Latest on the Economy – Three things we are watching

Ali Jaffery: Welcome to the latest edition of Eyes on the Economy podcast. I’m Ali Jaffray, Executive Director and Senior Economist at CIBC. And today I’m joined by our Chief Economist, Avery Schoenfeld. Welcome, Avery.

Avery Shenfeld: Nice to be here with you.

Ali Jaffery: Today we have a smorgasbord of topics to cover. There three big issues I know you’ve been thinking about recently. First, the rail dispute in Canada. Second, what commodity markets are telling us about the global economy. And last, of course, is Powell’s Jackson Hole speech. So let’s start with Canada. Where are we now in the labor dispute in Canada’s rail sector? And what are the potential impacts we might see in the upcoming economic data?

Avery Shenfeld: Well, I wish we could say we’ve put it fully behind us, but I think that would be a bit of a stretch at this point still. Of course, the government has referred this to the Labour Board and issued a back -to -work order through that process. And the union for now and the company for now have each dropped the strike and the lockout respectively, so we’re getting back to work. The issue is that the union plans to challenge the minister’s right to do this through the courts. And recent rulings from the courts in Canada have stressed the right to strike. So there’s some chance that in fact that the courts could rule in favor of the union and that the back to work order would therefore be rescinded. The likely outcome, however, is that some time will pass between now and the court ruling. By the time we get that court ruling, Parliament might be back in session. It’s due to come back in mid -September.

And one right that parliament does have is to pass back to work legislation as they have done in some past rail strikes. So I think that this was a quick and dirty solution that the government has tried. Might not hold up in the courts, but we’re hopeful that if it doesn’t, that the liberals likely combining with the conservatives would pass back to work legislation. As it now stands, we’ve had a slight disruption to rail service. It’ll take a few days to get everything back up and running.

We might lose a decimal place or so off monthly GDP for the month of August, but get that back with a rebound in activity in September. So I don’t think a lot of damage will have been done.

Ali Jaffery: That’s really interesting and we’ll keep an eye out on that. Let’s rotate this mortgage board a bit here and look at another topic. Last week you wrote about the signal commodity markets are sending about the state of the global economy. What’s that signal?

Avery Shenfeld: Well, if we look back historically, are often watched, particularly industrial commodities. So not precious metals, but things like oil and gas prices, as well as industrial materials prices, tend to be watched by economists as signal for the state of activity in cyclical industries globally. know, the fuel prices, for example, are tied to either industrial activity, or to transportation activity, which again correlate with the movement of goods and production of goods. And of course, industrial materials prices feed into both manufacturing and construction. And what we’re seeing right now is whether you look at fossil fuels as a group, or you look at industrial materials as a group, the global pricing for those products is very middling, as I would say in my generation. think young people would say mid or meh.

But not too inspiring. In other words, we’re not plumbing recession type lows. So those who fear that the global economy is in a tailspin don’t really see that justified by where commodities are. But they’re sort of moving sideways. They’re not at particularly elevated levels in terms of where they’ve stood in the past few decades. So they’re also not indicating a lot of optimism about a boom ahead. I think that’s quite appropriate.

In the sense that if we look at the major industrialized economies, while we’ve seen a bit of a slowing, we’re really not that far from full employment in either the US or Europe, for example, which means that while central banks are now engaged in an easing cycle to speed up growth, there’s not that much headroom for economic growth to accelerate from here without bringing back overly tight labor markets and inflation risks. So yes,

We do expect the global economy to be on a reasonably healthy course in 2025 and 26, but this isn’t boom times ahead. That doesn’t necessarily mean that individual commodity prices couldn’t climb for other reasons. You could have a supply shock, for example, to oil from an expansion of the Middle East stresses we’re now seeing. You could have a particular commodity like copper that gets a demand lift from electrification, but broadly speaking, we wouldn’t expect a lot of momentum there. And that also tells you that for other cyclical goods, you wouldn’t expect to see boom times ahead. Sort of, as I said at the outset, middling, mediocre, or kind of meh looks to be the global picture right now.

Ali Jaffery: So the global picture is also going to depend a lot on Fed policy and we had a pal Jackson Hole speech last week. What’s the main message from that?

Avery Shenfeld: It was pretty clear that Powell was saying the Fed is going to ease in September and that the number one risk to the economy is no longer inflation staying sticky or elevated or even escalating, but rather now too much slack in the labor market. And namely the other side of the Fed’s dual mandate is now more important protecting the labor market. And it’s not that the Fed sees the labor market as ugly at this point.

But Powell effectively drew a line in the sand and said that the Fed doesn’t want to see any further deterioration in the labor market from where we already are. Now that may sound a bit like a clarion call to a 50 basis point cut rather than 25. But I think that the key here is that we do have another employment report between now and the Fed’s decision. So they’re going to be watching that report. And making their mind up after they see it. And at this point, there’s really no reason to expect a particularly weak employment report. We do have Q3 GDP running somewhere, you know, maybe a bit shy of 2 % in the latest tracking measures. That’s usually healthy enough to actually stabilize the unemployment rate where it is. And we’re also with tighter border controls, likely not seeing as much of an inflow of new migrants to the US, so we’re not creating quite as much labor supply. So on the whole, there’s no reason to really expect a really weak labor market report. And that’s why for now at least, we’re sticking with our call for a 25 basis point cut rather than an outsize 50 move. But like Powell, of course, we’re watching to see whether that line in the sand in labor markets is breached and whether that would therefore require a 50 basis point cut. Stay tuned next Friday when those job numbers do come out.

Ali Jaffery: So spell that out Avery, what is that line in the sand? What is it gonna, what’s it gonna take for the Fed to cut by 50 basis points based on the next jobs report?

Avery Shenfeld: If we were to see, for example, a 0 .2 rise in the unemployment rate, I think that would raise the Fed’s eyebrows. On a 0 .1 move upwards, it’s really going to depend on the other color in that report. Was that caused, for example, by a rise in the participation rate, which would be okay? Or was it caused by a weak hiring number, in other words, a weak payrolls report that would raise some alarm bells that were breaking through that line in the sand? As I said, we have no reason to expect that this employment report is gonna be weak. Even the detailed numbers we look at for things like jobless benefit claims aren’t showing a material uptrend. So at this point, we don’t expect to see it, but we’re certainly prepared to respond in our own forecast, just as the Fed is, if we would be surprised by undue weakness in next Friday’s numbers.

Ali Jaffery: Okay, interesting. what does that mean though for the Bank of Canada? know, the Fed possibly thinking about jumbo rate cuts. Is the bank also thinking about that? Should they be thinking about that?

Avery Shenfeld:  Well, the schedule is that they have to make their decision before they know what the Fed is gonna do and before they see either the US or Canadian jobs numbers. But the reality here is as well is that the Bank of Canada has clearly demonstrate it’s not a monkey see, monkey do central bank. It’s already cut twice, the Fed has been on hold. It didn’t actually hike as much or as far as the Fed did on the upswing. So I think at this point, if past is prologue and what they’ve done so far is a sign of their taste towards rate cuts, they’re going to lean towards another quarter point cut. If they had wanted to do an outside move, they could have already done it when rates were higher. I think the further we get into rate cuts, the less you need to speed it up. So I think at this point, they’re pretty much set on a quarter point cut and I’d be surprised if they did anything different than that.

Ali Jaffery: Yeah, I agree with that. And I think that’s a good place to stop. Thank you, Avery, for your insights. And thank you to our listeners for joining us on today’s podcast. Until next time, we’ll have our eyes on the economy and we’ll be calling it as we see it.

Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.

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