For Eric Lascelles, chief Economist at RBC Global Asset Management, the Fed will rise its rates as of September. He also highlights weak business investment and employment intentions in Canada and the impact of a potential nuclear agreement with Iran.
The upcoming Fed minutes should prove quite interesting in the extent to which they add colour to the thinking behind the last Fed decision. The dovishness of that decision caught the market by surprise.
Yes, the statement removed its tribute to “patience” before tightening monetary policy – a theoretically hawkish signal, but this was undermined by downward growth and inflation forecast revisions, and by a material decline in the expected level of the Fed funds rate by the end of 2015.
As such, the minutes will be an opportunity to clarify what has changed in the Fed’s internal thinking. Presumably, dollar strength and low inflation will be cited as central reasons for the Fed’s new caution.
Given that these minutes follow a Fed decision that was accompanied by a press conference and updated forecast, the scope for significant surprises is limited.
That said, in this new era of diminished transparency, the Fed is becoming harder to predict. Our bottom line is that the Fed is now most likely to begin raising rates in September – a little sooner and more than the market currently budgets.
US job creation stumbled in March with a mere 126 thousand new jobs, ending a remarkable 12-month run of 200K+ new jobs per month. A 69K downward revision to prior months further soured the interpretation.
This result certainly advances the argument that the US economy has lost a step. Consistent with this, we shifted our US outlook at the beginning of the year from an above-consensus stance to an on-consensus one.
Other markets arguably have the better ability to surprise to the upside, with the eurozone the most prominent example. However, the degree of recent pessimism is not entirely warranted.
Some of the latest month’s weakness (around 30K jobs) was related to bad weather. More generally, US first quarter economic numbers have disappointed for the same reason, with Q1 GDP likely to fall well short of the recent trend (and potentially at +1.0% annualized or below).
It is also important to keep in mind that the US economy barely needs 100K jobs each month to keep pace with demographics, so even this month’s disappointing outturn represents a small step towards full employment.
Finally, hourly wages grew by a robust 0.3% in the report, arguing that inflation pressures may be brewing.
Canadian business outlook survey
Canada’s quarterly business outlook survey was weak, but not as bad as feared given Bank of Canada governor’s recent comments about an “atrocious” economy. The diffusion index for future sales expectations fell from +8 to +4, but managed to avoid slipping into negative territory.
Historically, negative figures have been the bare minimum necessary (though not sufficient by themselves) to signal a national recession. Business investment intentions fell slightly while employment intentions fell significantly. Both are now at their lowest readings since the global financial crisis.
The global oil shock is indeed proving a sizeable challenge to Canada, if a highly variable one. Companies in the prairies and in the energy supply chain report challenges, while “many” businesses indicate that the decline in oil and loonie paired with a healthy US economy should be positive for them.
Measures of economic slack were little changed, indicating in our mind that the Canadian economy is quite close to its full potential (if slipping away from it). Inflation expectations were also little changed – a comforting finding given the general decline in such expectations around the world over the past year. Despite the oil shock, credit conditions appear to be easing slightly. It could have been worse.
Canada’s March jobs report will be released on Friday. These numbers are always difficult to forecast with precision given their volatility.
While we believe net job creation is probable over the entirety of 2015, the upfront nature of the oil price shock is such that we should not be surprised if some job losses occurred in March. Leading indicators have certainly not been friendly.
In turn, the unemployment rate may bleed a bit higher. More generally, the jobs created in Canada have tended to be of a poor quality. This sour trend likely persists for now.
Tentative Iran deal
It is certainly notable that Iran and a host of western nations have arrived at a provisional nuclear agreement after decades of sanctions (and then several delays since last fall). Details remain to be sorted and could yet prove to be problematic.
If ultimately successful, this news is unambiguously bad news for the price of oil (meaning lower prices, though any actual increase in supply would be some time coming and subject to OPEC deliberations), good news for the Iranian economy and somewhat ambiguous for the rest of the Middle East depending upon whether the agreement succeeds in curbing Iranian nuclear aspirations or instead enables them to sneak forward.
Of course, the Middle East is hardly resolved from a geopolitical perspective. Syria has been embroiled in civil war for several years. Syria and Iraq are struggling against ISIS. Libya’s government is in shambles. Yemen is similarly unstable and was recently attacked by a coalition of Sunni nations.
It remains to be seen whether a proxy war will be waged there versus Shia-led nations (such as Iran).