Unemployment Rate in Canada Stays Flat in May; Europe Continues to Add to Global Uncertainty
The S&P TSX Composite closed at 11,500.63, up 1.23% for the week, but down 3.8% since the start of the year and uncomfortably close to 2012 lows.
Canadian employment numbers came in on Friday slightly above expectation with 7,700 new jobs being created during the month of May. Consensus estimates for the month were for 5,000 new jobs. The numbers, while a little higher than expected, essentially put an end to the strong month-over-month momentum we have seen March. Collectively, March and April brought with them 140,000 new jobs; a 30 year record for Canada’s economy. Although the prudent minded knew to look at the numbers with caution, there were, not surprisingly, many optimists that hoped the performance was the start of a new trend. Clearly they were disappointed by the May numbers. Overall the Canadian unemployment rate remained flat at 7.3%.
While we continue to see mixed data in North America, the situation in Europe is nothing less than clear. The continent continues to struggle with an unyielding debt problem which many fear is spilling over into the global marketplace. After rallying at the start of the year, nearly all major global stock markets are now either down or flat. Although Greece remains firmly in the spotlight, Spain has moved a few steps up the ladder to release its financial woes upon the world. Spanish banks have come under serious pressure which has caused economists and analysts to predict that the country will formerly request an EU bailout on Saturday, making it the fourth nation in Europe to do so. The International Monetary Fund is currently in the process of conducting an audit on how much money Spain would require (due out Monday) with preliminary estimates at €50 to €60 billion and potentially higher. Not surprisingly, ratings agency Fitch announced on Thursday that it was reducing Spain's credit rating by three notches on from A to BBB. This rating is now only one notch above junk status.
The situation with the PIGS (Portugal, Italy, Greece, and Spain) is analogous to what happens to an individual person that takes on too much debt. As an individual’s debt continues to grow, and their ability to pay that debt declines, naturally creditors will require a higher interest rate to compensate them for the additional risk. But at some point, creditors will just stop lending the money regardless of the rate that the debtor is willing to pay. This is true unless of course someone with a better credit rating and balance sheet agrees to co-sign the loans. In the case of Europe, this reluctantly generous co-signer is of course Germany. But Germany’s graciousness is not without a self-serving purpose as they stand to benefit more than anyone by the preservation of the Euro.
In the pre-Euro area, each of the debtor nations would simply allow their currency to de-value which would have the natural effect of lowering their respective debt burdens in real purchasing power terms. Although this is quite painful in the short term, it has historically been the only way to sort these issues out, as was the case with Argentina’s debt crisis in 1999 – 2002. The short-term pain was intense, but Argentina did recover and now enjoys one of the highest economic growth rates in Latin America.