The Top-Line
In the Macro
- How did Omicron impact January’s job market?
- Canada’s real GDP surpasses pre-pandemic levels
In the Micro
- Will conflict in the Ukraine impact the financial markets and your portfolio?
The Bottom-Line
In the Macro
How did Omicron impact January’s job market?
A surge in Covid-19 cases in December and late January impacted economic recovery across North America. While we have to wait a bit longer for GDP numbers to reflect Omicron’s impact, we now have an indication from the January jobs reports.
Starting with the United States, the Labor Department stated that another 467,000 jobs were added for January. Considering economists had expected a slow down in hiring, the report was seen as a relief, highlighting the resilience of the American economy.
A key metric, the labor force participation rate, also made a positive shift to 62.2% in January. The participation rate highlights the percentage of working-age Americans who are currently employed or seeking employment. The rate is now at the highest level since pre-pandemic days and is thought to be instrumental in maintaining job growth.
Source: New York Times
Since losing 22 million jobs at the beginning of the pandemic, the US has recovered over 19 million jobs. The continued recovery in the US labor market is yet another reason the markets are bracing for a rate hike from the Federal Reserve.
Source: New York Times
The release on Canada’s labour market was not quite so upbeat. Statistics Canada surprised economists by reporting a loss of 200,100 jobs during the first month of the new year. January’s report was widely expected to show a setback for the labour market though the decline in employment was higher than the 110 thousand anticipated. The country’s jobless rate ticked up to 6.5%, increasing 50 basis points from December.
Source: BNN Bloomberg
Over half of the jobs lost during the month came from accommodation and food services. These industries are particularly sensitive to surging Covid-19 cases, especially with Ontario and Quebec in the height of lockdowns.
According to BMO’s Chief Economist Douglas Porter, the report is not a cause for concern, though.
“While the headline drop in jobs is roughly double the consensus call, the reality is that no one will be seriously surprised by these figures, since it is almost a carbon copy of the setbacks seen in the second and third waves… As the restrictions have begun to ease in recent days in Ontario and Quebec, look for a sturdy rebound in jobs in the next two months.”
Despite the decline in jobs for January, the labour market in Canada is still higher than pre-Covid by about 30,000 jobs.
Canada’s real GDP surpasses pre-pandemic levels
Canada’s November 2021 gross domestic product (GDP) increased by 0.6% over the month, 20 basis points higher than the market had anticipated. Real GDP is now 0.2% above February 2020 levels based on this update.
On a per-capita basis, the economy is still below where it was pre-pandemic. The gap between GDP and per-capita GDP continues to increase as population growth outpaces productivity growth.
Source: The Globe and Mail
Early estimates show Q4 GDP expansion to come in at an annualized rate of 6.3%. If preliminary data holds, 2021 GDP growth would be 4.9% for the entire year. Following 2020’s economic contraction of 5.4%, the country has certainly come a long way since its peak pandemic days.
While we know the Omicron surge will affect GDP for Q1 2022, experts suggest that any contraction will be temporary and subside once provinces re-emerge from lockdown. The Bank of Canada has predicted Q1 GDP to be about 2% on an annualized basis.
In the Micro
Will conflict in the Ukraine impact the financial markets and your portfolio?
Tensions continue to escalate in the Ukraine as President Biden warned that Russia could invade the country imminently. While the news is troubling, we wanted to focus on how the announcement impacted the financial markets and what it could mean for your portfolio.
Biden’s Friday update sent stocks spiraling as investors turned away from riskier assets. The S&P500 fell 1.9% for the day, with the technology-heavy Nasdaq losing 2.78%. The DJIA moved down over 500 points on the news, and the three major US indices ended the week lower.
Investors instead turned to Treasury notes in search of safety. Prices on government bonds spiked, causing yields, which move inversely to prices, to fall. The 10-year Treasury yield had recently spiked above 2% for the first time since 2019 but ended the week at 1.95%.
Ryan Detrick, an analyst at LPL Financial, pointed out that “from an investment point of view, we need to remember that major geopolitical events historically haven’t moved stocks much.” As you can see from the below chart of significant geopolitical events since 1941, it has taken the S&P500 an average of 43 days to completely recovered from the sell-off. And recover it has every single time.
Source: Marketwatch
One area where we will see an impact is within the oil and gas industry. Russia remains a significant player within the sector, so the threat of economic sanctions sent oil prices soaring on Friday. The international oil benchmark, Brent crude, rose to $94.44 per barrel marking the highest level seen since Q3 2014. West Texas Intermediate, the US oil benchmark, moved up by 5% at one point in the day, reaching as high as $94.66 per barrel. Some oil and gas stocks moved higher in response.
Source: Wall Street Journal
According to an update from the International Energy Agency, oil prices have also been pushed higher by “chronic underperformance by OPEC+ in meeting its output targets.” Despite Russia being one of the largest exporters in the sector, there is room for OPEC members and even some American businesses to increase drilling and step-up production. Regardless, the IEA suggested supply could remain tight, “increasing the likelihood of more volatility and upward pressure on prices.”
BMO economists argue that “oil remains the single most important commodity, and its peaks and valleys have played a starring role in almost every major economic cycle of the past 50 years.” Higher oil prices directly impact inflation, driving it higher. According to the group, an increase of $10 in oil prices will increase inflation in North America by approximately 40 basis points. Rising consumer prices will increase pressure on the central banks to raise interest rates and cool economic activity.
Source: BMO Economics
Historically, skyrocketing oil had pushed the Canadian dollar up as well. In 2021 the trend did not hold, though we could still see a slightly stronger Lonnie if oil remains expensive.
The Canadian stock market is expected to outperform US equities in an inflationary environment with elevated energy prices. The TSX has a higher exposure to energy and commodity stocks, which should hold their ground against rising oil prices and growing inflation.
Regardless of the short-term impacts of higher oil prices and geopolitical tension, remain calm and avoid making any investment decisions in a state of panic. While we understand uncertainty can be unsettling, we know that sticking to your long-term investment plan will put you out ahead. We expect this situation in the Ukraine should be no different.
As always, if you have any questions or would like to discuss further, please do not hesitate to reach out. Feel free to share with your friends and family too, as referrals are the best compliment we can receive.
