Trade Report Caps Week of Discomfort for Bank of Canada

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(Bloomberg) -- Things aren’t getting easier for Bank of Canada policy makers after employment and trade reports on Friday increased expectations of another rate cut.

Canada’s trade deficit widened to a record C$4.1 billion ($3.1 billion) in September as export volumes fell 0.8 percent from the previous month, the government statistics agency said from Ottawa. The country added 43,900 jobs in October, topping estimates and rounding out the largest three-month gain since 2012 -- although the gains were in part-time jobs.

The spike in the trade deficit was largely on the back of a one-time purchase related to an offshore oil project. However, it’s a mixed bag that analysts said leaves no clear direction for Governor Stephen Poloz.

“It definitely leaves the Bank of Canada in an uncomfortable spot,” James Rossiter, a senior global strategist with Toronto-Dominion Bank, said in a note to clients. “Today’s data definitely doesn’t suggest a break-out to the upside of recent levels.”

Traders extended bets on a rate cut. Yields on March 2017 bankers’ acceptances contracts fell to 0.85 percent after Friday’s reports, the lowest level since late September. The contracts are used to hedge against currency swings and can be used as a barometer of short term interest rates.

Swaps trading showed the odds of a cut at the Dec. 7 meeting rose to 9.1 percent, from 7.2 percent a week earlier, while chances of a cut on Jan. 18 climbed to 15.9 percent, from 8.9 percent last week.

‘Mediocre’ Exports

Poloz said last month he and colleagues “actively considered” cutting interest rates in October, but held off to gauge the impact of government spending measures and the path of exports. So far, there’s little to be optimistic about.

On the fiscal front, Finance Minister Bill Morneau’s budget update on Tuesday provided no new immediate spending measures. Friday’s trade report presented a “fairly mediocre” export print, alongside a decline in U.S.-bound exports and a small slip in aggregate non-energy exports, Rossiter said.

“A decline in exports volume driven mainly by non-energy exports is clearly not positive,” said Charles St-Arnaud, senior economist with Nomura International Plc in London. “This increases the risk that the Bank of Canada may cut rates next year.”

The record trade deficit was spurred by a spike in “industrial machinery, equipment and parts” imports, due to what Statistics Canada an “exceptionally large” module destined for the Hebron offshore oil project. The data nonetheless included declines in overall export volume, in U.S.-bound exports and in non-energy exports.

“The dip in export volumes counts far more” to the Bank of Canada than volatile job figures, said Derek Holt, Scotiabank’s vice-president of economics in Toronto. The data is negative on balance and overshadowed by U.S. employment figures, he added.

Tepid Investment

The category that includes the offshore oil project module -- which had declined for eight consecutive months before rising 71.4 percent in September -- accounted for C$2.9 billion of the trade deficit. Without that category, the trade deficit was C$1.2 billion.

“The improvement in the trade balance is being driven primarily by weakness in imports rather than strength in exports,” said Rossiter at TD. “Weak imports to me are often a sign of tepid business investment growth and signal weak domestic demand growth.”

The median estimate of 17 economists for the total trade balance was a deficit of C$1.7 billion.

Part-Time Surge

The 43,900 net new jobs added beat the median estimate for a loss of 15,000 jobs, based on responses of 19 economists surveyed by Bloomberg. So far this year, Canada has added about 150,000 jobs, compared with 155,000 for all of 2015. If the country continues to increase jobs at the same pace as the last three months, 2016 will be the best annual performance since 2012, when the economy gained more than 300,000 jobs.

The job gains came in part-time work, with youth and men aged 25 to 54 recording increases while other demographic groups were little changed. Private sector employment rose while public sector and self-employed employment were little changed.

“Overall, the employment data should trump the trade picture, particularly due to the one-off nature of the widening in the deficit,” Avery Shenfeld, chief economist at CIBC Economics, said in a research note to clients. The job gains were “a mile better than expectations” and well-distributed across goods and services, he said.

Youth employment rose by 26,000 with all the gains in part-time work, Statistics Canada reported. Ontario, Canada’s most populous province, led the way by adding 25,000 jobs, followed by British Columbia at 15,000. Newfoundland and Labrador saw the biggest loss of 5,600 jobs. The unemployment rate in the easternmost province rose to 14.9 percent.

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