Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by Canada's hardest working economist, Eric Lascelles. Eric, you found out we were on video today. You're dressed a little different. Normally you're in a tracksuit because you're sneaking in a workout while you're looking at charts and recording something. You're doing eight things at once because that's what you do when you're Canada's hardest working economist. But today, you look rather relaxed in your office, well-dressed. You look video-worthy.

Thank you. Believe it or not, the jacket matches the pants. That's not always the case when one is on video, but this is an actual suit, so feeling pretty good about it. Thank you, Dave. You're looking good, too, by the way.

Oh, thank you so much. I think we actually almost match, don't we? We should have checked that with producer Nancy. Because when we're talking economics, we like to put on the economist team uniform, which is gray with a little blue or purple, whatever it might be, because that really speaks. I don't know. Dull? Bland? Whatever we want to call it. But a lot of stuff going on economically. And thanks for joining because this is another one where I just flipped you a note quickly yesterday and said, could you pop on and discuss a couple of things? And the first is obviously an important meeting last week with the Fed Reserve getting together as they do once a year in Jackson Hole, because it's a beautiful place. They're not in suburban Toronto. They're not around the corner from me in Mississauga. They're in Jackson Hole. Beautiful place. And they discuss really important things, much more important than we're discussing right now, maybe. But I'm sure you follow that meeting very closely and then what comes out of it. And is there anything that you call from the commentary or the press conference afterwards that has you thinking differently about what they're going to do one way or another?

Great question. You're certainly right. Jackson Hole is a big monetary policy confab. And by the way, it goes beyond the Fed. You have central bankers from around the world who go there. The central purpose isn't usually to shock markets. Even directly, the purpose isn't even to signal to markets. It's to share insights and thoughts and research and so on. So, that's what most of it was about. But we did, as you mentioned, have Fed Chair Powell speak. And of course, that is an important thing to happen simply because the Fed hasn't cut yet. Many central banks have. The Fed has this big meeting — or what could be a big meeting — in September. And so the question was, will we get that clear signal of rate cuts to come? And we did. So I think that's the big takeaway. Powell explicitly endorsed «the time for action is now» thing. And so he confirmed — big surprise — that in the next few weeks the Fed should start cutting. But he did so in a sufficiently measured tone — we were skeptical before as well, I should say —that I don't know that you could expect a 50-basis point rate cut. The market still got the chance of that. I haven't looked in a day or two, but it was a one-in-three chance the market thought of a 50-basis point rate cut. I don't know if I see that. I can't deny that historically, rate cuts happen pretty fast and so on. But the economy doesn't seem to be cratering as maybe for a brief moment in early August, we thought it might be. If a recession was here, you'd certainly be talking about bigger cuts. It doesn't seem to be. Happy to elaborate on that later if you want to go down that rabbit hole. But as it stands now, it was essentially a speech that suggested the rate cutting begins, and we can start probably with a 25-basis point move and it seems reasonable to guess that there could be then some further moves at later meetings in the year. And so, not strictly, but I should say, clearly endorsing rate cuts. Not quite clearly endorsing the amount the market has priced — the market might be getting a little bit bold in the pricing — but nevertheless, just the fact that the Fed has now explicitly said that. It made bonds feel pretty good and made the market feel pretty good on the risk asset side, too.

So you're going to have the decision on September 18th, where they go either a quarter or 50 basis points. Their next meeting is six weeks later, the day after the election. Does that timing play into it? Because even if they wanted to cut 50 basis points, you can go six weeks later. It doesn't make a huge difference. Then you may know who the President is the next day. And any policy changes that are coming, or at least the structure of US government. So maybe you wait and it gives you a chance to see how that plays out and not get accused of trying to move the needle on the election.

Yeah. So I guess what we're talking about is beyond September, into early November. To me, the most important thing is you will have six more weeks of data and you will know if the economy is reeling or fine or if inflation is coming down or not. And I would think if the economy continued on its current trajectory, I would still bet on a 25 basis point move in November. But if it does decelerate or something else happens, then that 50 is certainly possible. It is interesting. I've heard people argue, oh, no, you wouldn't want to cut right after the election. That would somehow signal partisanship. I don't know. They've been pretty clear through this. They just go when they think it's appropriate to go. In my view, that November meeting — and I think you hinted to this effect — is actually a pretty good time to be making some moves. Here's the way I think of it: you couldn't influence the election because the voting already happened, so that's attractive. You mentioned maybe we'll know the result. I don't know if we're going to know the result, Dave. My recollection from the last few elections is we do not know the result the next day. So you can't even argue they're partisanly favoring the party that won by giving them this gift. And so actually it's quite attractive to be cutting then. But I think, again, the best guess is just they will continue on a fairly smooth path. So I would guess another 25-basis point cut then, and maybe another one in December. And of course, they can pick from there as needed.

As an economist, you would back up other economists when they suggest that they're just going to follow the data. There's no politics at all involved in it whatsoever.

You're certainly saying that in a tone that suggests you have a degree of skepticism about it. Do the central bankers equally like both candidates? Probably not since one threatens their jobs. And so on a personal level, you might imagine that they do not have equally positive feelings toward both candidates. But I'm pretty sure they're just going to do their job and do what's best for the economy and not actually change monetary policy in a way that reacts to which person wins. I mean, you can argue they should be only in the sense, of course, one might cut taxes, one might raise taxes, one might do tariffs. There are all sorts of interesting things that happen. I think you could argue that a Trump win might argue for a little bit less rate cutting just because tariffs are inflationary and tax cuts could drive growth and things like that, and maybe the opposite. So maybe they should be paying attention to who wins, but they did it in a pretty cautious way, and they tend to be not totally reactive — and this is true in Canada as well and other central banks, which is they generally take the fiscal projection from some fiscal authority, and they don't try to get too cute in terms of projecting. And so I don't think the trajectory would be that different in the immediate months after the election.

I asked that question for entertainment purposes only, because I think, at least from my observation — I've been watching the Fed for a long time, maybe not quite as closely as you over your career — but it seems like they really are trying to stay with the principle, particularly in an election year, to following the data, and that the data is going to dictate what they do. And then after the election, once everything settles — and it is likely that we won't have a result the day after the election but it’s possible — and then you can see who you have in the House of Representatives, who you've got in the Senate, who you've got in the White House, and some kind of sense of the policy direction, and it would have an impact on your decisions from that point, because it would be a new data point. So you've got to factor that into the decision. Now, Canada has a decision between now and September 18th. Is that a likely third move from the Bank of Canada, or are they more likely to wait this time?

It very much looks that way. Bank of Canada has not signaled otherwise, and the economy isn't that great, if I'm being honest. And even with this work stoppage halted fairly quickly on the rail side, there's a bit of damage that comes from there, and the economy just isn't growing that fast. Anyway, that's its own story. Youth unemployment is high. Interesting immigration changes recently. So plenty of swirling developments there. But I would say rate cuts are appropriate for Canada, and it looks like the Bank of Canada is in a pretty good position to deliberate third, probably a 25-basis point rate cut. You've got a little chance of a 50 price there, too. But I think 25 probably is the more likely at this point since we haven't seen an abrupt shift in the economic data for Canada. Interestingly, if I got my numbers right, I think it’d be the first developed world central bank then to cut three times. We've had Sweden now do a second one, by the way. Canada has two, right now. European Central Bank should do a second cut around the middle of September. All sorts of central banks have dipped their toes into the water like the Bank of England and soon to be the Fed as well. But actually, Bank of Canada is a little ahead of the game there, and it does make sense to me. The economy is certainly weakening, and Canada has such a high level of rate sensitivity. We were just revisiting some of the mortgage rollover data for Canada. And 2025 and 2026 are pretty big years for Canada. 55% of all outstanding mortgages in Canada will renew or mature in those two years. And so that's a big chunk. And ideally, you do have mortgage rates lower. These are people who locked in at 1.5% or 2% or something in that approximate range. And five-year mortgages these days — and I'm just going to websites, so I'm sure many of the viewers know much more than me — but they're 4.5% or higher for a five-year mortgage rate. And so that is a fair size pivot and will be costly. So there's a certain urgency there. And so the bank of Canada is just moving a little quicker than some central banks.

Yeah. And wage growth over the last five years would be nowhere near enough a difference to make up that gap in disposable income if you end up with a mortgage rate that's 2% higher, or even if you pay down the balance, and then factor in inflation on other products, you're in a worse spending position than you would have been.

Likely. Actually, the math on that's a bit tricky. That's a really good question, Dave. I hadn't quite thought through that angle. So Bank of Canada has done some work. This is independent of monetary policy. They've done some research, dig into the individual mortgage holders, and of course, there's floating rate and fixed rate and all sorts of different things. The math they did, it's a little stale on it. At the time, the five-year mortgage rate was a little higher, so maybe it shaped these numbers a bit lower. But they figured that the average Canadian with a mortgage coming due in 2025 or 2026 would see a 20 to 40% increase in their monthly mortgage payment. The 40% is more people with floating rate stuff that really needs to adjust, and the closer to the 20% with a five-year mortgage it needs to adjust. I went down a rabbit hole, by the way, on mortgage. I have my own mortgage, by the way, I should admit, and the mortgage calculations, actually, is quite confusing. It's not just that the math is tricky. I'm a little bit surprised by a couple of the underlying premises, which is I always thought that you owe a certain amount, and it gets down to zero 25 years later. Of course, it's not a linear path to zero because you've got so much interest to pay at the start. So it's an accelerating path to zero. But I always figured that regardless of the interest rate, you would hit certain milestones. After five years, you would have paid off, I don't know, 6% of a mortgage, and after 10 years, you would have paid off 18%, and it accelerates on. That's actually not the case. I was plugging in different numbers for different mortgage rate assumptions, and they left you with very different principles owing five years later. By the way, this is a total waste of space, I guess, on your podcast, but I'm told it's because they assume that whatever the prevailing five-year rate is, it then extends over the rest of the lifetime of the mortgage. That changes everything. Whereas in my world, I guess I would assume you'd want to plug in some normal guess as to what it should be over the remaining years. But the bottom line was that in my own head, I thought, gee, a lot of these mortgages, two-thirds of the payment is interest. Two thirds of the payment is going to double or triple, and that's going to be a crazy increase. And because it's not, because of some of that math I loosely alluded to, that's why on a fixed rate side, it's more like a 20% increase. And so back to your observation, I think you're right, which is most people will struggle.

Well, let's just clarify. A lot of people have mortgages. People are getting their calculators out right now as they listen. But as you're saying, you have three, four, five, whatever your term is. You've got that. That's certainty, unless you're making additional payments. And then the next 20 years, say 25, that's just a projection. That's why your numbers are going to be different.

They swing a little less than I would have guessed. But still, a fixed year, Bank of Canada might say on average 20% higher when it renews in the next few years. I only hesitate because you said, wages haven't kept up. Well, they're moving at 5% a year right now. And over four or five years, maybe they’re almost half. But of course, that's an unusual period of wage growth. And critically, expenses have gone up so much that it's not really a real increase. So you're probably spending that wage increase on something else. And of course, that's just averages. Many individuals haven't seen any wage increase over that period of time. So there certainly is some pressure mounting and an extra bit of urgency for the bank.

I just threw that out because I knew you'd be looking for something to do on the Labor Day weekend. Since it's a long weekend this weekend, you need a project. But I think that is some interesting analysis. I'm not surprised that the government or Bank of Canada has done some work on it because the consumer is 70% of the economy and where they're going to land a year from now, as all these mortgages are coming due in terms of just how much money is there for people to spend, is something that'll certainly have an impact on the economy. But maybe I'm overrating it because, again, you just say, okay, well, wages are up, mortgage is up a little bit, price is up, but you add it all together and perhaps people are okay as long as we're in a world where rates are a little bit lower than they are right now and inflation has calmed down and normalized.

And unemployment doesn't keep rising because it's been rising in Canada quite a bit. It's up 1.6 percentage points from its low already.

So let's see where we go from here. It's going to be an interesting couple of years for the Canadian economy. And again, the lower rates are certainly going to help if we continue along this track. Speaking of jobs, this was an interesting one for me — and I don't know how many Canadians caught this because not necessarily everyone's following business news and economic news the way you and I do — but all of a sudden, the Bureau of Labor Statistics in the US comes out last week. This is a regular revision. I'm sure you're going to point us to how this isn't that uncommon, that there's an adjustment over the last 12 months in terms of the number of net jobs that were created in the US economy. And they shaved about 800,000 jobs off the numbers. That we've done a podcast every month reporting those numbers, reacting to those numbers, and then it ends up that there's 800,000 fewer jobs than we anticipated. And it just seems like, politically, which is interesting, nothing. And markets, they didn't seem to think too much of it anyway. So what are your thoughts on these disappearing jobs or jobs that just never did appear?

I did see Trump say some quip about it. So it did not go unremarked entirely. But you're right, 818,000 fewer jobs. So officially, previously, between March 2023 and March 2024, in the US, it has been thought to have created 2.9 million jobs. It turns out it was 2.1 million jobs. It's not a trivial difference. To reframe this, previously, the thinking was that the average month generated 246,000 jobs over that year. Now, it's 178,000. So it's still fine, but it's a fair bit less, when you're talking about 800,000. So pretty big. I will say this, just to calm us down a little bit. So one would be, it was pretty expected. So every time this preliminary benchmark revision comes out every August, for the last number of years, it has been a negative number. So this isn't a total shock. I had seen some pretty smart sell-side US financial institutions predicting numbers like 500,000 or a million. So this was within the realm of what was considered possible. So not a total out-of-the-blue outcome. Do note that this is the preliminary revision. There is a final revision in January or February, or early next year. For the last four years, that has then reversed about half of the initial. So it could be that minus 800 becomes minus 400,000. We don't know that, but that's been the historical pattern. I don't know why, to be honest. The one in particular that might have been missed — and I was writing about this in my latest Macro Memo. I was laughing a little bit about it — not too funny when you lose jobs — but laughing just in the sense that they're missing something else. The particular survey they're using to calibrate does a really bad job of picking up undocumented immigrants and unrecorded work. As you might guess, it's pretty hard to pick that up. And so the thinking is that that's probably been rising quickly given those numbers. And so I don't know that you could say, therefore, we're right back to zero. But I would say there are a number of forces that reduce it a little bit. The other thought — and I guess my plan here is to downplay this, I'm not sure why — but anyways, my other thought is, keep in mind, these revisions are through to March. When we got scared about the US job numbers, we were getting scared — and I'm losing track now — in July. This is prior to the slowdown. This is not suggesting that suddenly we are in something awful right now. It doesn't mean that we've miscalibrated the degree of the slowdown there. But at the end of the day, it's a softening labor market. If you want to see a silver lining in the softening labor market, actually weekly jobless claims have been getting a fair bit better the last few weeks. So that had been one of the signals that was deteriorated, and it stabilized. But certainly, this isn't great for the job market, and job creation was weaker in the month of July. And we're going to get the August number next. I think we're going to talk, probably. We usually do a podcast, don't we? We'll talk, presumably, in a week, Friday, or something like that. The thinking is, it'll be an okay number, but that's going to be a pivotal one because if we get a number that slips below 100,000 jobs for the month, that's going to be concerning, I think you could say, a continued trend toward weakness that we're hoping stops, but it hasn't so far. If it's 100 to 200,000, you could say, okay, let's start the soft-landing story. If it's above 200,000, you say, who cares about the July number? Clearly, it was a mistake, and we're perfectly fine. So there are a number of ways that could go, but that's going to be worth watching.

And it will be worth coming back to this podcast because this is the most important jobs report ever. So next Friday.

I'm going to be on remote assignment, Dave. I'm going to be recording from my Victoria Hotel when we do that at 5:30 in the morning or something.

Oh, that's good. I've recorded from there. Very good sound. So expect Eric to be sounding good, talking about what could be a good or bad jobs report. We'll see before we go there. But again, it's nice for us to know and it's nice for markets to know an accurate number around jobs, and then we can do some additional analysis to say, maybe it's a bit too high an estimate or too low an estimate, and we'll get an adjustment, and we've gotten this adjustment. But I would hope the Fed has many more tools in their toolbox to make that assessment around the labor market than just that report every month to make the decision of when they're cutting or raising rates, right?

That's right. Well, I mean, at a minimum, there are a number of formal surveys like jobless claims and like the Jolts survey. There are other ones like that, too, that they can take a look at. And so, yes, it won't be only that one thing, but that is maybe the one single most regarded indicator. And of course, that day does release the payroll survey and the labor force survey. They do release a chunk of things all at once there. Certainly, the other one to watch — and we'll talk about this, I'm guessing — is the ISM manufacturing index. Really, the reason everybody panicked for a moment in early August was weak payrolls and weak ISM manufacturing. And then we had a bunch of things that came out since that we really haven't talked much about, that looked just fine. ISM services. Senior Loan Officer survey looked fine. Small businesses is feeling better. Some consumer metrics looking pretty good. So we've had some things that look better. Now we want to circle around and say those two original bad things, are they still bad or are they a little bit less bad or where do they stand?

Yeah, and stay tuned for next Friday. But as we continue to remind the listeners — and I think this is one of the pieces that you get the most value out of listening to the podcast on a regular basis — is we're going to talk about what's happening in current markets. The big picture. We were talking about some individual earnings reports with Stu Kedwell on different episodes with him. But we know what we're trying to accomplish long term, and that's the focus we want to have from an investment perspective. Knowing what's happening allows us to, A, sleep at night and understand what we're trying to accomplish long term and whether we're on track, and recognize where some opportunities are created by markets. If we look at that scare around the jobs report and the ISM number that Eric's talking about last month, really created a nice opportunity. Or if you were a dollar cost averager and you had your monthly contribution going in at that point, or you accelerated it forward, you were able to take advantage of that, and that will benefit you long term. Long term has been the last 30 years, and the Chinese economy has been the major contributor to global growth. We check in on China from time to time because of the importance of that economy. When you look at that economy right now, Eric, because I know you spend a lot of time looking at China, where do you think China sits today from an economic perspective?

The optimistic statement would be it's the biggest the economy has ever been. Of course, that's the state for almost all economies, but it's moving much less quickly than usual. And so we did grow accustomed to a China that could grow a real GDP at 10, then 8, then 6% a year. These were really, really fast rates. And it's almost like compound math. You can double the size of the economy remarkably quickly every decade or faster when you're growing that quickly. And they've slowed. We always knew they would have to slow to some extent because no country continues to grow that quickly as it gets rich. Some of the growth they were enjoying previously was on the back of some maybe unsustainable trends like a housing market boom that can't last forever. Canadians know a little bit about that. It made sense that it slowed. The economy, despite those challenges and with still a profoundly weak housing market and some unenthusiastic consumers, if we're being honest, it is still tracking about 5% real GDP growth this year. So it's not quite the full-on disaster that people think, and their exports have been good, and they pivoted back toward manufacturing and industrial production and some of the things that they're historically good at. The hope that the consumer would grow and come to dominate the economy is put off for the future a little bit or isn't driving quite as much as they would have liked. But they are tracking 5% growth. We do think that slows. We've said for quite a while, we think they're going to settle into a 3 to 4% GDP growth rhythm, which again is half what they pulled off a decade ago. It's a real deceleration, but it's still enough that China will be growing faster than any developed country, really, of note, at least on a sustainable basis. Our math would suggest, just because China is such a big economy to start with, that it's set to drive about a quarter of global growth going forward. China is diminished, and it's no longer the only place that can grow quickly, and it can't grow as quickly. In terms of long-term challenges, of course, the demographics have turned. Their population is shrinking, and that's its own challenge. Housing is not at all a source of growth right now. And of course, frictions with the US. I would say one of the more pivotal moments for China will be which candidate wins the election because, of course, Trump is proposing some pretty aggressive Chinese tariffs, which would be consequential. Do note China's exports to the US are a surprisingly tiny share of China's GDP. It's 2 or 3% of GDP. So it's not the end of the story. We actually double-checked the numbers. I was suspicious when I saw them. I said, how could this be? But China is like the US. It's a very big, domestically oriented economy. So trade was 20% of the total or something. And then US just is X% of that, and that's how you get there. But certainly, there are some challenges that exist. We haven't loved the way that the state has been given preferences over the private sector, all sorts of things are, we think, limiting Chinese growth. We still end up with a 3 to 4% growth rate. I always try to remind myself that Chinese policymakers have been probably the most competent economic policymakers in the world over the last couple of decades. And they are not encumbered by politics and things like that. And they can afford to take a long view. They don't get it right every single time, but I would still bet that they do manage to stabilize the housing market and avoid the debt crises that some people talk about. And so I'll leave to people smarter than me whether that makes Chinese equities a buy or not and how all that fits together. But the bottom line is that it's a challenging time for China, but China is still a world power, and it is still growing.

Yeah. And we're going to get somebody on to talk specifically about Chinese stocks. Again, your view on the Chinese economy; it's direct drive economy. So like you say, no politics. They decide what they're going to do and do it. They don't have to worry about going to the voters, really, to decide whether they get another term or not. But are they inclined right now to try and stimulate the economy, or are they just really trying to stabilize things at this point? Where's policy right now?

Yeah, that's a good question. I might give you both those answers. I think that they are in a position where they're trying to do some stimulus in an effort to stabilize housing, if that makes sense. Providing support, though, is the goal here. I don't think anybody wants housing to be off to the races again, but the goal is to get housing on a better track and deal with some of the issues there. Indeed, they've been cutting rates. I'm losing track. I've got a big long list, but they tend to do incremental things. It's usually not a, hey, tax cuts for everybody. It's usually more like, we told this bank to lend more to builders or something like that, and you have to sniff it out over time. But they're doing things like that. They are very much trying to stabilize. I think they told local governments they could lend to builders more. Anyway, things like that. And so, yes, they are doing some work to that effect. And so hopefully, they pull that off, and I think there's a fair chance that they do. On the policy side with China, maybe the concern is just when you have a leader in place for an extended period of time, it can over time, become a bit more of an echo chamber with a lot of yes-men and yes-women around you. And maybe the risk of bad policy decisions grows over time. But so far, China has been doing okay.

Well, Eric, thanks for popping in. This was designed to be a quick visit, but as usual, a quick visit turns into a half an hour like nothing, because you always have so many interesting things to say. Thanks for always being available, and we'll see you next week for that critical jobs report.

Absolutely. Thanks, Dave. Thanks, everybody.