Canada: Wage growth disappointment continues – Nordea Markets

Analysts at Nordea Markets note that despite a continuously dropping unemployment rate, Canada’s monthly wage growth figure has disappointed for five straight months. 

Key Quotes

“The yearly wage growth now yields 1.9% compared to 4% in May. For the records, this is the exact opposite trend of what is recorded elsewhere across G10. It wouldn’t be a big issue for the BoC if it wasn’t for the fact that wage growth has been an increasingly important explanatory factor for core inflation trends over the past years. Wage growth + FX effects now suggest a Canadian core inflation at 1.2-1.3% early 2019.”

“This is bad news for Bank of Canada bulls, as Stephen Poloz seems more obsessed with wage inflation than the combo of falling equity prices, lukewarm growth perspectives and lower oil prices. “Higher volatility and a re-calibration of equity prices do not point to a gloomy economic outlook by any means – rather, they are welcome symptoms of normalization.” Poloz is probably the most “Borio’ed” central banker out there.”

“But, Poloz recently also said that: “Given our outlook for growth and inflation, the Bank’s policy rate will need to rise to a neutral stance to achieve our inflation target.” Inflation hence matters way more than equity or market volatility and with the recent renewed wage growth disappointments in mind, it is hard to see any “upside risks” to that statement.”

“As is the case with NOK, the list of downside risks to the CAD has emerged swiftly in recent weeks. Looking at EUR/CAD versus the Crude oil 1 month earlier it looks tempting to long EUR/CAD into-year end. We though opt for the long EUR/NOK bet for now but close our short AUD/CAD position, as a consequence of the increased CAD risk picture.”