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The Weekly Bottom Line: Canada – Solid Growth Raises Odds of October Rate Hike

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.

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.

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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.

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