US Jobs numbers out, increasing probability of Fed rate hike? Canada jobs number declines

By Musabbir Mazhar

In the US, the jobs report came out with non-farm payrolls increasing 211,000 for the month of November, which beat market consensus expectations of 200,000 jobs. In addition, the job numbers for October was revised upward from 271,000 previously to about 300,000. This is all good news. This, in addition to the beige book positive growth activity reports in the different states, and the fact that unemployment rate is at 5% as of November, gives more probability of the Fed increasing fed funds rate. The unemployment rate was at 5% in October end. Despite jobs added in November, the unemployment rate remained same as in October since the participation rate increased from 62.4% in October to 62.5% in November.

Source: Bureau of Labor Statistics US Dept of Labor

The fed funds rate, which is the rate at which banks borrow and lend reserves on an overnight basis, is currently at 0.13% as of Dec 3rd 2015. Let’s recall that since September 2007 this rate was reduced from 5.25% to a range of 0 to 0.25% in December 2008, which still holds.

If the fed hikes rates, what does that do? As interest rates go up, the bond yields would go up. As yields go up, the existing bondholders see the price or hence the value of their investments go down. On the other hand, the P/E ratios in the stock market tend to go down.

On Friday, December 4^th, 2015: The S&P/TSX composite index was at 13,358.77, down 7.7% in the last 1 year; the S&P 500 index was at 2,091.69, the DJIA was at 17,847.63 – both at about the same level since levels 1 year prior; while the NASDAQ composite index closed at 5,142.27 – up 7.6% compared to 1 year before.

While in Canada, the jobs number came out for November which decreased by 36,000 jobs, compared to October’s 44,000 jobs added which was vastly due to temporary additions due to election hiring. The unemployment rate increased from 7.0% in October to 7.1% in November, and labour force participation rate decreased to 65.8% in November from 66% in October 2015.

Stephen Poloz, Governor of the Bank of Canada, came out and announced the key policy rate which is the target for the overnight rate, keeping it unchanged at 0.5% – hence current accommodative monetary policy standpoint remains. The key policy rate, which influences short term interest rates including consumer loans and mortgages, has been decreased twice in steps in the calendar year 2015 from 1.0% in December 2014. The Bank Rate, which is the interest rate the Bank of Canada charges for loans overnight to Large Value Transfer System (LVTS) participants, is hence currently at 0.75% and the Deposit Rate, which is the interest rate that BOC pays to the LVTS institutions on any extra funds they keep at BOC overnight, is at 0.25%.

Total CPI Inflation increased 1% year-over-year in October 2015, same as was in September 2015. That’s below the BOC target mid-point of 2% for their target range of 1% to 3%. The ‘core’ inflation index was up 2.1% in the same one year period ending October 2015. The core inflation excludes 8 of the most volatile components of the CPI’s index.

While the US is getting ready for rates hikes, the rest of the world is surviving on an accommodative monetary policy. The European Central Bank (ECB)’s president Mario Draghi announced on Thursday 3^rd December 2015 that it cut deposit rates from minus 0.2% to minus 0.3% – hoping it would spur lending. As of now, the ECB is buying €60 billion euros per month which is expected to run till March 2017, and if needed beyond. The easing monetary policy is hoping to turn around the low growth and the high unemployment rates in the euro area eventually. The EUR/USD currency pair is trading at 1.0860 USD which has depreciated 11.6% in the last 1 year – this is due to the contractionary monetary policy as done by the fed and strengthening the US currency while the easing monetary policy stance from ECB has been weakening the euro.

The Bank of Japan continues its accommodative monetary policy announced in November 19^th BOJ meeting, of increasing monetary base by 80 trillion yen per year. This ought to increase on an annual scale as of November 30^th statement as the target to buy government bonds is set at 8 to 12 trillion yen per month in principle. The USD/JPY currency pair is at 123.30 JPY, down 1.49% in the past 1 year; down 19.7% in the past 2 years when it was at 102.91.
USD/CAD currency pair is at 1.3395 CAD, down 17.1% in the past 1 year. The opposite monetary policy stance has been the reason and the US economy strengthening while Canadian economy weakening with the effects of oil price decline shocks felt larger by the day. The Canadian economy shrunk in the 1^st half of 2015.

WTI Crude oil levels are at 39.56 USD/bbl. This is a fall of about 62.7% since June 2014 highs of 106 USD/bbl.