Bank of Canada needs to cut as jobless rate heads for 7%: economist

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Federal Reserve chair Jerome Powell caught the market’s attention this week when he said that inflation was not the only risk the United States is facing.

Speaking to lawmakers Tuesday, Powell said officials are becoming concerned about risks to the job market from higher interest rates after July 5 data showed the third straight month of rising unemployment.

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“The latest data show that labour-market conditions have now cooled considerably from where they were two years ago — and I wouldn’t have said that until the last couple of readings,” he said.

It was the first acknowledgement in three years that the Fed is now paying as much attention to the slowing labour market as it is to inflation.

His testimony “wasn’t overly optimistic but it revived the expectation that a rate cut could come sooner rather than later, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

Further north, the Bank of Canada could be facing a similar predicament.

Like the United States, Canada’s jobs data last week came in below expectations. The unemployment rate rose to 6.4 per cent and the economy lost 1,400 jobs.

Yet markets remain unconvinced that the central bank will cut again on July 24 mainly because inflation was hotter than expected in May, said National Bank economist Taylor Schleich.

“While the latest data wasn’t ideal, we don’t think it’s wise to miss the forest for the trees. Inflation today is much better behaved, while the labour market is gasping for air,” he wrote in a note this week.

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Canada’s unemployment rate has risen 1.6 percentage points from its 2022 low, the largest increase in the G7 and 5th largest among OECD nations, said Schleich. If this trend continues National predicts the jobless rate could top 7 per cent this year.

Schleich says interest rate cuts could ease these labour pains, but the Bank of Canada has to act sooner rather than later.

“To us, a July cut should be considered a higher probability outcome, as only a disastrous June CPI report should leave the BoC sidelined,” he said.

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Container shipping costs are surging again and this time it’s because of cheap goods from China.

Today’s chart shows the most closely tracked measure of global container shipping costs has shot up by 115 per cent since the start of May, pushing it up 286 per cent year-to-date.

Capital Economics says the surge in costs is driven entirely by outbound routes from Asia, particularly China. Aggressive discounting on Chinese goods brought on by manufacturing overcapacity has boosted demand, but shipping is taking longer because freighters are travelling around the Cape of Good Hope to avoid the violence in the Red Sea.

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So far the increase in shipping costs will boost global consumer prices by 0.1 per cent, but Capital economists expect this price pressure to build.

• Ontario officials will have an update on the closure of the Ontario Science Centre. 
• Yukon government will hold a briefing on the situation at Victoria Gold’s Eagle Mine following the failure at the heap leach facility.
• Today’s Data: United States consumer price index for June
  
• Earnings: Cogeco Communications Inc, MTY Food Group Inc, Aritzia Inc, PepsiCo Inc, Delta Air Lines Inc, Richelieu Hardware Ltd.

With the tax changes in the 2024 federal budget, many successful Canadians seem to be considering whether greener pastures exist abroad. Perhaps it’s the United States for a more accommodating business climate, Saudi Arabia because it has no income tax or Australia for the better weather. But for those considering a departure, there are many financial considerations and the biggest one is tax. Find out more.

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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