High probability that the Bank of Canada will raise interest rates in July

Canada’s economy is about 1/10 of that its neighbor at the south ($1.5 trillion Vs $15 trillion), so today’s blowout announcement that June employment rose by 93,200 is as if the U.S. had announced the creation of 930,000 jobs (instead they lost another 125,000).  Since Jan 1, 2010 the Canadian economy has created more than 300,000 jobs, which is truly astonishing.  

As a major exporter Canada is excessively exposed to the world at large, probably the last country one would expect to “decouple” from the G8 crisis.  In fact, Canada finds itself in the interesting position to have reached a level of employment almost equal (still 14,000 jobs missing) to the pre crisis level.

Wages are still decelerating (despite the strong employment growth), and this new gives the Bank of Canada an opportunity to increase interest rates – allowing Canada’s central bank to create a buffer for future recession.  According to David Rosenberg, this is not the very first time that Canada economy has diverged from the US in the past 90 years; it’s the third time (including the great depression).

Looking closely at the labor numbers two sector did poorly:  manufacturing and transport, these are the two most “American” sectors of the Canadian economy – for those who don’t know the Automobile manufacturing sector in North America is completely integrated, and as demand for vehicles drop so does production (annualized sales of 11 million vehicles in North America is on par with the number of cars sold in 1990 – bad).  On the transport side, the vast majority of Canada’s trade is North South, not East West, Quebec trade towards to US dwarfs the trade between Quebec and Ontario or Quebec and the Eastern provinces.  Both manufacturing and transport saw labor shrinkage.  In fact, it appears that Canada is looking East for hits trade business (China, Japan, Korea) instead of the god old US of A.  

Again the issue is what will the BoC do to short term interest rates. 

1. Employment picture is pointing to a general economic recovery
2. Wages and salaries are stable (if not falling in the face of positive inflation)
3. Number of hours worked fell marginally (equal to 43,000 jobs lost)
4. Expectations (95%) are for a July rise in the s/t interest rate by 25bps to 50 bps
5. Global economic situation seems to have stabilized (for now?)
6. Housing prices are still rising, although sales seems to have rolled over.

The jury is still out on a increase in interest rates, but assuming that things remain "even" and that there are no major external shocks, its probably safe to say that the Bank of Canada will be sorely tempted to increase interest rates, the decision is probably more in the size of the increase, as opposed to the decision to raise rates at all.

Maybe this time my prediction will be better, than it was at the end of May