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Forward Guidance: Trade Concerns Remain, But Economic Backdrop Still Healthy

Attention remains focused on Saturday’s highly anticipated meeting of Presidents Trump and Xi as the two try to iron out their differences on the side-lines of this week’s G-20 meetings. The outcome of that meeting is still very much in doubt – and any re-escalation of tensions between the two world powers could have a significant impact on the global economic outlook for the second half of this year. But next week’s data should also highlight that, notwithstanding all of those trade concerns, the US and Canadian economies are coming from a point of strength.

We look for US employment growth to bounce back to a 180k rate in June after a 75k increase in May. That (smaller-than-expected) earlier reading caused some hand-wringing, but looked decidedly better under the hood. The unemployment rate held at multi-decade lows in May and wage growth is still tracking slightly above a 3% pace. The US trade deficit widened in May, likely in part tied to a pull-forward of imports from China ahead of another round of tariffs, and industrial output is still far from spectacular. But growth in consumer spending (roughly two-thirds of the US economy) is tracking firmly above a 3% rate in Q2. The risk of an escalation in trade tensions is still a legitimate concern for Federal Reserve policymakers. And low inflation is giving the central bank lots of flexibility to respond, potentially pre-emptively, with more stimulative monetary policy. But solid current economic data recently still makes market pricing for almost-certain rate cuts as soon as July look odd.

May international trade data will also keep attention on Canada’s, albeit secondary, role in escalating global trade tensions. The new restrictions on China’s imports of Canadian meat announced this week are a reminder that Canada is not entirely immune from disruptions although the larger risk remains any potential slowing in US industrial output that spills-over to the Canadian manufacturing sector. But, like the US, broader domestic economic data has been looking decidedly better. A 0.3% increase in April GDP added further confirmation that economic activity bounced back after transitory disruptions to oil production and bad weather weighed on growth over the winter. And the Bank of Canada’s key Business Outlook Survey showed a tick higher in business confidence in Q2.

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The Bank of Canada will also be watching next Friday’s labour market data, but it is difficult to imagine a downside surprise in the often-volatile numbers that would really cancel out a long string of positive reports. 453k workers were added over the last year — two-thirds of them full-time. The unemployment rate hit a new multi-decade low at 5.4%. Even wage growth has been ticking a touch higher in recent months. We don’t think that type of performance will last, and look for a tick up in the unemployment rate in June and a smaller employment gain. But even if the job rally stalls, the labour market remains in good health and, with GDP growth recovering, markets are not priced for the BoC to follow the Fed down a rate-cutting path.

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