How do the U.S. and Canadian labor markets differ?
Executive summary:
- The Bank of England could cut rates at a faster pace than expected
- A recession looks more likely than not in Canada
- We believe investors should remain cautious and disciplined in today's market environment
On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin and Product Operations Analyst McKenna Painter discussed the outcome of recent policy meetings by the Bank of England (BoE) and the Reserve Bank of Australia (RBA). They also chatted about the state of the labour market in both the U.S. and Canada, before concluding with key reasons why they believe investors should remain cautious in today’s market environment. In recognition of Asian American and Pacific Islander Heritage (AAPI) Month in the U.S. and Asian Heritage Month in Canada, Lin spoke in Mandarin during the final segment.
Bank of England, Reserve Bank of Australia hold rates steady
Painter and Lin kicked off the conversation by recapping highlights from the BoE and RBA’s recent policy meetings. Lin said that while both central banks left their key interest rates unchanged, their outlooks on monetary policy differed a bit.
The BoE struck a dovish tone at its 9 May meeting, opening the door to a summer rate cut, he explained, with Governor Andrew Bailey going so far to say that the central bank might need to cut rates by more than markets expect. By contrast, RBA officials stressed that while significant overall progress has been made in bringing Australian inflation down closer to its target, the recent uptick in quarterly inflation numbers means that all options—including a rate hike—are still on the table. “The RBA signaled that it’s prepared, if necessary, to potentially increase rates more to ensure that inflation trends back down toward its target,” Lin remarked.
Ultimately, both the BoE and the RBA’s approach to monetary policy remains highly data-dependent, similar to that of other developed-market central banks, he observed. “Whether these banks leave rates steady or eventually lower them depends on how upcoming inflation and labour market data plays out. At Russell Investments, we’ll be closely watching and analysing the data as it comes in for clues on how central banks may act,” Lin said.
Assessing the state of the labour market in Canada and the U.S.
Next, Painter asked Lin about the current state of the U.S. and Canadian labour markets—and how they differ from each other. Starting with the U.S., Lin said that weekly jobless claims for the week ending 4 May came in a little above consensus expectations, at 231,000. While this number was higher than in recent weeks, Lin said he’s not overly concerned just yet.
Zooming out to examine the broader picture in the U.S., he pointed to the April payrolls report as evidence that the country’s labour market is probably cooling down a bit. “Unlike in the first three months of 2024, U.S. job creation in April came in below consensus expectations, with the economy adding 175,000 new jobs,” Lin stated. However, he stressed that this number still represents a healthy pace of job creation, pointing out that it’s in line with the so-called replacement rate—the amount of new jobs needed each month to sustain a constant unemployment rate.
In Canada, the situation has been quite different, Lin said, with the Canadian labour market in a much more fragile state. He said that over the past few months, job creation in Canada has generally fallen below the replacement rate, leading to a rise in the country’s unemployment rate over time.
Could this mean that a recession is more likely in Canada than in the U.S.? Lin said it looks that way, with weaker economic data and a higher amount of leverage among Canadian households leading to elevated recession probabilities. “At Russell Investments, we estimate that there’s a 55% chance of a recession in Canada in the next 12 to 18 months. However, we anticipate that any potential recession will be on the mild to moderate side, rather than on the severe side,” he stated.
In the U.S., Lin said that while he expects the economy to soften somewhat over the course of 2024, he believes a soft landing is more likely than a recession. “I wouldn’t rule out the possibility of a recession altogether—I still think there’s roughly a 35% probability of one in the U.S. in the next 12 to 18 months—but my base-case scenario is for the American economy to achieve a soft landing,” he stated.
The importance of staying cautious and disciplined in today’s market environment
Lin wrapped up by explaining why he believes investors should still exercise caution in the current environment, even with the S&P 500 Index nearing record highs. He spoke in Mandarin in honor of AAPI Month in the U.S. and Asian Heritage Month in Canada, noting that fundamentally, investing is about evaluating opportunities and risks.
Opportunity-wise, the potential for rate cuts in the U.S., Canada, Europe and the UK this year is supportive for equities, Lin said. However, he stressed that the risks for a recession have not fully abated, noting that the 35% probability for a downturn in the U.S. is still much higher than the typical probability for a recession in any given year, which is around 15% to 20%.
“At the end of the day, there are still some residual risks out there for investors and, in an environment where the S&P 500 is approaching new highs, I think investors will benefit from being cautious and conservative. At this point, I don’t see a need to chase into the equity-market rally or to overweight equities. Rather, I’d argue it might be better for investors to stay calm and disciplined and stick to their strategic asset allocations,” Lin concluded.