The US job creation engine maintained its modest momentum last month, keeping the Federal Reserve sidelined for now. According to the Bureau of Labor Statistics, 139,000 jobs were added in May – representing an overshoot relative to the 125,000-consensus forecast – and the unemployment rate held at 4.2 percent, as expected. Average hourly earnings climbed 3.9 percent, pointing to relative resilience in aggregate household incomes. However, the previous two months were revised lower by a cumulative 95,000 positions, and the manufacturing sector shed 8,000 jobs.
Benchmark ten-year Treasury yields are climbing as rate cut expectations are pushed further into the future, equity market futures are rising ahead of the open, and the dollar is advancing as real rate differentials tilt in its favour. In the background, an astonishing public spat between US President Trump and Elon Musk has left broader currency market sentiment unmoved even as it has wiped out billions in value across the technology mogul’s holdings. The euro is holding firm after European Central Bank president Christine Lagarde yesterday hinted that easing was nearly complete, and the pound is slipping off a three-year high as trading flows move back to the dollar.
The US trade deficit narrowed in April by the most on record, falling 55.5 percent from the prior month as imports plunged. Data from the Census Bureau yesterday showed goods and services imports falling 16.3 percent in the month, while exports rose 3 percent. If sustained, this could represent a narrowing in American trade imbalances. But a quick glance at a longer-term chart illustrates that imports simply normalised after a brief surge in front-running efforts ahead of the implementation of the Trump administration’s tariffs. It remains difficult to assess the degree to which the import taxes will lead to a re-routing in trade flows, with a conclusive answer likely a few months away — at the least.
Canada added more jobs than expected in May – helping to ratify the Bank of Canada’s cautious messaging earlier in the week even as the overall labour market remained weak. According to Statistics Canada, 8,000 positions were created in the month, but the unemployment rate climbed to 7 percent from 6.9 percent previously and the goods-producing sector continued to shrink as factory shutdowns and a surge in policy uncertainty clobbered hiring intentions. Consensus estimates had pointed to roughly -10,000 jobs lost, with unemployment seen pushing up to 7.0 percent. Average hourly wages for permanent employees – a variable typically closely watched by central bankers as they work to assess the – rose 3.5 percent from a year earlier, accelerating from the prior month’s 3.2-percent print.
April’s drop in American goods imports was mirrored on the northern side of the border, where Canada’s goods trade deficit widened to a record $7.1 billion as exports plunged 10.8 percent, with declines seen across most product categories. Shipments to the US fell 15.7 percent as tariff increases hit, with the auto, consumer goods, and food processing sectors taking the brunt of the adjustment. Net trade is likely to take a serious toll on the country’s gross domestic product calculations during the second quarter, unwinding the artificial gains seen in the first three months of the year.
But ‘bullwhip effects’ are playing a role here as well. Although month-over-month changes admittedly look extreme, total Canadian exports in the first four months of this year were up 5.8 percent from the same period last year as businesses and consumers rushed to move products across borders before trade levies were imposed. We think shipment volumes to the US will ultimately settle at lower levels as American consumers lose buying power – and this will exert long-term drag on Canada’s economy – but the path there could be bumpy as inventories are rebuilt, and tariff increases on the rest of the world in the last two months mean the country is now trading from a relatively-privileged position.
