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Canada’s Economy Slows as US Wage Gains Accelerate

The Canadian economy ran out of momentum toward the end of the first quarter, helping bolster market-implied odds on an imminent pivot to easing by the Bank of Canada. Numbers released by Statistics Canada this morning show real gross domestic product missing forecasts with a 0.2 percent expansion in February, following a downwardly-revised 0.5-percent expansion in January.

The services sector led gains for a second month, but goods-producing industries flatlined. Just 12 of 20 economic sectors reported positive growth, down from the prior month’s 18. On a year-over-year basis, activity rose 0.8 percent, with the first quarter tracking toward a 2.5-percent annualised expansion, undershooting the central bank’s 2.8-percent forecast.

Perhaps most meaningfully, a preliminary estimate showed real gross domestic product remaining unchanged in March, with gains in the utility industry and a modest rebound in real estate-related activities offset by weakness in the manufacturing and retail sectors.

The Canadian dollar is tumbling as growth expectations fall relative to the United States – and as traders bet on a more aggressive easing cycle from the Bank of Canada. Tracking of the “hours worked” measure of labour market demand suggests that the economy could lose more steam in the months ahead, confounding our own hopes for a “dead cat bounce” in the Canadian economy – and helping bolster the case for rate cuts beginning in June. Rate differentials relative to the US dollar look set to remain stubbornly wide.

Separately, the Bureau of Labor Statistics’ Employment Cost Index rose 1.2 percent in the first quarter of 2024, accelerating by the most in a year and topping market expectations for a 1-percent increase. Relative to a year earlier, wages and benefits have risen roughly 4.2 percent, helping to lift consumer demand and business investment across an increasingly exceptional US economy. Bond yields and the US dollar are advancing on the print, and hawkish guidance risks heading into tomorrow’s Federal Reserve announcement are rising. Simply put, the central bank cannot deliver its long-awaited pivot until labour markets and inflation pressures ease relative to today’s superheated levels.

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