Hello and welcome to our video #MacroMemo.

There's plenty to cover off this go round.

We'll talk a little bit just about the recent economic data and the highlights or lowlights, including a weak payrolls report in the U.S. But subtly contrasted against some okay data elsewhere that helps to balance out the overall impression.

We'll talk about central banks who continue to be in rate cutting mode. And indeed, the Fed (Federal Reserve) at this moment looks as though it is on the cusp of delivering its first rate cut.

Joining the party, you might say. We'll talk about Canadian politics for a moment, in the context of what could be an election in the next year or so. We'll also spend a moment on Canadian housing, and on the USMCA.

That's the free trade deal between the U.S., Mexico and Canada and a renewal that needs to occur before too, too long.

And lastly, just some quick international contrast, Germany versus UK economic contrast.

So let's begin. We'll start with the overall economic data and where it is right now.

And as alluded to a moment ago, we did get another fairly soft U.S. payrolls report. So the job numbers are not as strong. If you want to worry about economies, worrying about the U.S. labor market is probably the place you should be focused right now. It was not a disaster, by the way, but nevertheless, hiring was 142,000 jobs in the month of August. That was a little bit less than expected and it does represent a notable deceleration from, say, six months ago. And so there has been a slowdown there, maybe more notable.

And to me, the reason that I interpreted it as being a soft report instead of an okay report – because there's nothing horrible about 142,000 new jobs – is that there were some significant downward revisions.

They revised down the job estimates for the prior two months by a cumulative 86,000 jobs. That definitely took some of the shine off and did suggest that this is a softening labour market in general. So we do need to watch this labour force quite closely. And if you're fretful about recessions, do fret in this particular direction.

I do want to say, though, just for balance and indeed to help explain why we still think it's at least a bit more likely that we get a soft landing that avoids a recession:

First of all, within the labour market, the unemployment rate actually fell. It fell from 4.3% to 4.2%. That's probably taking credit for something that doesn't quite merit taking credit for, just in the sense that we think some of that drop was because Hurricane Beryl had distorted the numbers in July, and we lost that distortion in August. So maybe that's not by itself cause for too much celebration.

But more generally, when we look at the weekly initial jobless claims numbers, which is a totally different survey, those numbers are still very low.

In contrast to earlier in the summer, those numbers are actually pretty steadily falling right now.

And so, it’s hard to fathom anything too horrible happening to the labour market, so long as the number of people claiming unemployment insurance continues to descend from one week to the next. And so labour market a question mark in focus, but not universally negative. I think this is the way to think about it right now.

Unfortunately, we did get some other economic data that I don't know if I could say was good, but it was okay and consistent with economic growth.

One thing is that we've been tracking is the overall nature of economic surprises. Have they been disappointing? Have they been impressive? And on the net, they have been not just disappointing but sort of getting worse and worse or more and more disappointing over the span of much of 2024 tenatively.

Interestingly, we did recently see the economic surprises, both for the U.S. and for the world, maybe start to bottom out a little bit. So not that they're necessarily positive on the whole, but they're not getting more and more negative.

And so we're watching that with interest, wondering whether there's a new trend afoot there, which would be certainly welcome. I can say as well, when we look at the ISM (Institute for Supply Management) numbers in the U.S., the manufacturing and services leading indicators, they're not strong. In fact, the manufacturing number is pretty weak on an absolute basis.

But, you know what? They both been fairly stable and indeed actually each ticked a little tit higher in the month of August. So just pushing back against the idea that something particularly negative is happening in the economy right now.

There is a general economic deceleration. It is not a time of great economic strength. The labour market might be a bit more pessimistic than some other areas. But we still think it's more likely that economic growth continues to be eked out, and that a soft landing can probably be achieved.

Okay, let's pivot from there to other central banks. The rate-cutting story continues, particularly in the developed world. And so the Bank of Canada actually has now cut for a third time, a third 25 basis point rate cut and its third opportunity. It's gone consecutively since it began.

The European Central Bank has proceeded a bit more gingerly, but at least as I record this, it appears to be on the cusp of a second rate cut over the span of several months. And so it's moving lower. And the thinking is there could be maybe another rate cut before the end of the year there.

And then you have the Fed, the U.S. Federal Reserve. It hasn't started yet. It has been really very much the laggard in that regard, but it looks indeed quite likely to begin on September 18th. And so, the Fed likely beginning there and probably continues at a fairly steady rate.

It can probably cut rates at every opportunity over the remainder of 2024.

Much as, by the way, the Bank of Canada realistically can as well. And the reason central banks are suddenly in quite an excellent position to cut rates is inflation has been coming down, which is of course, welcome, and was the central problem until recently. And as mentioned, the economy is slowing to some extent.

Both of those align on the same side of the ledger in terms of what central banks can do. Both of them allow for rate cuts. We are therefore getting those rate cuts. And it's a really important thing because, keep in mind, the whole reason we're fretful about recessions and worried about growth – and for that matter, why growth isn't that great right now – is largely because interest rates are high. And that's a headwind to growth.

And so we start to remove that headwind, all sorts of variable, imprecise lags involved. But nevertheless, that should then start to allow economic growth to revive or at least avoid decelerating too, too much further.

There is a bit of a narrative. Could these central banks cut by 50 basis points at a pop instead of 25? I think the answer is yes. Theoretically, I think the answer would be yes.

If we were to see a real sudden deterioration in economic activity, or if inflation really fell off a cliff quite quickly. I think as it stands right now, I believe 25 basis point rate cuts are still more likely. And you can get a fair distance with those, because if you're delivering those at every meeting or nearly every meeting. You can move fairly quickly on that basis.

So there's room for a fair amount of easing without having to resort to the 50 basis point moves. And we think, indeed, you can have multiple percentage points worth of easing over the next, say, 18 months or so, without getting yourself really into an economically stimulative position.

You're just going from monetary restraint to a neutral monetary stance. So we think that's not an unreasonable expectation.

The market may be a little bit ahead of itself, in part, pricing in the chance of 50 basis point cuts, in part thinking that literally every meeting through to the middle of next year will contain a rate cut. That could happen, but it may also be the case that central banks proceed a bit less quickly than that. And so we do wonder whether bond yields have fallen far enough already in anticipation of that.

Okay, on from there and into a bit of a Canadian focus for a few sections here.

So let's just start on the Canadian political front, which hasn't gotten a ton of attention lately. You might have seen that the NDP has formally withdrawn from its partnership with the governing Liberal Party.

And so the nature of Canada's parliamentary democracy is one in which there is the chance there could be an election imminently without that support. Most minority governments don't last this long. So that risk suddenly does present itself now that that alliance is broken.

I would say that we are not expecting a near-term election, and that is simply because not only are the Liberals trailing very much in the polls, but the NDP itself is also doing notably worse than it did at the moment of the last election. And so no one's really incented to get an election called right now. They will probably hold their noses and cooperate with one another.

This is more an opportunity for the NDP to achieve some separation from the unpopular Liberals and maybe give themselves half a fighting chance for an election that might actually happen in about a year. That's when the election has to happen, by October 2025.

Polls for the moment say that the Conservatives are well ahead and indeed likely to win a pretty commanding majority if the current numbers hold up. Of course, we'll see if that actually sticks. But, if it does, it would certainly represent a change of government.

I guess through an economic lens – and given such woeful productivity growth and perhaps poor business animal spirits in recent years – it does give at least an opportunity, perhaps, to revive some of those things. And so maybe there could be a path towards faster productivity growth or perhaps a friendlier business environment, though it should be acknowledged that the present Conservative party has a great deal of populism in its playbook as well. That's a little bit less obviously favorable toward businesses, investors and economic growth.

Nevertheless, that potential for change is very much there in about a year's time.

Further on Canada, on the housing front, just a quick check-up here. I think it's well appreciated that nationally home prices are going roughly sideways. And we think they probably continue to go sideways for another couple of years. It’s really a statement about ongoing poor affordability.

The historical norm is that you have a housing bust that does last three, four or five years, not just a year or two. So we're budgeting for that.

On the activity side, resale activity has certainly slowed. It is now low by the standards of the last few decades, but not unprecedentedly low. In fact, it's in line roughly with the the 1990s norm, which was that last housing bust for Canada specifically.

I would say it's not a full-on buyer’s market though. We've seen the balance between new listings and sales shift from being very much a seller's market during the initial phase of the pandemic to a more neutral stance right now. That’s the way to think about it.

However, when you dig beneath the surface, you find that not all markets are created equal. And we do see particular weakness in the likes of Toronto and Vancouver, some of the bigger markets.

So let me just focus on Toronto for a moment and say in Toronto that the new listings of homes-to-sales ratio is now outright into a buyer's market. So there is greater weakness there. And there is now an imbalance favoring buyers over sellers in the Toronto market specifically.

And then if you narrow down the assessment a little bit more and talk about the Toronto condo market specifically, you'll find even more weakness. It is a more extreme buyer's market there.

And your Toronto condo listings and actually rental listings are both really spiking right now.

It's proven a very difficult time for condo builders as well. The cost of financing is high. The availability of skilled construction labour is still, I gather, challenging and the buyers just aren't there.

Historically, when you're building a multi-unit in Toronto, you would plan to pre-sell about 70% of the units before a spade hits earth. That is now down below a 50% presale and actively falling.

So it makes it much harder to start new projects.

And you do see some bankruptcies and receiverships on the construction side as a result of that.

We still think there should be more construction eventually. There has been a big population boom and there is a housing shortage and so on. But it doesn't seem like it's going to be a 2024, maybe not even a full-on 2025 story. It's going to have to come a little bit later as the market settles somewhat first. Okay.

Two other quick ones for me. One just to flag this: you may recall, on July 1st, 2020, a new free trade agreement was struck between the U.S., Mexico and Canada called the USMCA (the initials of the countries involved). That gets revisited, it gets reopened in a sense on July 1, 2026.

I know that's still a good year and a half away. But nevertheless, as we think about this U.S. election and the possibility of a more protectionist government, if there were to be a Republican win, it is worth recognizing the implications for the likes of Canada directly.

To the extent that this thing would get reopened, the U.S. is in a position of power as the big economy. Indeed, it looks as though the U.S. could well make demands of Mexico in terms of demanding changes on the agricultural and the energy and the labor side.

Also with regard to China using Mexico as a back door into the North American free market for its products. That would be the focus from a Mexico perspective.

It's less clear for Canada, but the U.S. could well take another look at the supply management programs in Canada, at the forestry sector, which often gets targeted by the U.S., at the digital tax that Canada put on recently to the ire of the U.S.

So those are in play. And there is some uncertainty there.

In general, when you see a renewal of an agreement like this, it does create uncertainty. And it does discourage long-term investment to the extent that businesses can't be sure that the big factory they were planning on building in a different market will actually prove viable as the rules swirl around them.

Now, we'll finish just briefly with some international contrast here. And just really to flag in a European context, the German economy is looking quite weak right now.

Some of it is that Chinese demand for industrial products is down. Some is also China-related in that Chinese automakers are really flourishing and starting to muscle out some of the traditional European automakers in some of these emerging markets in particular. There are some multiple challenges there.

We've seen German industrial production shrink, and its purchasing manager indices are consistent with contraction as well. So that's a challenge.

I will say though, the UK is looking a fair bit better. And so after a truly atrocious 2023, the UK purchasing manager indices are in growth mode both for manufacturing and services.

We've seen a rebound in hiring. We've seen a rebound in monthly GDP as well. So more strength there.

Okay I'll stop there. Thanks so much for your time. I hope you found this interesting. Please tune in again next time.