Hello, and welcome to the Download. I'm your host Dave Richardson, and it is economics day. So you know what that means. We bring in Canada's hardest working economist, working harder than ever because, wow, what do we make of everything that's going on economically? That is Eric Lascelles, chief economist at RBC Global Asset Management. Eric, you seem unusually cheery for a day that's just going to create piles of analysis and work for you.

Dave, you have to remind me, is good, bad and bad, good? Or is good, good and bad, bad? I'm getting sufficiently confused. I'm not sure what I'm supposed to think about these strong job numbers, but they were strong. Should we just dive in or do you have a different plan of attack?

Well, no, I mean, you just said it. We're in that part of the cycle where it does play out that way. Well, I mean, depending on what you're cheering for. But if you're cheering for interest rates to stop going up and inflation to be under control and signs of that, the numbers this morning were not necessarily on your side, even though, as you say, they were good numbers. You should be celebrating the fact that people are getting jobs, lots of people are working, which is normally what we want, and there's some strength somewhere in the economy. So, what do you make of all this?

Right, well, I'm sort of laughing in the sense that I'm reading newspaper articles. Here's one in front of me from Bloomberg saying stocks climbed and that's true at this point, with traders brushing off concerns about data showing a strong labor market. So it is one of these weird worlds in which normally we should be celebrating. I think in the end you do say it's good when hiring is strong, so I'll just say societally, in a logical way, we should be quite pleased. Canada and the US added jobs and I'll get into those details in a moment. The twist is just that every time the labor market stays strong, central banks say, u-oh, that means inflation sticks around for longer and so central banks have to raise rates more. And that's been a bit of a theme recently to the extent you had a hawkish Fed meeting a few days ago and market added a little bit to its assumption about where the Fed funds rate needs to go. And then again, on the back of this, we've seen another half a hike added to the peak policy rate sometime out there in 2023, as the market is thinking the policy rate could actually sneak a little beyond 5%, given this persistent strength. So that's still a fair distance from the 4% rate that the US is at right now. And digging into the numbers, it was pretty strong for the US; very strong for Canada. The US added 261000 jobs. The market had looked for a little under 200000. That's not that different, but nevertheless, a little stronger than expected. Some slight upward revisions to the prior month. So, it looked pretty solid through and through. The unemployment rate went up a little bit, but it was one of those people-looking-for-work kind of twists as opposed to something inherently bad about the economy or the labor market. And I guess, if you wanted to poke a hole— I don't think you should, because in the end, this is a pretty solid report and we've seen numbers looking pretty good right through it— but if you wanted to poke a hole, you could look at the household survey. Now Dave, remember this is a payroll survey. They survey businesses, they tell their hiring. Note there is another way of doing it— it's actually the way Canada does it, which is to survey people and ask them what they're up to and that can surface some things. For instance, they're not quite hitting all the companies out there because companies are forming or failing and so on. So the household survey says there was a loss of 328,000 jobs. So you get a very different conclusion if you want it. But that one does tend to be a bit more volatile. It deserves a little bit less attention. I wouldn't give it a zero weight, but equally, it's stretching to say the labor market is really soft. I think that the bigger story here is one in which, whether you're looking at the official number or whether you're looking at jobless claims, or whether you're looking at the ADP employment survey, which is a good little leading indicator, they've all been holding together. The US labor market remains broadly strong. Let's acknowledge, we can see little hints of turns. One could even be payrolls that were rising at well over 261000 a while ago, but it's still a good number. But you can see little hits elsewhere. I mean, it's quite a juxtaposition to see these overall job numbers and then you read the headlines in the newspaper and lots of talk about tech companies laying off right now. So there is a turn happening there. I don't know that I can say with certainty that's the leading indicator per se, but at least one sector is anticipating a more challenging environment. And to the extent that some of that is coming from diminished marketing spending, you might argue it is a leading indicator of sorts. So we'll see if that maps onto others at some point. We can see that job openings are trending a little lower. We can see that quits rates— people quitting their jobs— are starting to go down, as perhaps they perceive that the number of opportunities out there are shrinking a little bit. So there's a bit of a turn. But for the most part, the labor market is still fairly resilient and we still see economic weakness out there. Housing is absolutely turned and the inventory cycle has absolutely turned, and companies are saying they're going to do less capex and consumers are saying they're going to do less spending. But there's still a bit of a waiting game in terms of economic weakness. And I will say, we still think there's a recession coming and we still think it's most likely in the first half of next year. But there have been a few tongues wagging recently that maybe it's a second half of next year's story. I'd be surprised if it waited that long, but I would say it's not a 0% probability this thing comes together— or I guess falls apart is a better way of putting it— maybe a little later than once assumed. These job numbers are stronger than you would have guessed, given all of the central bank tightening that's happened and given all of the high inflation that we're facing right now.

I guess this would be completely unusual to have so much tightening and have so much of a delay before you really see things grind to a halt. Or is that just an element of all the money that was slushing around post-COVID and you've got to eat through that before the monetary policy really kicks in and so you could see things push a little bit later?

Yeah, I mean I think the best argument for a delayed hit is, as you say, household finances. We're looking maybe ex-Canada. We're looking better than normal going into this— Canada, of course, with all that household debt and housing markets may be less true but nevertheless, yes, I think that's a pretty good argument for later. Let the record show that we've always said we still think the labor market should be relatively less badly affected by a downturn than normal because companies fought so hard to get those workers in recent quarters and so they're going to be reluctant to shed those workers. So I think it's fair to say we shouldn't look to the employment market to be hit more than normal or to be a leading indicator in that regard. So, in that sense, maybe it's cooperating. It's a tricky thing though, in the sense that people often say, listen, central bank rate hikes hit with a lag of 18 months and if that's strictly true then actually second half of next year makes a lot of sense, maybe. But that's not totally true. That's for the full impact of the monetary tightening to be felt, right, every last drop of it, but quite a chunk of it is immediate and in fact some of it is anticipatory. People have priced-in rate hikes that showed up in the bond market and that's already in things like mortgage rates. And we can see rate sensitive sectors like housing clearly softening. And so, I would argue that it doesn't totally make sense that a downturn would take that long to come together, but really the observation so far is that, particularly in the case of the US, there's just been some pleasant resilience in recent months and it's made complicated by the fact that normally we'd all be cheering this on as investors— because we like it when economies grow—, but this time to the extent that inflation needs to be drummed out of the system, this is a signal that we're not quite getting to where we need to get maybe in terms of pulling inflation back down. And with October CPI print that's coming up and it's probably going to be fairly heated again, in part just because gas staged a mini revival, the central banks are still very much on the attack here and raising rates for the moment. And that's a painful thing, you would think— apparently not to the labor market—, at some point.

Yeah, I guess there is the argument that all of these higher rates have really just taken rates back to the normal level where they have been historically. But we'll leave that one for another day. Let's go into the monetary policy because we had the Fed announcement this week. So you brushed the idea that maybe the Fed fund rates ended up going a little bit higher than we would have thought before this jobs number, and from Powell's comments, but it was also a little bit in there about how we're going to start to not go up three quarters of a percent on the announcement. We're going to start to level things off. What are your thoughts on that? Do you think that's the way it plays out or does this not change everything again?

Right. Gosh we were all a bit whipsawed by that Fed decision. So it did come in on the screws in the sense that everyone looked for that three quarter percentage point height. That's what we got. So policy rates at 4%, just a hair below, technically, but it moved quite a bit. Initially, the takeaway— markets felt pretty good about this— was that, as you say, hey, we don't need to go 75 every time. We can perhaps slow the pace of tightening. In fact, there's the Boston Fed President who is on the wire saying something similar today, if that's going to help to contribute to the stock market's relative pleasure despite the prospect of a fair bit of hiking left. So that was the initial takeaway and I think that's important. We already thought and we've seen indeed bank of Canada passed that moment of peak velocity in terms of tightening, and so the Fed is seemingly in that realm as well. So that's the first step. That's like a first derivative move. We want maybe a second derivative move. We want the next derivative turn and actually get to a peak rate here. But nevertheless, the tightening is slowing. But then the bombshell of the counterpoint was that Powell said that they think that the peak policy rate is going to have to be a little higher than they conveyed in September— and what they conveyed in September was a high 4%. And so the market said, oh boy, okay, well, they're slowing the rate, but they still think there's a bit of work left. And so the market went from pricing a 4.9% peak policy rate to a 5.1 or 5.15%, which can't quite happen, but just putting that into placeholder. And then after these job numbers, it's up to about a 5.25% peak policy rate. So potentially north of 5, we'll see if they quite get there. I'd like to think inflation start to behave in a way that maybe precludes the last little bit of that, but it's probably not bad to be budgeting for something in the realm of 5%. Do note, we're already at 4%, so we went from 0 to 4%. We're talking about 4 to 5%. And so in theory, we're 80% done the tightening, if that makes people feel any better. But of course, we still suffer the pain of the higher rate even after the tightening is done.

Now, the big question I'm getting, as I'm out doing a lot of speaking across the country— you are as well—, the big question that I'm getting from investors is: what about Canada? Because we saw Canada raised only 50 basis points on the last bank of Canada announcement. Are we seeing these policies slightly diverge? And if so, what do you think the key driver or drivers of a divergence in policy would be?

Yeah, that's a great question. And so I totally agree, we are seeing a bit of a divergence. And it looks plausible that the bank of Canada ends up peaking out maybe three quarters of a percentage point below where the US does. It doesn't look like bank of Canada is targeting a 5% handle or anything north of that. They've been pretty clear that they're slowing their pace of tightening. And let the records show, and I hope I can get this right, bank Canada raised rates 100 basis points in July, and then 75 in September, and then 50 in October. No guarantee it's 25 in December, but nevertheless, there's a clear decelerating trend afoot there. And their language has been consistent with that. And it's worth mentioning, there's more heterogeneity in terms of what central banks are saying. And we've heard for a little while there was just everybody saying, there's more, there's more. We're accelerating, there's a lot of tightening happening. And the Fed's message is still— it's even become more nuanced— but there's a certain chunk of work left to be done. Bank of Canada has changed its language, suggesting it's getting closer to an end. Just as an aside, just to the extent that it maybe says something about how central bankers think, the bank of England did a 75-basis point hike quite recently. It also explicitly said it expects to do less tightening than the market assumes. That's an even bolder statement. But the central banks are starting to think maybe they're getting closer to having done enough and they're cognizant that the full damage isn't immediate. So, there's some lag impact they need to be ready for here. And in Canada's case, why should Canada do less? I think Canada should do less. And the answer is just that our economy is so much more rate sensitive. There's more household debt and the housing market is more vulnerable and we're seeing a bigger impact already. And so I think the bank of Canada appreciates that as the differentiator with the US. And so, sadly, there's as much economic damage from a 4% rate in Canada as a 5% rate in the US. They don't have to go quite as far. I think that's where the thought process is really.

Excellent. Well, that's a lot of ground covered. I'm in Boulder, Colorado this morning. We just got what looks like a couple of feet of snow here that wasn't forecast and then it's going up to 20 degrees today. But we've got our lumberjack shirts on. We're ready to work hard today, Eric. I can see you are in full on mode and as always, thanks for jumping on the morning of these announcements to give us an update on what it means for all of us. So, always appreciated.

My pleasure, Dave. Thanks. Talk to you later everybody.