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22,000 Vs 54,000

Earlier this week, the US released its job creation for the month of April May, the number was a disappointing 54,000. Canada over the same period created 22,000 jobs, in an economy 1/10 of that of the U.S. Canada's unemployment fell from 7.6% to 7.4% (if we counted jobs the same way the Americans do, we would be a 6.4%). Clearly, the employment situation is positive, but also labor unrest for higher wages is also starting: Canada Post has staged one day strikes across the country (did anyone notice?) and Air Canada's ground crew is looking at strike action later this month.

Obviously, Canada's economy is now firmly detached from its southern neighbor (although exports account for 1/3 of our GDP and 3/4 of that goes to the U.S.). The market is still of the firm belief that interest rates will remain at their current accommodative level of 1.0% (although long dated Canadian interest rates 10Y and 30Y are 50bps and 87bps lower than for similar duration U.S. sovereign debt), it remains that there exists tremendous scope for the yield curve to flatten out in Canada with a rise in the short term interest rate; Carney (the Governor of the BoC) has often indicated that he dislikes surprising the market, but he could pull a Korea (which just raised short term interest rates last night -- to the market's surprise), and raise interest rates.

All the elements are there for a concerted action by the BoC:

(1) Bubbly housing market
(2) Out of control indebtedness (now higher than in America)
(3) Strong labor market
(4) Capacity utilization close to historical average
(5) A currency that has calmed down (at 1.02/98 to the USD)
(6) Inflation at 3.3% and core inflation at 1.6% -- at the upper edge of BoC comfort level

These are all good reasons for interest rates to rise. On the negative side

(1) The U.S. economy seems to be slipping back into recession (at the very least slow growth)
(2) PIIGS in general and Greece in particular look like nearing the endgame for bailout
(3) China seems to be slowing down
(4) Austerity in U.S. government spending seems to be the new mantra -- accounting for 14% of US GDP that will impact GDP growth
(5) China appears to be slowing (although how much reliance can you put in Chinese data?)

In a sense all the excuses to do nothing are externalities over which Canada's central bank has zero control (or even input). Canada has the choice to take action now before things get completely out of control (a friend moving to Toronto from New York decided to rent -- house prices in Toronto are higher than in NY for similar properties).


The question is: What Will Carney Do?

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