Posted on March 6, 2020

Solid Jobs Report in Canada and US Ahead of Virus Spread

Steady February Job Market Ahead of Virus Scare

Job growth in Canada remained robust last month with net employment gains of 30,300 – all of which were in private-sector full-time jobs. The unemployment rate rose a tick to 5.6%, but that is still down from a year ago and around multi-decade lows. The positive news was wage growth remained strong at an annual rate of 4.1%, well above the rate of inflation.

But these data sets are a rear-view mirror snapshot of economic activity. They will matter little for financial markets fixated on the growing impact of the Coronavirus that sparked dramatic rates cuts by both the Federal Reserve and the Bank of Canada this week.

That the labour market held up in February is not a surprise. Earlier reports on consumer and business confidence were surprisingly resilient in the past month despite disruptions from rail blockades and Coronavirus concerns abroad. The Ontario teachers’ strike, however, did result in reduced hours worked for the educational services sector.

British Columbia and Ontario posted the most significant job losses last month; they also saw the unemployment rate rise notably as more people searched for work. Quebec posted job gains of 20,000 continuing a trend of substantial growth in employment in the province for several months, and the Quebec unemployment rate fell to 4.5%, the lowest since at least 1976. For the first time in recent memory, Quebec has the lowest unemployment rate in Canada (see table below), surpassing BC for that honour.

In February, most of the disruptions from the Coronavirus were concentrated in China. Imports from that region to Canada were reportedly down in January in numbers released separately this morning, but mainly due to fewer finished goods (cell phones) rather than a significant drop in the supply of industrial inputs.


The US jobs report for February was also released this morning, showing considerable strength. Employment surged, and the jobless rate declined to match a half-century low of 3.5%. The data did little to alter a flight to safety in financial markets, as investors remained focused on the potential economic fallout from the virus. The yield on the 10-year Treasury was down 20 basis points to 0.74% while the S&P 500 fell 2.6%, bringing the monthly decline to -11.6% as of this writing. The US Treasury 5-year yield is only 0.56%.

Canadian financial markets have been similarly impacted, with the government of Canada 5-year yield trading this morning at .65%, down from 1.69% at the start of this year (see chart below). The graph shows the government bond market in a free fall. The TSX has dropped -8.32% over the past month. Oil prices are down sharply, falling -16.7% over the same period. Gold prices are up sharply, reflecting its safe-haven status.

Bottom Line: The markets currently are predicting overnight interest rates will continue to fall as the Fed and the Bank of Canada react aggressively. Another cut by the BoC is priced in at its April 15th meeting. The Fed is expected to cut again at its regularly scheduled meeting on March 18th.

At times like these, there is no predicting how far this will go or for how long. The best advice is to avoid panic selling. From a housing market perspective, lower interest rates make housing more affordable. Governor Poloz, following a speech in Toronto yesterday, said that restoring confidence is crucial. He defended the Bank’s 50 bp rate cut–its most aggressive move in more than a decade–from criticism that it will fuel excessive household debt accumulation. He argued that the rate cut would improve cash flow for those with flexible rate mortgages and will boost confidence. He believes the virus could slow housing demand and suggests that the Bank’s actions will forestall a damaging slowdown in the housing market.

“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market,” he said. “In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”

He might well be right about that, as none of us know just how close to pandemic we might be. In any event, the monetary easing provides a buffer for the economy.