 25bp hike in July – although we’ll wait for the meeting next week before making that call official.
Douglas Porter, chief economist, BMO Capital Economics
Perhaps the biggest eye-opener in today’s report was the flash estimate for April GDP at +0.2%, despite the public sector strike in the second half of the month. We estimate that the strike likely trimmed at least a couple of ticks from growth (albeit with a wide range of uncertainty). The main point is that there’s more underlying momentum in the economy than anticipated, and we will be revising up our Q2 GDP forecast from what had been a small drop (-0.5% annual rate) to a small positive.
Bottom Line: Each of the main figures here are better than expected—Q1, March and April GDP—and the details were solid for Q1 as well. The run of sturdy data undoubtedly raises the odds that the Bank of Canada needs to go back to the well of rate hikes, and even puts some chance on a move as early as next week’s policy decision. However, given the uncertain backdrop and the possibility that inflation took a big step down in May, the BoC could opt to remain patient for a bit longer and signal that it’s open to hiking in July if the strength persists.
Jay Zhao-Murray, forex analyst at Monex Canada, a commercial foreign exchange specialist
Two weeks ago, we argued that the Bank of Canada would likely be forced to hike rates on June 7th, largely because upward momentum in inflation pressures had picked up sharply and downside risks were beginning to fade out of the picture. A few days after we made that call, Governor Macklem tried to downplay the uncomfortably strong inflation data when asked by a journalist, buying himself a bit of time by suggesting that he would wait for today’s GDP report and then take all of the information together before making a decision. With the final piece of the puzzle also suggesting that the economy has more excess demand than the Bank of Canada thought,the stars are aligned for a resumption in the hiking cycle. We are now at a stage where, should the Bank lack the conviction to act in June, the history books likely won’t look kindly upon the decision.
The BoC has needed to considerably revise its growth forecasts, having anticipated a mere 0.5% reading for the quarter back in January. Even after lifting its forecast to 2.3% in April, the estimate fell 8 tenths of a percent short of the actual data. The breakdown by expenditure component makes it clear that both domestic and foreign demand were strong, with household consumption and exports delivering virtually all of the growth in the quarter. …
Adding more fuel to the fire, today’s GDP report showed no slowdown in wage growth, with total compensation accelerating by 1.7% in Q1 and picking up steam from Q4′s 1.2% print. In goods-producing industries, wages and salaries rose 2.3%, whereas in services they rose by 1.6%. Annualising the total reading for the quarter would lead to a growth rate of 7.0%—Macklem has expressed worries that inflation would get caught above target if wage growth remained in the 4 to 5% range, but it is clearly well beyond that now.
While much of the growth in GDP was delivered in January, the Canadian economy didn’t contract throughout the remainder of the first quarter, expanding slightly in February and remaining broadly unchanged in March. This ran contrary to the Bank of Canada’s expectations and the market consensus, both of which foresaw the Canadian economy slipping back at the end of Q1. Preliminary estimates suggest that the economy grew by 0.2% in April, which would annualize to 2.4%. With a strong first month to set the tone for the second quarter, we believe the Bank will probably revise up its 1.0% quarter over quarter annualised forecast for Q2 as well.
Despite today’s report coming in much stronger than the Bank of Canada had expected, policymakers could point to a few slight areas of weakness in the March data if they choose to pass up a June hike. Specifically, activity within services was much softer than the 0% month over month aggregate reading suggests. Economic activity contracted in the industries most exposed to consumer discretionary spending, namely retail trade, wholesale trade, and food and accommodation. For wholesale and retail trade, March’s contraction in output marked the second consecutive month of decline, which may signal the beginning of a trend. Furthermore, the 2.2% contraction in accommodation and food services follows a sharp decline in growth in February, which itself was a reversal from January’s monstrous 4.2% increase. …
Combined with the fact that the economy entered what may well be a stagnant period of growth with much more momentum than the BoC had factored in, the latest round of data adds weight to our view that the Bank will need to conduct an insurance rate hike at either of its next two meetings. In our view, given the BoC’s flawed decision in January 2022 to delay the start of its hiking cycle and its preference thereafter to frontload hikes, we believe markets are underpricing the risk that the Bank acts sooner rather than later.
Derek Holt, vice-president & head of capital markets economics, Scotiabank
GDP data is the latest in a string of evidence supporting my long held view that the BoC quit its hiking cycle prematurely in January and needs to return with further tightening now. …
The Bank of Canada needs to exhibit a sense of urgency in next Wednesday’s decision by hiking the overnight rate by at least 25bps as per our forecast. They should leave the door open to further increases as the real policy rate is not yet restrictive enough for the idiosyncratic factors that continue to drive Canada’s economy and Canadian inflation. On this list are immigration, the terms of trade, ongoing fiscal expansion, strong corporate balance sheets, still pent-up services demand, an undervalued C$ etc.
GDP growth is outpacing the BoC’s April MPR projections which indicates that the economy is in a deeper state of excess demand than they had judged at the time. …
The details behind the Q1 growth numbers were arguably more impressive than the headline print of 3.1% and in a way that indicates that the Q1 rebound was about much more than just reversing the distortions to 2022Q4 GDP. Key is that despite all the overly gloomy consensus talk, the Canadian consumer remains alive and kicking and by enough to have contributed 3.0 ppts to the 3.1% GDP gain in Q1 in weighted terms. …
The BoC is getting clear signals that its policy stance is not yet restrictive enough with each piece of evidence that showcases how core inflation is unacceptably high, that growth is resilient as indicated in today’s numbers, that consumers are doing quite well on balance amid obscenely exaggerated concerns about a minority of them, that housing is on a tear again and that the job market is still strong. Roughly 20 months into a bond market tightening cycle that preceded the commencement of policy rate hikes should be marked by greater evidence of the damage being done through lag effects that have been given long enough to work by now.
Furthermore, households and businesses don’t believe the BoC’s 2% inflation target as evidenced in the BoC’s own surveys. Prominent strike action resulting in aggressive settlements signals that workers don’t believe the BoC either. It’s time for Governor Macklem to take the gloves off and prove that he’ s serious with concrete action instead of just talk. …
If the US House of Representatives passes the debt ceiling agreement this evening as expected, then there is no good reason why the BoC should dither any longer. A hike was considered in April and the case for hiking has since grown. … A 25bps hike would prove that the BoC is serious when it says it is thinking of further tightening and against cutting anytime soon in a signalling sense, but it would probably be insufficient.
Nathan Janzen, analyst, RBC Capital Markets
The jump in GDP early in Q2 means output is potentially running substantially above prior expectations. Labour markets have remained very firm, and inflation also surprised on the upside in April. There are still early signs that cracks are forming in the economic backdrop – job vacancies are declining, consumer delinquency rates are edging higher and households are saving less. And headwinds from higher interest rates will continue to build. But the economy’s resilience will put pressure on the BoC to raise interest rates further. Governing Council will actively discuss a hike next week, but we think they’ll wait until July to see if more evidence accumulates in favour of a rate increase.
Andrew Grantham, senior economist with CIBC Capital Markets
Overall, the headline reading, composition of growth and handoff to Q2 were all slightly stronger than we had expected, raising the odds of another Bank of Canada rate hike. However, we still expect that they will want to wait to see more data and revise their forecasts (in the July Monetary Policy Report) before making a final decision on whether to raise rates again, rather than hike next week.
James Orlando, director and senior economist, TD
The Bank of Canada’s next interest rate decision is next week, and while today’s report might not force a move off the sidelines, it may be used as rationale for a hike later this summer. Thus far, the BoC’s rhetoric has focused on its expectation for a quick deceleration in economic growth over the remainder of the year. That slowdown still seems likely, but if the data keep coming in hot, the BoC may be compelled to move once again.
Matthieu Arseneau and Alexandra Ducharme, economists at National Bank Financial
The performance of consumer spending was eye-catching, with growth of 5.7%, the strongest in three quarters. We knew that consumers had assets at their disposal, notably a savings rate that remained above its pre-pandemic level, and thus an accumulation of excess savings that seemed to have been put to good use. Growth in the first quarter was therefore stronger than the Bank of Canada had anticipated in its latest Monetary Policy Report. However, we need to put things into perspective. Like us, the central bank probably underestimated the economy’s potential GDP, which is currently being boosted by an unprecedented demographic boom. If the unemployment rate and falling job vacancy rates in the economy are any guide, this growth does not seem to be pushing the economy further into excess demand. In light of this morning’s data, we do not change our view that the economy will slow significantly over the next four quarters as interest rate hikes continue to weigh on the economy. The third consecutive quarter of declines in corporate profits and investment does not suggest that the appetite for hiring will continue in the months ahead. A softer labor market is also likely to dampen the enthusiasm of consumers, who have been able to afford high levels of consumption despite a decline in disposable income, a situation that will not last much longer with the savings rate now back to pre-pandemic levels.
Tiffany Wilding, managing director and economist, PIMCO
The stronger-than-expected real GDP growth tracking, coupled with signs that the housing market is stabilizing and firmer inflation, taken together suggest the economy may be more resilient than anticipated. However, other recent indicators muddy the picture. Weakness in the April retail sales flash estimate points to negative real consumption growth, and weaker survey data that tends to lead economic activity raise questions about the durability of the recent economic strength.
Recent economic strength make further Bank of Canada rate hikes a real possibility. However, given the mixed picture, we think the Bank of Canada will prefer to wait until July for any possible hike, at which point it will have two additional labour force surveys, April’s GDP release and May’s Consumer Price Index data with which to judge the strength of this resilience.
With a report from Reuters
