January 26, 2010
– BREAKFAST WITH DAVE
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the prospect of a “blowout” GDP number this Friday. The Canadian economicrevival has been far less reliant on aggressive monetary and fiscal support, though there is no doubt that the moves here to revive the housing market haveperhaps been too good to be true, as home prices have surged to recordhighs. But what is critical is that there is no job crisis in Canada, which is why the political atmosphere, proroguing aside, is far less poisonous in Canada at the present time.Since September, Canada has posted nearly 70,000 net new jobs and every oneof them has been in full-time positions, which means that the corporate sectorhere is beginning to make more of a commitment to the labor market. This iswhere the organic trends in personal income are derived from – in the U.S., there have been 350,000 losses and companies continue to rely on part-timehelp and temp agencies to fill whatever labor requirements there are. Even witha downbeat export sector for the time being, Canada is much further along theroad towards a non-government-assisted renewal – so look for some pullback infederal support when Ottawa releases its budget on March 4
.Another key, and this may end up playing a key role in how monetary policy mayalso diverge between Canada and the U.S. in the future, is the differencebetween the degrees of economic slack that exists in the two countries. Canadahas an 8.5% unemployment rate, down from the 8.7% peak in August and wellbelow the 10% rate south of the border. But that really understates the gapbecause Statistics Canada deploys a broader definition of the labor force than the BLS does -- on an apples-to-apples comparison, the Canadian jobless rate is7.1% which is nearly 300 basis points lower than the prevailing U.S. level and that is unprecedented. Indeed, if the Bank of Canada is correct that the outputgap is 3.7%, then it is roughly half the magnitude of excess capacity in the U.S.economy. This would then suggest that the Bank of Canada will begin to snug policy ahead of the Fed, and the fact that 2-year Government of Canada bondyields are trading almost 40 basis points north of comparable Treasuriessuggests that market participants are beginning to sniff this out. It may pay tonote that the Bank of Canada has already started to take some measures toreduce the size of its balance sheet – compressing it by 8% over the past yearwhile the Fed’s balance sheet has remained at its pregnant level of $2.2 trillion.Indeed, the Canadian dollar plays a significant role in the relative return gapbetween the U.S. and Canada in any given year – on average, half of the totalreturn gap is influenced by how the loonie and greenback perform. So investorsshould keep in mind which country has the superior fiscal, financial, political andbalance sheet fundamentals, not to mention the exposure to Asia via theresource orientation in Canada’s equity market and balance of payments. As the chart below illustrates, the Canadian dollar’s fair-value line is pointing north,indicating that through the interim peaks and valleys, the loonie is in afundamental bull market. And the fact that the fair-value line has continued torise, together with the loonie pulling back in this most recent countertrend rallyin the U.S. dollar, has placed the Canadian dollar into virtual realignment with itsequilibrium level. In other words, most, but not quite all, of the Canadian
There is no job crisis inCanada with nearly 70,000full-time jobs created sinceSeptember.