HIGHLIGHTS OF THE WEEK
United States
It was a quiet week on the U.S. macroeconomic news front,
however the stock markets made headlines with both S&P 500 and the Dow
Jones rising to record levels.
The effects of Fed's quantitative easing program are also
being felt beyond Wall Street. Based on the latest Senior Loan Officer Survey,
credit availability continues to improve, with lending terms easing for small
businesses and households.
In terms of households demand for credit, prime residential
mortgages continue to strengthen in tandem with the recovery in the housing
market. Non-revolving credit is still advancing at a strong pace, meanwhile
growth of revolving credit, which includes credit card debt, remains soft.
Canada
The Canadian economy created 13,000 jobs in April, putting
the 3-month and 6-month average job gain at 2,900 and 12,400. The unemployment
rate held steady at 7.2%.
Full-time jobs were up a more hearty (+36,000), but mostly
driven by government hiring (+34,200), while the private sector shed jobs for
the third time in four months.
This week's housing starts report helped solidify our view
that construction activity is now cooling from the unsustainable pace recorded
in 2011 and 2012. Homebuilders broke ground on 175,000 units in April of this
year - continuing a moderating trend that began in April of 2012.
UNITED STATES - FROM WALL STREET TO MAIN STREET
It was another record-breaking week for the country's stock
markets. A series of better-than-expected corporate earnings reports, strong
trade data from China and expectations that the Federal Reserve is in no hurry
to take away the punch bowl, helped to push both the Dow Jones and the S&P
500 to new highs. Although the markets lost some steam by the end of the week,
both indexes were still 0.7% above last week's level, at the time of writing.
Conversely, the appetite for fi xed-income assets continued to wane, with U.S.
Treasuries trading at slightly lower prices, pushing 10- year yields 17 basis
points higher since the end of last week.
While one of the stated effects of the Fed's ongoing
monetary support is to prop up stock prices, in order for quantitative easing to
be successful it must go beyond Wall Street. Fortunately, according to the
Federal Reserve's Senior Loan Offi cer Survey (SLOS), Main Street too is
beginning to see the benefi ts of the Fed's easy money policy. One of the
important lessons of the fi nancial crisis was that it is not just the price of
credit that determines fi nancial conditions, but also its availability -
especially to the small businesses and households that drive economic growth.
So, it was encouraging to see that lending terms on commercial and industrial
(C&I) loans and on commercial real estate (CRE) loans improved for both
large and small businesses in the second quarter.
On the household side, credit constraints remain an issue
when it comes to residential mortgages. Of course, it is not just the supply of
credit that matters, but also the demand. For the fi fth consecutive quarter,
banks reported stronger demand for prime mortgages, which is in line with the
housing market recovery over the past year. Mortgage applications have also
begun turning upward, with 12% gain relative to year-ago levels as of May 3rd.
Outside of the residential mortgage segment, consumer credit
continued to grow in March, although at a decelerated pace relative to
February. In fact, only the non-revolving component - comprised mostly of
student and motor vehicle loans - posted an increase, while the revolving
component - made up of mainly of credit cards - declined by $1.7 billion. The
decline refl ects slow growth in new issuance relative to repayments and a
normal rate of charge offs. The latest data reinforces the broader trend.
Non-revolving credit is up 8.4% year-over-year, while credit card debt expanded
by 0.5%. Weak growth in credit card debt suggests that households continue to
carefully monitor their borrowing. Meanwhile, strong growth in non-revolving
credit refl ects ongoing pentup demand for autos that has driven the rebound in
loans, as well as a ramp-up in student debt - a legacy of the protracted
recovery in the labor market.
The bottom line is that while we're not completely out of
the woods yet, there are growing signs that monetary policy is bearing fruit
beyond Wall Street. With ongoing easing of lending conditions and improvement
in credit growth, faster economic growth cannot be too far away.
CANADA - SLOWLY BUT SURELY
This week's labour force survey release painted a picture of
a softening Canadian employment market. Only 13,000 jobs were created in April,
putting the 3-month and 6-month average job gain at 2,900 and 12,400 - both of
which are indicative of a soft hiring environment. The unemployment rate held
steady at 7.2% in the month.
Digging deeper into the data, one may argue that the
increase in full-time (+36,000) employment in April paints a brighter picture.
However, that gain was mostly driven by government hiring (+34,200), while the
private sector shed jobs for the third time in four months.
Putting it in perspective, some the softening in employment
in recent months refl ects payback for strong gains in the second half of 2012.
In addition, employment generally follows any pick up or slowdown in real GDP
growth with a one to two quarter lag. So, it's not surprising to see job growth
stalling given the weak economic backdrop experienced in the second half of
2012. In fact, most of the job weakness has been in manufacturing, and is
likely tied to the sharp slowdown in trade experienced last year.
While, the economy has since picked up steam, with real GDP
growth estimated to have clocked in at 2.5% annualized in the fi rst quarter of
this year, the temporary slowdown hit in the U.S. economy due to fi scal
restraint may continue to weigh on Canadian business confi dence and hiring
intentions in the near-term.
On the domestic front, the public sector and construction
industry, which have been two sources of relative strength since late-2012, are
likely to act as headwinds on employment going forward. Public sector hiring is
likely to wane as governments focus on spending restraint. Meanwhile, this
week's housing starts report helped solidify our view that construction
activity is now cooling from the unsustainable pace recorded in 2011 and 2012.
Homebuilders broke ground on 175,000 units in April of this year - continuing a
moderating trend that began in April of 2012. Subsequently, starts have fallen
30%. We expect this slower pace of construction activity to continue going
forward. For one, slower housing demand and price gains are likely to weigh on
homebuilders decisions to start new projects. Second, the pace of construction
is now in line with demographic and economic fundamentals and in our view more
sustainable than the break neck pace experienced over the last few years. The
full extent of the impact of falling construction activity has yet to be felt
on real GDP growth and employment.
As 2013 unfolds, the economic backdrop should improve,
helping to support a pick-up in employment in sectors not tied to government
spending and housing. Overall, economic growth is expected to continue at a
near 2% pace through the rest of the year, which is consistent with monthly job
gains in the range of 10,000-15,000. In particular, manufacturing employment is
expected to turn around as the sector benefi ts from improving U.S. private
demand in the second half of this year and the prospects for a softening in the
Canadian dollar.
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