U.S. Highlights

• The U.S. economy generated solid job growth in July with payrolls expanding by 157k (170k private). The unemployment rate edged down to 3.9% (from 4.0%) and the core (25-54) labor force participation rate moved higher.
• Tariff concerns were once again in the spotlight. While the U.S. and EU called a truce, the battle with China continued to rage with little end in sight.
• The Fed’s decision to keep rates unchanged this week was just as markets expected. With above-trend growth likely to continue, a September rate hike is all but a foregone conclusion.

Canadian Highlights

• The Canadian economy grew by a robust 0.5% in May. The gain was broad-based, with goods-producing industries up 0.6% and services up 0.5%. Overall, 19 of 20 major industries expanded in the month.
• Economic resilience was further evidenced in the trade data for June, which showed a strong rebound in export growth (2.1% in volume terms) and pullback in imports (-1.3%).
• Preliminary home sales data for the Toronto and Vancouver markets showed growth in the former and some signs of stabilization in the latter. Existing home sales were up 19% year-on-year in the GTA (up from 1.4% in June). Sales were down 30% (y/y) in the GVA – still an improvement from the 38% decline in June.

U.S. – Red Hot Job Market, Lukewarm Wage Gains

The US economic calendar was jam packed this week. Front and center was the labor market data, which showed a payroll gain of 157k in July, somewhat below the consensus forecast, but still healthy.

Of note, the unemployment rate came in a touch lower (3.9% from 4.0% last month). The overall labor force participation rate remained unchanged, but the rate for core aged workers (25-54yrs) edged up (Chart 1). There were also upward revisions to the employment numbers for both May and June – further evidence of a strong job market. Overall, these dynamics suggest that the booming labor market is drawing more Americans off the sideline and into the job mix.

Despite the strength of the labor market, wages show little sign of accelerating. Average hourly earnings were up 2.7% (y/y) in July, unchanged from June. The lackluster performance of wage growth in the face of near-record-low unemployment and increased reporting of worker shortages is a bit of a puzzle, but it may be turning a corner. Several industries most affected by the short supply have posted above average wage gains (Chart 2).

Overall, the jobs report harkened back to the Fed’s policy statement on Wednesday, which lauded the strength of both the labor market and overall economy. As expected, the FOMC kept the policy rate unchanged. Given the strength of the economic data thus far, a labor market at or near full employment, and core PCE inflation approaching the 2% target, we expect the Fed to continue to raise interest rates, with the next quarter point move in September.

On the trade front, the U.S. and EU have called a truce on further tariffs, but tensions with China continue to escalate. President Trump ratcheted up pressure this week, as his trade team received marching orders to assess the possibility of more than doubling the rate of proposed tariffs on China (from 10% to 25%). China has warned that such actions will not go unpunished and has vowed to retaliate in both scale and severity with measures of their own. In fact, the Chinese government has already announced $60bn worth of U.S. goods on which retaliatory tariffs would be applied.

The peace pact between the EU and U.S., along with strong employment numbers reduced demand for safe haven bonds this week. These developments, along with the announced increase in Treasury issuance caused 10-year Treasury yields to breach 3% mid-week. The looming trade tussle between the two economic heavyweights however (U.S. and China), ruffled the feathers of market participants, sending yields back below 3% by Friday.

The strength of the economic data has set the stage for a solid Q3 showing of around 3% (annualized), below Q2’s 4.1% print, but still a very robust pace. The US economy is firing on all cylinders and, trade wars notwithstanding, appears well positioned to absorb further increases in interest rates.

Canada – Solid Growth Raises Odds of October Rate Hike

After a cold spell earlier in the year, Canada’s economy is hot again. The economy grew by a robust 0.5% in May with support coming from 19 of 20 industries (utilities production fell on account of good weather).

The Canadian economy’s resilience was further affirmed in the trade data for June, which showed a strong rebound in export growth (2.1% in volume terms) and pullback in import volumes (-1.3%). While falling imports can sometimes indicate flagging domestic demand, this was not the case in June. Rather, it was a giveback for the rise in petroleum imports in earlier months due to refinery shutdowns. The pullback reflected the resumption of normal activity.

Taken together, these data lend confidence to our forecast for second quarter real GDP growth to come in above 3.0%. This is even better than the 2.7% we had been forecasting in June, as well as the Bank of Canada’s July forecast for 2.8%.

Market reaction has firmed expectations for the Bank of Canada to raise interest rates later this year. The odds of a rate hike in October sit at 75% as of writing, corresponding to Canadian government bond yields moving up by about 20 basis points across maturities this week.

In terms of the key questions facing the Canadian economy, the trade report for June – the first full month that tariffs were implemented – showed the impact of steel and aluminum tariffs. Canadian exports of steel to the United States fell 37% (m/m), while aluminum exports fell 7%. Encouragingly, these declines were swamped by growth elsewhere. So long as tariffs remain contained to steel and aluminum, the Canadian economy should escape relatively unscathed.

The other key question for Canada’s economy is, of course, the fate of the Canadian housing market. Early data for the month of July reported this week was mixed, but overall suggest that the worst of the housing correction is in the rear-view mirror. In the GTA, home sales were up 6.6% in July, leaving the sales to listings ratio above 50, up from a trough of 44 in March, while average prices rose 3.1% (m/m). In the GVA, meanwhile, sales appear to have edged up slightly (m/m, seasonally adjusted), but growth in quality-adjusted home prices (the only reported metric) slowed to its softest pace since 2015.

All told, there are still some soft spots on the landscape, and temporary factors appear likely to return in the third quarter (shutdowns in the Alberta oil patch). Still, for the year as a whole, the Canadian economy looks to maintain above-trend growth. With inflation above 2% and unemployment close to a historical nadir, the case for continued increases in interest rates remains solid. The question is less a matter of if and more of when. The Bank of Canada will surely be watching the trend in Canadian employment and wage growth next week. Should labour market indicators continue to run hot, the chance of an earlier rate hike will cement itself.

U.S.: Upcoming Key Economic Releases

U.S. Consumer Price Index – July

Release Date: August 10, 2018
Previous: 0.1% m/m, core 0.2% m/m
TD Forecast: 0.2% m/m, core 0.2% m/m
Consensus: 0.2% m/m, core 0.2% m/m

We expect CPI to hit 3.0% y/y, with core inflation rising to 2.3% on a firm 0.2% m/m increase. Weakness in gasoline and food prices should be offset by strength in the core, underpinned by a pickup in core goods prices and resilience in shelter costs.

Canada: Upcoming Key Economic Releases

Canadian Housing Starts – July

Release Date: August 9, 2018
Previous: 248k
TD Forecast: 230k
Consensus: N/A

We look for housing starts to cool to a 230k pace in July on a pullback in multi-unit construction. Multi-unit housing starts surged by 46% in June, a move that is unlikely to be sustained despite a steady trend higher in permit issuance. On a regional basis, Toronto should see a sharp slowdown, but there is scope for a partial recovery in Vancouver where construction has slowed to its weakest pace since 2016. Single family starts should see little change, allowing the more volatile multi-unit component to drive the headline print.

Canadian Employment – July

Release Date: August 10, 2018
Previous: 32k, unemployment rate: 6.0%
TD Forecast: 20k, unemployment rate: 5.9%
Consensus: N/A

We expect the economy to add 20k jobs in July on a rebound in private sector employment after two consecutive months in decline. Full time positions should lead job growth to lend an upbeat tone to the report after underperforming part time by roughly 60k since March. We also look for labour force growth to moderate from June, which should allow the unemployment rate to edge lower to 5.9%. Lastly, wage growth for permanent employees is likely to push higher to 3.6% y/y on a rebound in monthly earnings.