Economists see rate cut in future – for now

(April 8, 2004) Economists at the big banks are calling today’s employment report a clincher for an expected rate cut from the Bank of Canada on Tuesday.

“Central banks do not make interest-rate decisions on the basis of a single data point, but this morning’s Canadian employment report for March will surely be a critical input in the Bank of Canada’s thinking,” said Gillian Manning, an economist at TD Economics.

The loss of 13,300 jobs last month was worse than expected, indicating the Canadian economy could underperform that of the United States, which finally seems to be picking up steam.

But the loss of jobs was not as bad as it might sound, as both the TD report and an economic update from RBC Economics point out that the cuts were very focused in the part-time service sector. There was actually some growth in full-time positions and in the important manufacturing sector.

The largest job losses were in tourism, education and building/business services, with each of these sectors experiencing unique challenges. For example, the education job losses followed a month of hiring in the same sector, leaving employment virtually unchanged on a year-over-year basis, according to Derek Holt, assistant chief economist at RBC.

“Overall, this is not a bad report and the market impact will probably be minor,” he said. “Markets had already been expecting a quarter-point rate cut next Tuesday, and there was a slim to none possibility that anything in this morning’s report would have swayed expectations.”

Meanwhile in the U.S., it’s starting to look like interest rates will begin rising, according to Sherry Cooper, chief economist at BMO Nesbitt Burns, pointing to inflation from rising commodity prices, especially oil.

“It ultimately means a sharp rise in long-term interest rates, whether or not the Federal Reserve responds quickly, and the recent surge in U.S. job growth has already triggered that surge,” she says.

“What I’m suggesting is mortgage rates will rise, and rise meaningfully in coming quarters — so will bond yields and bank deposit and term deposit rates,” she continues. “That is good news for savers but bad news for borrowers. I only hope the Fed responds to the scent of inflation soon.”

Cooper says rising interest rates in the U.S. will be followed by a similar, though muted, move north of the border.

“Even here, the short-term trend in industrial prices has turned decidedly upward — 20 of 21 industrial sectors reported higher prices in the most recent data,” she says. “Now while this may have more importance for business pricing power than inflation, it is something to put in the pending file. Consumer price inflation might be low, but the pricing environment seems to be firming.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com