FMX | Connect – www.fmxconnect.com - (Reported 7/9/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
CANADIAN EMPLOYMENT - IN A WORD, SURREAL
If the Canadian employment data seem too good to be true, it’s because they probably are.
First the good news: Employment soared 93,200 in June and this was not only five times as large as the consensus estimate but it extends a string of healthy gains – totalling 227,000 just over the past three months (most since 1976 though the +5.5% annual rate is “only” the best since 1987). So far in 2010, the Canadian economy has generated 308,000 net new jobs in six months which is what you typically see in a full year during economic boom times. For the first time since January 2009, the unemployment rate managed to slip below 8% (to 7.9% from 8.1% in each of the past two months).
As an aside, and this may just take more than a little sheen off the headline but half of the headline gain was de facto wiped out by the reduction in the workweek as the 0.25% cut in the workweek is equivalent to a 43,000 job cut. In other words, the decline in hours swamped the actual net hiring figure that makes the headlines by a factor of over four. Just to add some perspective – there may have been less to this report than meets the eye, even as the Canadian dollar soars and the money market pit reprices the odds of Bank of Canada rate hike action.
What was glaring in the employment report was the decline in average hourly earnings – down 0.6% MoM and this was on tip of a 0.4% decline in May. In fact, wages have deflated now in Canada for four of the past five months, even with the decline in the unemployment rate. In fact, at $22.27 an hour, average pay is down to its lowest level in nine months. Average weekly worker-based pay has basically stagnated since February - this may be something the folks at the central bank may want to concern themselves with from a deflationary standpoint.
CHALLENGING YOUR OWN VIEW
A big part of the "income theme" has been this dramatic move in the disinflation process towards eventual price stability, and even perhaps, deflation. The deflation risk is being taken so seriously at the Fed (though not for some of the regional bank presidents), that the Washington Post ran an article on methods the central bank is contemplating – ranging from even more direct rhetoric in the press statement to reinforce the message that rates will stay near zero indefinitely, to cutting rates charged on bank reserves, to expanding quantitative easing.
That said, one of the underpinnings of the disinflation momentum has been residential rents, which comprise a large chunk of the CPI and they have been going down at an unprecedented rate. Now while the Reis data this week showed vacancy rates rising and rental rates falling in both the office and shopping center spheres, in Q2 we saw the reverse in the apartment sector where the U.S. Vacancy rate dipped to 7.8% from 8% on the nose in Q1, while rents advanced 0.7% QoQ in what was the strongest advance in two years. Rents only fell in 10 of the 82 markets.
So, for the third week in a row, and despite a 13bp bond-induced decline in mortgage rates, applications for new purchases fell (by 2%) and are down 35% from year-ago levels; and those year-ago levels were already down 12%. So, after plunging 18% in May and then by 15% in June, mortgage apps for new home purchases are already down 3.4% so far in July. Clearly, as far as the Treasury market is concerned, more needs to be done — and since Mr. Bernanke is done cutting rates, it will be up to Mr. Bond to carry the ball, and likely a little further.
CHAIN STORE SALES – LESS THAN MEETS THE EYE
The headline number says +3% YoY same store sales growth in June – supposedly the best for this time of the year in four years (but below consensus views of +3.5%). Let's keep in mind that the data received a huge skew from the timing of the Memorial Day weekend – landing in June. When this last occurred was in 2005 – May was up 2.8%, June was up 5.2%, July then slowed to 3.7% so it may well be that half of the ballyhooed 3% headline this time around were pure calendar effects.
There can be little doubt that deflationary pressures are mounting in the retail sector – Gap was cutting prices 30% as June drew to a close and Abercrombie and Fitch was selling shorts at half price (and in this heat wave). Sources tell us that you can buy two bottles of Grey Goose or two bottles of Glenlivet for 55 dollars at La Guardia's duty free shop! Luxury sales deflated 3.9% last month too and even the discounters aren't offering up a lot of optimism, with Family Dollar's CEO, Howard Levine, saying "the environment remains challenging for consumers and customers continue to buy what they need".
CONSUMER CREDIT COLLAPSES
We had some eye-popping consumer credit numbers yesterday with the Fed reporting that consumer credit plunged $9.1 billion in May (missing consensus estimates to the downside by 5x). On top of this, there were major downward revisions to the April data, which were taken down from +$1.0 billion to -$14.9 billion. .In fact, once all the revisions are taken into account, credit actually came in $22 billion below consensus estimates for the month! This is clearly signaling that consumer spending is slowing and that the just released July consensus figures for Q2 and H2 consumer spending may still be too high (at 2.8% and 2.6%, respectively)
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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