Hello and welcome to The Download. I'm your host, Dave Richardson. And it is that time of the month. It's Canada's hardest working economist, Eric Lascelles, to tell us what's going on in the jobs market. I feel like we should have a theme for this particular podcast, like the old Shanana song «Get a job». Get a job, sha-na-na. That'd be a great one. Or «Working for the weekend». Because it's always on Friday, right, that we do this? The jobs reports are always out on the first Friday of the month.

That's fair. «Two is the loneliest number», Dave. That doesn't quite speak to the employment numbers.

Two is the loneliest number. Well, yeah. I'm even trying to figure out where you're going with that one. Anyway, here's my podcasting tip of the day: if you’re ever to start a podcast, don't do it with people that are smarter than you because they're going to come up with better stuff and you're not going to understand it and you're just going to look foolish.

But your idea is far better than mine so far. So maybe that lesson is best heated by me.

If you have a podcast, you should really actually try to get really smart people on who can tell you everything that's happening. And then that helps you stay gainfully employed like 277,000 people in the United States over the last month, correct, Eric?

Actually, incorrect. It was 272, but you got the gist. See, here we go again. Yeah, you're right. Could I remember that if I wasn't looking at the number on my screen? Probably not. 272, it's a big number. You take it two ways. The one would be that's almost smack dab on the average of the months we've had since the start of the year. There's nothing all that shocking or remarkable about it. But market was looking for 180,000. It got 272,000. If I've got my numbers right here, that is above consensus and by a fair margin. Here we are talking about rate cuts and maybe looking for a Fed rate cut at some point in the near future. The market's interpretation is essentially every time you get a good data point, the Fed can't cut. Every time you get a bad one, it says, hooray, the Fed can cut, even though the hooray needs to be limited because, of course, it's not great when the economic data is weak for its own sake. But in any event, this is one that came in on the stronger side for sure. As always, you can slice it a few different ways. A further support of the interpretation of strength would be that wage growth was a little quicker than normal. US wages are now running 4.1% year over year, up from 3.9%. The month of May was fairly strong in and of itself. That would be your sources of optimism — and I guess, by extension, pessimism about the Fed's ability to move. If you wanted to feel a little bit better, you could note that a fair chunk of the hiring was not your classic economically sensitive sectors. There was a lot of education and health that added 86,000 jobs, and the government added 43,000. A lot of this wasn't exactly a direct statement that the economy is on fire or anything like that. Then similarly, unemployment did go up. In fact, my trusty colleague, Vivien Lee — always hard at work behind the scenes — was taking a peek. First of all, the unemployment rate did go up, and it's moved from 3.9 to 4%. We got a four handle here, which is still an amazing number, but not a three. But we were checking Sahm's rule. Do you remember Sahm's rule? If the three-month moving average of unemployment goes up by half a percentage point, that's always predicted a recession, at least in modern history. We're not there yet. We've gone from a 3.55 average, three-month average to a 3.9. But I wouldn't be surprised if we exceed that. To be honest, our view that a soft landing is more likely is really of the view that this rule isn't going to work this time. I'm assuming the unemployment rate does work its way up into the low and maybe even the mid-fours without maybe too much damage. But that's worth watching. You have to acknowledge that this is a rule that historically has worked, and we're getting a little bit closer to triggering that. On the whole, though, it was a pretty strong report. The other thing, Dave, I made a big deal of this maybe a year ago, and wrongly, so we'll just acknowledge it this time. The household survey, the other survey that estimates the number of people employed, and how that changed. A totally different way of doing it, going straight to households instead of straight to businesses. It was a minus 408,000. I guess I buried the lead here. If you wanted to be pessimistic, you'd maybe start with that. I will just say it's so choppy. We've had a bunch of negatives in the last year, and it never really seemed to mean anything. I remember getting a little worked up around the start of the year. We had two negatives, and I think it was three months or something like that, and then they went away, and it didn't mean that much. One thing we've come to realize is that because there is so much undocumented immigration into the US, the population is rising faster than the official estimates would say. The place that gets distorted or the thing that distorts is the household employment. I would say, be aware there was a negative number there. I would say it's the less credible and it's the choppier. For now, I would say the real number was 272. Or according to you, 277. Maybe there were 5,000 more employed people, Dave. It's possible.

Hard to be that precise, right? But correct me if I'm wrong, did we not have a Sahm's rule violation, so to speak, at some point last year where we had the unemployment rate tick up beyond that rule?

It depends on your exact definition of the rule. If you're just viewing it as unemployment goes up half a percentage point, that's the rule, then that has happened. The law was a 3.4%. We're at a 4%. That's a 0.6%. The letter of the law of the rule is a three-month moving average. So the three-month moving average hasn't quite pulled out. To be clear, if you were to stick even at 4% for a couple more months, we're already there, I think that would then trigger it. I would say, check in in two months, and even if this unemployment rate doesn't go up any further, that would then be a Sahm's rule confirmation. And the debate then is, is this the latest guaranteed recession signal to break, or is this what actually right? That'll be the next debate.

But again, we were talking with Stu Kedwell about this on a couple of different recent episodes. And I'm being very rough line in the sand here, but January, February, March data would be released. Generally, a little bit stronger. So surprise to the upside. And then we go through April and everything was surprise to the downside. May has been mixed up until this report, if not too generally, everything's been a little bit worse than expected in terms of surprises. So I'm at a loss now. This is why you have to work so hard, and I don't. I just get to ask the easy questions. How do you put all this together, Eric? You've been doing this for a long time. Can you remember a time where it's this confusing around where we're headed?

Probably not. It speaks to my memory more than the reality of the situation. For those who don't know, the story really is it's messy out there when it comes to the economic data. If you want to feel really grim about things, you look at the unemployment rate that's rising and you look at an ISM manufacturing that is sinking back below the waves in a slightly concerning way. You look at high interest rates. If you're going to be optimistic, you say, well, the job creation was still quite good. It's hard to be too grim when jobs are being created in significant numbers. And the twin of the ISM manufacturing, the ISM services index, which we also pay really close attention to and is also, in theory, something of a leading indicator. It had sunk the month before. It had made us really nervous by going below 50 — very unusually for the ISM services. And it just bounced in a big way. It's well past 50 now, and so it's expressing optimism. There is a lot of contradiction and I guess messiness. I think it is unusually so. I don't know if I could say the most ever, but unusually so. Maybe the thing that really is close to the most ever is the range of opinions as to what it means. There are people who think that the economy is going to race forward from here. Others like us who think most likely it's going to settle down and be a bit weaker but hold on. A recession call is not unreasonable. Big debates around, do we get rate cuts? Do we not? Maybe it's more momentous than usual that we're getting this contradiction. Often, you're just trundling along and it's the mid-2010s or something like that. Okay, we got a strong number. We got a weak number. It's not really totally radically changing what the world means. But there are big different debates and big potential scenarios that differ. Each one is getting a couple of boxes ticked, but not all the boxes ticked right now.

The question was not precise enough or targeted the right way. I guess it's more that we're so far into a cycle where there's been an expectation that we were going to get a recession. Ultimately, the signal is pulled back to where it's more of a soft landing, but you still keep getting mixed results that don't give you a real sense. It seems to me that with all the data we've accumulated through this cycle, where we are right now, that we have a clearer view of when rates are going to start to come down in the US. Other central banks are lowering, which we'll get to in a moment. I don't recall a period like this.

I think you're right. Just reflecting that, as we've been saying very openly all along, there have always been these two entirely viable scenarios. You recall we were on the more pessimistic side last year, and we've been on the more optimistic side for this year. But 35% chance of a recession is still what we're saying, which is a pretty real chance, and it's sitting two or three times higher than the normal risk. You can certainly talk yourself into that pathway. I still think it's the less likely of the two right now, and it's just the resilience we keep seeing in economies makes me loathe to predict too much trouble, particularly at a time when rates are maybe in a position to start coming down a little bit. But we still have some inverted yield curves and Sahm's rule is perhaps about to trigger. There is a subset of the warning lights that are blinking red or blinking amber and about to blink red, maybe in the case of Sahm's rule.

And then the other thing is I look at the stock market. The numbers this morning are negative. So the longer-term yields rise fairly significantly after they've come down about 40 basis points from where they had peaked last month. And then you've got the stock market, which you might have expected, with the strong numbers. More of a mixed picture. Some of the economically sensitive stuff might be having a good day, but across the board, everything's looking a little bit soft. So just a trying time. Except that, if you just stayed invested through all of this, you've done really well.

Yeah, that's right. I do think the market is a little bit quick to leap to the «bad data is good». This is a happy soft landing as opposed to something worse. Good data in this case is bad because of the reverse. That's a reasonable interpretation, but there are a few ways this could yet go and of interpreting all of this. I would agree. I would say on the market side — and certainly you don't bring me on to talk markets; that would be more of a Stu domain or yourself or any number of other people — but we just finished writing our quarterly outlook, and I do drift into market space a little bit as I'm writing my economic piece. To me, the notable thing, and this is very obvious, is just that it's a pretty good time to be an owner of all the three major asset classes. You can do okay in cash, though you'll do less well over time as rates come down. Fixed income has got those nice coupons and maybe scope for a bit of a capital gain and certainly some nice downside protection if there were to be any trouble that accrues. You're even more sympathetic to that view than I am, and so that's fair. The stock market, well, it depends where you are, and it's a bit expensive in the US and so on. But nevertheless, you would think, if this is indeed a mid- or late-point in the cycle, you’d normally get some not exuberant but pretty reasonable equity returns. There are certainly many markets out there that are quite reasonably priced in terms of x-US as well, if you're reluctant to go buy things that are maybe on the surface a bit expensive. We were in a pretty tough position there for a long time before the pandemic, where really nothing looked all that great and equity valuations were very high and bond yields were very low and it was tough. To the degree it's a tough investment decision, now it's tough because you have a number of pretty good options to choose among. It's not a coincidence that we're ultimately landing in a place that isn't that far removed from a neutral stance just because you do want to own a little bit of all these things.

Well, behind the scenes, we're not trying to push any way. I just hope most of our listeners have been invested through this period, particularly as markets have just had a fantastic eight-month period. Where we go from here, we're not going to try and precisely project, but as you say, underlying scenarios look pretty good. But it's been a very good period if you've been invested. Let's go to Canada because we had the rate cut this week from the Bank of Canada. Why don't we take a look at the jobs number? And then what’s the rationale behind the Bank of Canada, in your opinion, carving its own route out there around rates relative to the US, to the Fed Reserve, who's just not there yet? Does the report today change your view in any way or likely change their view in terms of where they might go for the remainder of the year?

Yeah. So indeed, we got those Canadian job numbers. This is about as late in the month as you would get numbers like this, by the way. This might actually be the latest possible date for the US in particular. But in any event, I'm finding myself a bit confused because we get inflation numbers for the US next week. It's mid-month next week. Usually, you get a bit of a spacing, but that's neither here nor there. For Canadian employment, it was on the screws. It was as expected. A pretty solid number in an absolute sense, 26,700 new jobs, a couple of thousand above the consensus. Keep in mind, population growth is still moving pretty fast. In fact, I'll say that we've been talking about population growth decelerating in 2024; still being fast for Canada, but decelerating. That's fair. We've seen some important rule changes, but it is a good reminder, some of the recent population figures that it's still really fast. I can't say we've seen particular evidence of it slowing. People were admitted into schools in prior months, and they're still coming. Population growth is quite quick. I mentioned that because, of course, that informs whether this was a good job number or not. It was decent. It was above consensus, but it wasn't quite enough to keep pace with the incredible population growth and the incredible growth in the labor force. Unemployment, just like in the US, did go up a little bit, in Canada's case, from 6.1 to 6.2%. In Canada's case, that unemployment rate is up by well more than a percentage point. There is no Sahm's rule for Canada, but if there were, you would have certainly triggered that some time ago. And the details were a little soft. Full-time was down, part-time was up. Keep in mind, a lot of the people coming into the country are intentionally being targeted for lower-skilled jobs or they’re students working on the side in a way that either demands that they're part-time or prioritizes that. So not a great surprise that the quality of the job creation isn't quite as good. On the aggregate, this is a job number that doesn't signal distress in any way, but it's one that would be supportive of the rate cut that took place earlier in the week. It's supportive of the idea that the Canadian economy has a little more slack in it than it did the month before by virtue of the unemployment rate. The counterpoint — and economics is an exercise in managing contradictions as far as I'm concerned, and there are always things that disagree — wage growth was a little quicker in Canada, too. It was up 5.2% year over year for permanent hourly workers, which was a little hotter. That would be maybe the rebuttal. But in general, the job numbers are consistent with that rate cut. And indeed, speaking of the rate cut, I guess that's maybe the place we should land now.

I was just going to say, Eric, it wouldn't be Sahm's rule here in Canada. More like Dougie's rule or Gordie's rule or something like that. We should keep it all Canadian here. But let's go on to those. And uniquely Canadian as well. We're not uniquely Canadian, but uniquely Canadian relative to the US. Rate cuts this week. So the Swedes, the Swiss. The first non-SW country to cut rates.

Yes, that's right. I was trying to come up with some clever acronym. SSC. In any event, here we are. Yes, the Bank of Canada beat the European Central Bank to it. I mean, ECB was scheduled for the next day. I don't think we should read too much into that. But the first comment is, we've been saying for a while we probably hit peak global policy rates, and indeed, I think that did happen. And of course, we've had the EM Central Banks cutting, and you mentioned Switzerland and Sweden, and now we have Canada and the entirety of the Eurozone. So this is a pretty big chunk of the global economy that's now dipping their toes. That's the way to think of it, dipping their toes into rate-cutting mode. The Bank of Canada did it. It wasn't totally clear. With the GDP number in Canada a little softer last week, we were ultimately persuaded that, yes, it was more likely that the Bank would cut in June than July. I'll admit, I thought it was a bit less likely than the market did, so not my greatest call, but they did it. There was no error. June was a perfectly reasonable time to cut rates. It looks like it should be fairly slow from here, but actually, if you listen carefully to the press conference, there was at least one comment a bit about July is not totally impossible. I'm typing this up rapidly on my Bloomberg as I do this because the numbers change so rapidly that you can sound very foolish very quickly. I guess the fact that this has to get published means it'll sound foolish no matter what. I wouldn't say July is especially likely in my eye, but the market actually has about half of a rate cut priced for July. In fact, technically a little bit more. Maybe I'm going to be the hawk who again misses the boat here, but I think September is more likely as the next step, and you might want to stop and wait and look around. But it's not impossible that the Bank of Canada goes in July as well. Moving a little quicker than previously imagined, I guess, is the story. Of course, they're aware the economy has opened up a little bit of slack, and job numbers support that. Inflation in Canada, I wouldn't say well-behaved is the right word. It's still well north of 2%, but it's moving in the right direction more reliably than in the US. Of course, rates do bite more in Canada just with all that household debt, and a lot of it is rolling. I can see the allure of cutting. I guess the point here is we can probably expect another, maybe a couple of rate cuts by the end of the year. Maybe that's the way to frame it. That does put Canada a bit ahead of the US and helps to reduce a bit of the pain that we're feeling in the economy.

Yeah. By the way, I do a little internal video with my dog, my Chihuahua, Bean. We lay the snacks out in the possibilities. She did call for a 25-basis point rate cut, so she is 100% accurate. She got all the rate hikes as well. So if you need some help on next month, I'll send you the video in advance and then you can get it out because it's not publicly available this video. And the other thing I was thinking is we're going to have to do a podcast where we just maybe sit for a half an hour and just listen to your reaction as things pop up on your Bloomberg. That would be fantastic. That's exciting listening. Eric, we go to the US cutting. When do they cut? And we got to remember that elections are sitting there, which creates some political uncertainty around the cuts just beyond even the economic data.

Yeah. Very exciting. Let me type some things onto Bloomberg, Dave. A riveting listening, I'm sure.

I'll keep quiet so they can hear the keystrokes.

Can you tell a fast typer? This is my humble break. No, I have it in front of me. Certainly, it looks a little bit less likely that the Fed’s in a position to cut just by virtue of some strong job numbers. So that makes sense. That's consistent. September is really where the debate lies. Nobody thinks they're going next week, to be clear, as 1% of a rate cut is priced in. Not a 1% rate cut, a one in 100 chance of a rate cut. So not happening. July is at a 10% chance or so, which again is not very likely, barring some big surprise between now and then. September is a serious one, I think. September, the market really has ebbed and flowed. It felt pretty good about it at one point, and then it got a little queasy about it last week, and then it felt pretty good about it before today's number, and now it's not quite sure. I've got a 51% of a rate cut priced in, so another coin toss. We may need to get your dog out to sort this one out, I suppose. I'll say at a minimum September is the decision point. I'm sympathetic to a September rate cut. I think we're seeing signs that other central banks are comfortable doing this. Our inflation forecasts are for a modest decline, which would be consistent with some cutting. I'm going to say I think September at this point is more likely than not. Yes, there's an election on November 4th. Fascinating, there's a Fed decision on November 7th. The approximate one is the next one, but of course, it's much less controversial to cut after the fact as opposed to before. I guess that's not the issue. But I would say September is most likely. I'd like to think we're in a position where the Fed can deliver a couple of cuts this year, but it makes sense that they're going later and that they would go less than the likes of Europe and the UK and Canada and some others who just have lower inflation prints and weaker economies.

And we'll stick with our musical theme today. «The first cut is the deepest». Not in terms of the actual amount. Cutting a quarter point — Canada this week and the Fed maybe in September or November — but what's most important is that first cut, which means you've reversed, you're no longer going up, you're not going sideways, you're going down. That sends some important signals out to the market, correct?

Yeah, that's right. I think you got it exactly right.

All right, Eric. I know you've got probably another million things to do today. So that's a great update on everything. We'll check back in with you. We got to get you on a little more often, but we'll try and get you back on one more time before we slow down over the summer. And thanks, as always, for being available on this Friday morning.

My pleasure. Great chatting with you. And hi, everybody out there. And I'll get that next call right. Don't you worry.

Oh, I know you will. All right. Thanks, Eric.

Thanks for your confidence. Bye.