The Dust Has Settled

 

 

Canadian employment surged last month, as the economy added the most jobs in over seven months. The best part of this news is that employment came everywhere, which is exactly what policymakers like to see. Canada recorded a net gain of almost 59K jobs while analysts had been expecting a net gain of a 10K with the full- and part-time almost evenly split (31K and 28K respectively). The unemployment rate stayed the same at 6.8%. After experiencing dramatic declines last year due to plummeting commodity prices, employment in Canada finally looks to be trending higher. More good news is that manufacturing jobs outside the commodity sector buoyed the employment report.

 

According to Bloomberg, "Canada added six times as many jobs in May as economists predicted on the biggest manufacturing gain in four years -- the kind of progress the central bank says is needed to foster a

recovery from the shock of lower oil prices. The strength counters other recent setbacks – shrinking Q1 output, record trade deficits, slow inflation – and supports Bank of Canada Governor Stephen Poloz's view that momentum is shifting to non-energy companies as the oil industry cuts investment and jobs."

 

It’s important to note that some of gains in May were driven by self-employment, but paid employment was still up by a healthy positive 37K. CAD bulls would suggest that last week’s jobs figures is a sign that the Canadian economy is shrugging off any set-back from its first quarter. On the flipside, aside from the rate divergence argument, USD bulls will also lean on how erratic Canadian jobs report can be. If you’re someone who manages your company’s USDCAD exposure, it’s important to remember that ‘one’ headline print is not a trend, so do not look at one report in isolation.

 

In addition, while the labor market added jobs, consumer spending also rose. The Wall Street Journal reports that the retail sales figure came in at an annual pace of 3.1%, above the previous month's reading of 2.5%. After falling alongside the weakening labor market, consumer spending has recently begun to rise. Auto sales contributed the most to the consumer spending measure. The WSJ states, "The largest gain in dollar terms was a 1.5% increase, to C$10.24 billion, in auto-related goods, led by a 1.8% sales gain at new-car dealers. Excluding the auto component, Canadian retail sales rose 0.5% to C$32.22 billion."

However, despite that fact that the labor market and household spending are improving, productivity of the labor force is falling. In Q1, the productivity figure came in at a quarterly contraction of -0.1%, which is down from Q4 2014 revised reading of 0.3%, while also missing estimates for 0.2%. In recent months, the productivity measure has leveled off, seen below. As productivity declines, economic growth will continue to have trouble rebounding higher.

Canada's economy remains weak, but is steadily improving. Jobs are being added to non-energy related sectors which is aiding consumer spending measures. Increased jobs, however, are not translating to economic activity as much as it could, due to lower labor force productivity. Ultimately, the Canadian economy is improving, which should technically lead the loonie to higher ground in coming months.

 

 

From the Canada Mortgage and Housing Corporation, the trend measure of housing starts in Canada was 181,231 units in May compared to 179,524 in April, according to Canada Mortgage and Housing Corporation (CMHC). The trend is a six-month moving average of the monthly seasonally adjusted annual rates (SAAR) of housing starts. "The small increase in the trend was primarily driven by higher multiple starts in Ontario, the Atlantic region, and Québec. Despite month-to-month variation in multiple starts, CMHC expects builders will continue to focus on managing inventory of completed but unsold units — inventory that is still above historical average," said Bob Dugan, CMHC’s Chief Economist. "CMHC also forecasts slight moderation in housing starts in 2015 and 2016, reflecting a slowdown in housing market activity in oil-producing provinces that will partly be offset by increased activity in provinces that are seeing the positive impacts of low oil prices."

 

From a report for April, Statistics Canada demonstrates that contractors took out $7.8 billion worth of building permits in April, up 11.6% from the previous month and a second consecutive monthly advance. The gain in April stemmed from higher construction intentions in both the residential and non-residential sectors in Ontario.

In the non-residential sector, the value of permits rose 30.2% to $3.3 billion in April, following a 24.8% gain in March. Increases were posted in three provinces, led by Ontario, followed by Alberta and Newfoundland and Labrador. British Columbia and Quebec registered the largest declines in construction intentions for non-residential buildings. Construction intentions for residential buildings increased 1.2% to $4.5 billion, a third consecutive monthly advance. Gains were noted in Ontario, Quebec, Nova Scotia and Newfoundland and Labrador. The largest decrease occurred in British Columbia, which had posted a notable increase the previous month.

USD in Focus

 

　

Last week we mused that because the Swiss franc was able to nudge out the USD as the best weekly performer that it foreshadowed a brief pause in the USD rally. And that’s exactly what transpired; the USD corrected its strong two week rally with a four day losing streak until Friday’s strong U.S. jobs data arrested its decline. The outliers for the week were the euro, NZD, and the yen. The euro was the top performer last week as the long German bund and short euro hedge position reared its ugly head again (the last time it happened was late April and early May). The NZD sold off to a low dating back to August 2010 as the market is pricing in a 50% chance of an interest rate cut by the Reserve Bank of New Zealand on June 10. Meanwhile, the yen also reached a multi-year low dating back to November 2002 as the strong May U.S. nonfarm employment report caused the December Fed funds contract to fully price in one rate hike by the Fed this year.

 

Euro in Focus
 

The price action in the Euro was very volatile last week. It moved from a low of 1.0880 on Monday to a high of 1.1380 on Thursday, that’s a 5 euro move and it was all powered by the unwinding of the long German bund and short euro hedge trade. International holders of German bunds decided to sell their bonds and to buy back their euro hedges, which basically caused that massive short squeeze in which the euro rallied by five big figures.

More important is why the bonds are being sold. Two reasons, the first is that back to back Eurozone inflation of 0.0% for April and 0.3% for May demonstrate that deflationary pressures are easing, which in turn are causing investors to question whether the ECB will continue its newly minted QE program. The second reason is fear that the Greek crisis could unravel. Greece is refusing to maintain the status quo of pretend and extend – that is to say that they are not looking to have creditors loan them more bailout funds in order for them to service debt. The Greeks want debt relief. The trigger point last week was that Greece delayed a key debt payment to the International Monetary Fund due on Friday offering instead to bundle four payments due in June into a single 1.6 billion euro (£1.16 billion) lump sum which is now due on June 30. This might be a sign that Greece may be choosing to preserve what's left of its war chest if talks don't improve and default.

JPY in Focus

 

The other move that caught our eye last week was that of the JPYUSD to a multi-year low at the 125 level. The decline in the yen suggests that traders are once again speculating that the Japanese currency will continue lower and, indeed, the recent CFTC Commitment of Traders data shows a dramatic increase in bearish bets on the JPY (bullish JPYUSD positions). In the past two weeks, net yen shorts have risen to 86K from 22K. This week’s revision to Japan’s initial Q1 GDP estimate will be the key market moving event. Revisions have been consistently higher than the original estimate so if it also happens on this one it could pour cold water on those looking for more QE which could induce a period of short covering.