Learmonth echoed that big picture view and offered some additional insight into how labour markets have played into central bank positions. Despite headlines of unemployment ticking up in the US and Canada, he notes, unemployment levels in both countries remain quite healthy by historical standards. We’re roughly in a range similar to late 2019 and early 2020, before the onset of the pandemic. Topline economic data neither shows massive deterioration nor does it show rapid acceleration, putting both the US and Canada in a bit of a goldilocks scenario. Though the US economy and US consumer both remain better positioned than their Canadian counterparts.
In this environment any datapoints that support interest rate cuts are greeted warmly by investors. Upticks in unemployment, declines in the CPI, or shifts in other underlying factors like wage growth and consumer confidence can be constructive for investors. While markets are data sensitive, Learmonth cautions against letting single points dictate a narrative.
It is unlikely, he says, that either country embarks on a dramatic rate cutting cycle because of single employment or CPI prints. As of now, he notes that futures markets have priced in a 50/50 likelihood that the US Fed cuts in September and a certainty that one cut comes by December. The odds in Canada are somewhat better, with 50/50 odds that a cut comes at each of the next few meetings.
While labour markets are key factors in central bank decisions going forward, Learmonth adds that there has been a gradual decline in the overall labour market participation rate since the early 2000s. Largely citing US stats, because that is where more granular data is available, he highlights that there has been a broad shift in the overall labour market. Fewer participants overall support somewhat tighter labour markets, which could explain some of the wage growth and relatively low unemployment we continue to see in the US and Canada.
While the labour market picture is nuanced, Learmonth says that it remains the key economic area to watch as we look for when bad news becomes bad news again. If we begin to see topline labour market reports show serious deterioration, that could become a trigger for the market. The same goes for corporate earnings, which would indicate a broader economic shift if and when companies begin to guide revenues and earnings estimates much lower.
