Welcome to the Download. I'm your host, Dave Richardson. And it's time for jobs report Friday with Canada's hardest working economist, Eric Lascelles, chief economist at RBC Global Asset Management. Eric, I just got to state we're a little bit late with this. We were supposed to do this on Friday morning, but I was on vacation. I know you frown upon vacations because you're always working hard. Eric seems agitated today. He's agitated at me, not the beloved listeners of the podcast, because he wanted to get this done on Friday, and I delayed him. So I'll apologize up front, Eric, so as to calm you down a little bit before we get going. How are you doing? You're good?

Boy, am I mad. No, I'm just fine. Thank you. Yeah, Dave, it's busy days, and so always tap dancing in one direction or another, but doing fine. I feel like we've got half a handle on what's going on, which is always nice.

Half a handle. Well, that's probably more than most because it continues to be a really, really interesting period. And that's a couple of bank people who love economics, saying that economics and markets are interesting. But I'm going to lay it out there that it is, and that most of the listeners find it very interesting because they're listening to a podcast about those subjects. So that would be a good thing. But why don't we start with the jobs reports, which have been, I guess, an area of uncertainty, and they've been a little bit weaker than reported, although maybe we're not even counting right and firing the people who count things and all that. So there's all that stuff circling around it. We had the number in Canada as well, correct?

We did. It was weak too.

So what do the US and Canadian numbers from Friday look like?

Quite soft on both sides. A little bit of context is appropriate. I'll get to that in a moment. But why don't we get the headlines out of the way to start with. So US payrolls, this is the data for August—of course, it's released in September—but just 22,000 new jobs in the US. That's a pretty small number. The consensus had been 75,000. And if we'd rewound a year or two, we might have defined normal as 150,000 or something. So 22,000 was not very many. I guess that was the big takeaway. The other big takeaway—and it was really just a symbolic thing—was that as they did the standard revisions to the prior two months, the June numbers—which is going several months back now, but nevertheless—those June numbers flipped from a positive to a negative. So minus 13,000. The loss of 13,000 net jobs in June. That is, for what it's worth, the first negative month since December 2020. So not the norm. And so quite unpleasant on that front as well. And of course, I guess just job numbers always attract a great deal of attention. There's a reason that we anchor this podcast to them. They do matter a lot. But of course, they've taken on an outsized interest, at least because a month ago—and you've alluded to a bit of this—there were also quite weak numbers, and big negative revisions, and of course, the head of the BLS, the Bureau of Labor Statistics, was fired, arguably because the numbers were dissatisfactory. And so they are, again, dissatisfactory, I guess, is the takeaway here. I still think the numbers are credible. I think we know there's a high level of volatility to them and uncertainty associated. And we know the BLS is underfunded in a way that is literally reducing the amount of data collection they do. And we know that you and I and everybody else don't answer their phones anymore, and that makes it hard. And so any number of things are making the data a bit harder to trust. But I don't think that there's an explicit bias in it. We're on our toes in case that were to happen, but I don't think that's part of the conversation this time. Now, a couple of ways we can go from here. It was certainly weak in other regards. This is a longer-term trend, but one neat thing we've done recently, we've broken down US hiring into cyclical versus non-cyclical sectors. We've done this mathematically. Certainly, government tends to be non-cyclical, and you can imagine the cyclical sectors. But we actually did it looking or inspecting the data saying, oh, that's surprisingly stable. And so some private sector industries are considered non-cyclical by that definition. But when you do that, Dave—and this is year-over-year data—what you find is that there has been no net hiring in cyclical sectors over the last year. In fact, for the last year and a half or so, it's been pretty much flat. And so the hiring has come from the non-cyclical side, which is perfectly fine. And indeed, this month's data showed quite a bit of hiring in health care as an example, and this could be wonderful jobs. But equally, it's not telling you what's happening in the economy exactly. I mean, these are secondary things. And so it would suggest there is some degree of real caution among, I can't say private sector because some private sectors aren't that cyclical, but nevertheless, in the traditional cyclical sectors, they're behaving quite cautiously. It's not brand new, though. I mean, of course, the rate of hiring has slowed, but actually, over the last year or so, there hasn't been a whole lot. So this is not a brand new trend, but it is one that is softening to some extent. So it just speaks to an even softer underbelly to the job numbers. If you wanted to get a proper perspective, though, you do need to factor in the fact that there's not much population growth in the US right now. The immigration has really dried up. Some of that was happening a year ago as well, as illegal immigration was slowing, I think from memory from late 2023, even. But nevertheless, of course, that's accelerated. There's even less immigration, and certainly even less undocumented immigration. And so what a normal rate of hiring is, is lower. So for instance, and I think we've given you different numbers every month, but my latest figure I'm hanging my hat on is maybe 50,000 jobs a month might be normal right now. Whereas, as I mentioned, maybe 150,000 was normal per month a couple of years ago. So 22,000 jobs is not that big a miss. It is still a miss, though. And on a trend basis, we are accumulating a number of misses here. Of course, you can cut right through all of that messiness and stop trying to figure out exactly what the population is and just look at the unemployment rate. The unemployment rate has gone up. It's not bad. It's gone from 4.2 to 4.3%, but it certainly is higher than it was in the mid threes a few years ago. And it is, again, seemingly trending pretty clearly higher, and it's the highest since 2021. So net-net, it was a soft report. I think when you combine that with the Jackson Hole speech by Fed Chair Powell, it does argue pretty strongly for a Fed rate cut. I've ignored Canada for the moment. We'll get to that, I'm sure, in a moment.

Yeah. And just coming in with a couple of things. When we talk about some of these questions about the data and the reliability of the data which led to that firing. If you stretch it out over several months instead of just looking at this one. We've talked about this a lot over the years as we've done these Friday jobs reports podcast. The number is important. You want to look at the number and get the number that comes out, as it did last Friday, and look at the revisions. But what you really want to do is take a step back and take a look at a longer-term picture. And whatever is happening, you're very clearly seeing a trend where those numbers are coming down. Now, you can look as you have dug into, probably on your vacation, and see what's behind those numbers. Are there any other reasons why the trends are happening? As you mentioned, reduced immigration in the US. And when we get to Canada, we've got to think about reduced immigration here as well when we look at the Canadian numbers. But nevertheless, no matter what way you slice it, the job market is not as robust as it was a year ago or two years ago. And that has implications, which you then link to what the Central bank does. And of course, there's been a lot of talk in the news and coming from many different directions on the need or no need for the Fed to act. And it looks more and more, as these numbers continue to be soft, as you said, that the Fed is going to ultimately now reduce rates. And the question now becomes, have the numbers gotten weak enough to not just reduce by a quarter percent, but maybe even go to a half percent when they meet in a couple of weeks?

Yeah, I think that's exactly it. So the debate is now how much cutting, not do they cut? And not to be too unexciting here, but it looks like a standard vanilla 25-basis point cut is still thought to be the most likely. I was checking out market pricing just before this. It's maybe a 10 or 15% chance of a 50-basis point cut is the way the market is currently thinking. Now, let's see what the next inflation number brings, and maybe that'll change the equation again. But very clearly, the labor market is cooling. The Fed at Jackson Hole did indicate that they believe inflation from tariffs to be temporary. I got to avoid that «transitory» word. It's got a little bit of a taint associated with it these days, but nevertheless, transitory. They said quite correctly—this is before the job numbers came out—that they viewed there was being some downside risk to employment. And so that has happened. And so, again, that's why the market is quite confident there's a rate cut coming. Keep in mind, as much as the White House is trying to gain influence over the Fed and Fed voters, and you can argue there are two voters that are already linked to the White House, and that number will rise. Of course, that isn't the case right now. It is still Powell as Fed Chair as well as that might be a pushback against a 50-basis point cut. I think what the market has done, though, Dave, is priced in pretty confidently that September 17th cut, also priced in, the great majority, of an October cut, also priced in at this point, the great majority, of a December cut, and actually is up to almost six rate cuts over the next year. So not shy about looking for rate cuts. And that's a combination of, hey, the economy might have some weakness. And similarly, hey, there might be a political wind here that encourages a little bit more easing as well. And I'm sympathetic to both of those forces right now.

Yeah. And I was out talking to some advisors and investors over the last couple of weeks and talking about, if you go back to last September, when the Fed did cut rates for the first time in this rate cutting cycle and cut the Fed funds rate by 50-basis points, a half of 1%. Last September, you saw the longer-term rates—if you look at the 10-year US Treasury, it popped higher. Whereas this time, is it the right thing to cut rates? And if we cut rates too soon, does that create inflation longer term so that those longer-term rates go up? This time, the Jackson Hole speech occurs. He says, yeah, maybe there's some room for rate cuts now. We're moving closer and closer to where it's almost certain that we're going to see a rate cut. And those long-term rates have stayed pretty stable, which is another one of those indications that the economy maybe is a little bit softer than we want it to be right now.

Yeah, I think that's quite right. There are so many things happening at the long end of the curve. We were just talking before this podcast that 10-year yields have been declining. And of course, that is a statement of economic concern. And we're seeing some weakness here and a bit of a risk-aversion push and so on. You go further out the curve to the 30-year and you see, again, some decline recently, but nevertheless, a yield curve that's much steeper than we're used to. And 30-year yields that have been, despite declining recently, relatively resistant to the declining trend that you might have expected, given a non-trivial amount of rate cutting already and a certain amount priced in for the future. And so that would seem to reflect, interestingly, not really inflation fears—often that will show up in long-term yields, a little tiny bit, but that's not the main reason—but the main reason is just the other bit, which is just a bigger term premium. A bigger risk premium. There's seemingly less confidence in the fiscal positions of countries. And indeed, as we're recording this, I think the French Prime Minister's vote just failed. And so there's going to be a shift there. That was over austerity that the public doesn't want, but is arguably necessary. UK is struggling with this. Japan's Prime Minister just resigned yesterday, and that was at least in part over some of the painful measures there as well. And so there is, unfortunately, a fair amount of fiscal austerity that's necessary across a pretty broad swath of countries. They're not totally embracing that, or their voters or their parliament are not totally allowing that to happen. And so I would guess that it's still going to be a pretty steep yield curve kind of environment. And these longer-term yields, certainly while ebbing and flowing, might still be somewhat resistant to the happy downward action you might normally see if you had the Fed cued up for three consecutive rate cuts, which seems to be the case right now.

Yeah. And we had Stu Kedwell on a week and a half ago talking about the stocks that benefit from a steeper rate curve. He covered that off because that pretty much looks like where we're going. So we've got all that political instability everywhere. Coming back to good old solid, calm Canada. And how was our jobs report? And what are you seeing coming out of that in terms of the Canadian economy?

Not so solid or calm, unfortunately. So 65,000 jobs lost. Not a laughing matter whatsoever. Pretty steep decline. The prior month was down 41,000 jobs. So that's 100,000 some in the last two months now. You and I both know the Canadian job numbers are pretty choppy. You probably want to smooth things out a little bit. The month before that had been a big positive. I would say even taking a three-month moving average, it's pretty clear we're in at least slight negative territory. There are some genuine job losses happening here. Not that you should feel too good about those, but if you wanted to temper your concern, you might note that quite rightly, in this month, at least, it was mostly part-time job losses, and it was mostly self-employed job losses. Those tend to be lower quality jobs such that the net hit to the economy or Canada's income earning capacity maybe didn't quite suffer as much as 65,000 lost jobs would suggest. But still, there is a weaker trend here for sure. You mentioned earlier that, of course, Canada doesn't have any population growth either right now by virtue of this immigration target shift. And that's not a permanent condition because the target is actually a non-trivial number of permanent residents coming in, but just as the prior cohort of temporary residents leaves, there is just an air pocket here where there's not any population growth. And so, again, normal might be a flat number. And so we're running a little bit below that, but not scandalously below. And then just like with the US, you turn and say, well, maybe at the end of the day, the unemployment rate is the thing I need to look at here, and it'll give me a sense for whether there's slack and whether it's getting worse or getting better. And it just helps to control for population swings versus job swings. Unfortunately, as with the US rising, unemployment is up to 7.1%. It's the highest since 2021. It's been, I can't say a steady rise because we had a couple of months of decline in there over the summer, but nevertheless, it's a pretty visible rise. And as much as a normal unemployment rate in Canada is probably a couple of percentage points higher than the US, I'm afraid to say, nevertheless, this is now a good percentage point plus above what we might deem to be normal. And so it's not a brand new situation. We've known Canada has had some slack for a while, but the slack is opening up more. And to be honest, it's more than a bit disappointing because the reality of tariffs—which would seem to be one of the bigger forces here—is that they have actually hit Canada a little bit less hard, or at least the theoretical impact has been a bit smaller because all that USMCA compliant product getting exempted. We're now in a position where about 90% of what Canada sells to the US is being exempted. You would think the blow wouldn't be that hard. But the reality is we're seeing job losses. We thought, maybe initially, there were such apocalyptic fear, and then the reality wasn't as bad, and maybe there's a bounce back or something later in the summer. Well, we're really not seeing a bounce back here. I probably talk about GDP numbers less than you would think I should since it is the final benchmark of how things are going. But the problem is they come out so late and they get revised and it’s just not really the way to get the pulse of the economy in real-time. But nevertheless, not a bad framing mechanism in retrospect. And so unfortunately, Canadian Q2 GDP came out negative, so declined at 1.6% annualized. That wasn't a great shock, but it was a little worse than we'd all thought. And then Q3 is still an open question. We don't even finish the quarter until the end of this month, so let's not get ahead of ourselves. But just given a fairly sour handoff from the second quarter, given that we do have a flash estimate for July—which is the first of the three months that constitute the quarter—you'd need a pretty good looking rebound in August and September—which again, we just saw job loss in August, so not exactly counting on this—you'd need a pretty good rebound not to have the third quarter come in negative as well. And some people like to call a recession for two quarters in a row. I push back against that. I think it's a bit more nuanced than that, but certainly some real economic weakness and some real pain being felt.

Yeah, I was just going to jump in and say, if you know anyone who's looking for work—I've talked about many times in the podcast, I've got a 21 and 18-year-old, and the job market certainly was not what it was two or three years ago, to get summer employment, and talking to their friends. But again, just people who have lost jobs and are looking. And I bumped into some of them along the way as I'm out about. And it is not an easy job market right now, and that is reflected in this. So that's your anecdotal on top of the numbers actually come. And that's when the economist nods his head and goes, wow, this doesn't look good. And that is despite, though, our interest rates. We talk about the Fed cutting rates maybe significantly. But we're already well below the US in terms of our Bank rate here in Canada. And across the yield curve, although the yield curve is steepened, our longer-term rates are significantly lower than the US. So what does it take to get this Canadian economy going again?

Yeah, I don't know if I have an answer to that last bit, but I will say policymakers are doing a reasonably credible job in Canada. And so Bank of Canada was ahead of the game in cutting. It looks like it was appropriate given the damage we've seen since. Looks like some more is probably coming. Markets priced in most of a cut. It's weird, also for September 17th. It's rare those dates line up for the Fed and the Bank of Canada, but get ready for a big day. And so it looks like there'll be some more help, but Bank Canada cannot be said that it's not already trying. And then similarly on the fiscal side, this new government is proposing a fair amount of spending and has done a bit of tax cutting and infrastructure and the like. And so we'll see how quickly some of that money gets out the door. But we and most are budgeting for some positive fiscal impulse there, too. So there are some helping hands. Seemingly not enough yet. We are right now assuming that there are a couple more challenging quarters, shall we say, for Canada, and then there may be scope for some tentative acceleration in 2026. And so that's what we're looking and hoping for. But I have to confess, over the last four or five months, we've been more than a little disappointed with the data that's come out and it has even been a little hard to reconcile versus the actual impediments and sand in the gears and so on that tariffs have thrown in because it hasn't been as much as we thought. Maybe it speaks just to the high uncertainty that does damage of its own and everyone's sitting on their hands. It seems pretty credible when you think about it.

That's exactly it. It's the uncertainty itself, not the actual policy that creates the problem. I think you even said it on one of the earlier podcasts this year, as we talked about the tariffs: hey, just give us the bad news and then stick with it. Then it's resolved and we know what we're dealing with. But again, as you talk to business owners—I know you talk to business owners, I talk to them too—and you're just sitting there, what do I do? Maybe it's a little clearer and it looks like, as you say, I think we can be fairly optimistic that it's going to turn out quite a bit better than the worst case, but it's still sitting there in the background and you still have to try and figure it out from a business perspective. Large corporations have different ways that they can work through it, but small businesses, they're the major employer in the country, and it's harder for them.

That's absolutely right. Right now, we have a sense, perhaps. But of course, in Canada's case, that USMCA trade deal, does it survive? Does it not? I think you'd have to assume it does. If they were going to scrap that thing, it would have been scrapped months ago in theory. But what concessions are demanded to keep it and what exemptions are put in place, if any? And so still enough uncertainty, unfortunately. And so I guess that's where the damage is.

So how much more can the Bank of Canada lower rates, given that we're significantly lower already than the US?

Yeah, it's interesting. Not that we're wildly off consensus by any means, but we think maybe a little more cutting than the market assumes. In fact, I struggle a little bit to understand why the market, with an overnight rate of 2.75%, doesn't even have two rate cuts priced in over the next year. It seems to me like if you have an economy that's shrinking and inflation that's really not too far off the mark and tariffs shouldn't be too inflationary—particularly as Canada's retaliatory tariffs are taken off and that would have been the channel by which you get more inflation—and it's not quite clear what a neutral rate is in Canada, but call it 2.75%. And so even cutting down to the low twos is hardly a huge jamming on the accelerator moment. And so historically, you would have been maybe nervous that the housing market would go into overdrive, but it's pretty soft right now, right? Home prices are falling and condos are very weak. And so it seems to me like you could do more. And so, again, the challenge here is, once upon a time, the first hint of trouble, rates plunged to 0 or 0.5% or something. Some lessons have been learned such that we're probably not going to see that extreme action. I can't say this is our base case forecast, but I don't see why you can't get into the 1% if you needed to. I mean, that feels okay to me. And so as a scenario at least we could have a fair bit more cutting in front of us if it's needed.

It just seems the Canadian economy has run at a slower pace than the US for such a long time. Generally, when you have that happen—you've talked about this before—you see the Canadian economy catch up at some point. And it just hasn't happened even with the lower rates.

Yeah, that's quite true. And there's a long-term 40-year story of that. There's a shorter-term two-year story. There's an even shorter-term six-month story. And they all point in the same direction, which is, Canadian economy has not been moving. We're certainly hopeful that productivity—which you recall was falling for a period of time—can start rising again. And we got a little bit of that. And some of it is just mechanical. Population goes down and productivity goes up. But actually, quite disappointingly, these Q2 numbers came out and productivity fell. Now, of course, when the economy is falling, I guess not too many things are pointing in the other direction, but nevertheless, still waiting, I'm afraid to say, on that important turn, because that's the ultimate measure of well-being.

Yeah. And then I think a lot of people might look and go, well, hey, the Canadian stock market is at an all-time high and the stock market is looking forward and, in some ways, projecting where things are going to be. But the nature of the Canadian stock market is such. It's a lot of financial services companies that love a steep yield curve and lower rates at the short end, and a lot of mining companies that love record gold and silver and platinum and all these metals that are booming. The price of oil isn't fantastic, but the Canadian energy industry is so efficient, having lowered their costs over the years, that they can still make money at these levels. So you can't really just look at the Canadian stock market as a sign that things are going to get better. If I'm looking at the S&P 500, I'm seeing it sitting at a high. It's probably an indication that rates are probably lower a year from now and profits are probably higher and economic growth is pretty solid, but you can't make the same association in Canada.

Yeah, that's quite true. It's an interesting market in terms of the skews and tilts that it has, though I must say, not to undermine your final comment, of course, the US market has gotten awfully interesting, too. These big tech companies are taking such a big share that suddenly it's not just about the economy. You need to have a tech view, much as in Canada, you've always had to have the oil and the gold and the banking sector view. And so whether that's ideal or not, I guess that's an open question. It does, I'm sad to say, make my job a little bit less important, though, to the extent that markets can diverge from the economy quite significantly these days for quite sustained periods of time.

So Eric, let's just finish off on inflation because we're getting the CPI and PPI out of the US this week. Consumer price index and producer price index. But we've had some numbers come out around inflation since we last spoke. Are you getting any more sense of the direction of inflation? Is it still anchored where you like to see it in terms of where we need to get it back to?

Yeah. I guess «no» was the answer to that last bit, but that's been true right through. Even before the tariffs came on, we just didn't quite get back to the 2% number that we all hoped we would. So there is a bit of a sticky maybe scarring issue, you might say, from the post-pandemic inflation spike. And it's clear that we are getting some effects from tariffs. This is mostly a US conversation. Other countries aren't seeing—nor should they expect to see—too much extra inflation just given the way currencies have moved and given the lack of retaliation. But for the US, we're definitely seeing it when we look at core goods inflation. It's higher than it was. We can look at particular products—toys and games and appliances and things like this—and they're definitely moving faster, which is consistent, particularly with Chinese products coming into the US at a pretty hefty tariff rate. So we're seeing it. And I would say on the aggregate, the consensus for this week is an inflation that's a little warmer than normal. Again, 0.3 is for headlining core month over month, and so a little hotter. But I must say, inflation has had some helping hands here. For instance, in the US context, lower oil has been enormously helpful. Soft housing market. Keep in mind the lags associated to it. It means that even though maybe it's not quite as soft as it was a year or two ago, that's still bleeding through the lags and people resetting mortgage rates and rental rates and things. And so those are really helping to keep inflation down, even as we do see some goods components go faster. The other thing that's maybe tempering the inflation somewhat—we'll see how long this last—is that we are seeing foreign manufacturers actually eat a little bit of the price increase. So we've seen import prices fall, which means that foreign companies are paying for it. And then here and there, you hear American firms eating a little bit, too. Really not a lot on the aggregate, but it does seem like the car makers, at least, are definitely taking multibillion dollar hits as they hold their prices back. So it's not quite all accruing to the consumer. And so we still walk away saying we do think inflation is going to be somewhat higher over the next six months to nine months. And we're still budgeting for headline numbers in the mid threes. Do note the forecast just later this week is a 2.9 already, rising from a 2.7. So we are trudging in that direction. But worth keeping in mind, it's nothing like the order of magnitude from the pandemic. That was 9% inflation. This might be 3.5% inflation. And we are getting a little lucky with some helping hands here in a way that maybe prevents it from getting too high. This was always true, but this is a one-time price level shock. In theory, central banks are able to maybe not quite completely look through it, but downplay it to some extent. And of course, the nervousness is, might household expectations shift and might that become self-fulfilling? We really don't know yet, but in theory, it shouldn't have to. And so this is why central banks are able to cut despite the extra inflation.

And just as you're talking through all those areas that you describe as good fortune, that is all part of the Trump economic team strategy, which is, okay, we're going to get oil prices down, we're going to reduce housing costs, and that's going to be the offset for the tariffs in some way. That's the only way you get back to a normalized inflation. But you can see even with those—I guess, it’s the opposite of tailwinds—but with all of those things falling into place, you still don't have inflation really back down to the levels that you want to get it. So clearly this policy prescription is likely not going to get you back to a 2% inflation anytime soon.

Right. I guess the X factor is how much economic damage does the US feel, and that can do its own deflationary force. But yeah, I have to confess, we're not right back to a 2.0% happy inflation number in our forecast horizon. And really, ever since the pandemic, or at least the post-pandemic recovery, which was so wild, we've been of the view that, yeah, I take the over, not the under, on a 2% inflation target, and we are probably going to run a little warmer than that. And that has been the experience so far.

Excellent. Well, Eric, that's a terrific update. Sorry that I delayed it. I know you were chomping at the bit to get to this last Friday morning. So once again, it's my fault, beloved listeners of the podcast, not Eric's, because he's always working away. But a great overview. I think the one thing I would say as we start to move forward is maybe we'll spend a little bit more time on Canada than we spent the last few months because it looks like it deserves our attention. Obviously, it's where we live, but it deserves our attention in terms of just how weak the economy may be right now. Let's try and figure out how we're digging out of this. Anyways, thanks, Eric, and we'll catch up with you in a couple of weeks.

My pleasure. Thanks. Bye, everybody.