Canada's labour market beat forecasts once again with the economy creating another 19,200 jobs in April, solidly beating market forecasts for a 10,000 job increase. The unemployment rate edged up to 6.1% as another 23,800 people entered the labour force, but remains near generational lows. The wage measure for permanent employees rose 0.2%, much slower than last April's 0.7% outsized gain and resulting in the year-over-year rate slipping to 4.2%, but still solidly outstripping inflation.

Gains were concentrated in full-time positions, which rose 20,600, while part-time jobs fell by 1,400. Public sector jobs rose by 9,100 and self-employment increased by 18,300. The private sector pared back payrolls by 8,300. Manitoba posted a healthy increase of 9,000 jobs - the largest increase in percentage terms, while Quebec posted a 19,800 loss. Prince Edward Island also lost jobs.

The gain in employment was concentrated in the services sector with goods-producing firms losing 3,700 jobs. In the goods-producing sector, losses in agriculture, utilities and manufacturing offset another strong gain in construction jobs, which were up by 16,200. Manufacturers cut another 14,900 from their payrolls, bringing the 12-month total to 111,500 jobs lost. The construction industry added 113,000 jobs in the year to April.

The Bank of Canada expects the domestic economy to remain strong, underpinned by the elevated level of commodity prices, strong labour market and stimulative monetary policy, although its forecast does anticipate some moderation in the pace of consumer spending due to the tightening in credit conditions.

Against a backdrop of a weak U.S. economy and fragile financial markets, we expect the Bank of Canada to remain wary of any indications that the underpinnings supporting Canada's robust domestic economy are being shaken by the weakness emanating from the United States. We forecast that the Bank will cut the policy rate by an additional 25 basis points in the months ahead as a measure of insurance that sufficient stimulus is being injected into the system to sustain Canada's economy in the near-term.

Third consecutive rise in Canada's merchandise trade surplus
Canada's merchandise trade surplus was much larger than expected in March and came in at C$5.5 billion - the largest since May 2007. Exports posted another monthly gain, rising 1.6% while imports softened, falling 0.3%. February's surplus was marked down modestly to C$4.8 billion from the preliminary report, which showed a C$4.9 billion gap. Forecasters expected a moderate easing in the surplus to $4.5 billion in March.

March marked the third consecutive monthly increase in Canada's trade surplus with the first-quarter gap being the largest since the second quarter of last year. Exports increased by 1.6% to C$40 billion, the highest since April 2007 while imports stalled, falling by 0.3% to C$34.5 billion, the second monthly decline. The rise in exports in March reflected a rise in prices as volumes were lower. The strength in exports was led by a 6.6% rise in energy products with exports of consumer goods posting a solid 13.4% gain in March. The only two categories to post declines in March were for forestry products and automotive products. In the 12 months to March, exports of forest products fell 25.2% with auto exports down 26.6%.

The decline in imports was fairly broad based although these declines were largely offset by a 17.6% surge in imports in the energy sector which recouped ground after falling by 19.7% in February. Imports of auto products posted their largest decline since August 2003 due to a labour dispute in the U.S. parts supply chain.

However, the export picture on a volumes basis was weaker with a 2.1% dip reported. Imports were also softer on a volumes basis, falling 2.4%. On a constant dollar basis, the deficit narrowed to C$5.13 billion (in constant 2002 dollars) from - C$5.4 billion in February.

While the first-quarter trade data showed that the trade sector likely exerted less restraint on the economy in the quarter than in last year's fourth quarter, the softening in the U.S. economy points to weaker export growth ahead, while the strong labour market performance and Canada's elevated currency will likely support import demand.

U.S. trade deficit continues to retreat
The U.S. international trade deficit narrowed to US$58.2 billion in March from a downwardly revised US$61.7 billion (prior US $62.3 billion) In February. Going into the March release, the deficit was expected to narrow to US$61 billion from February's initially reported level.

Imports declined 2.9%, more than reversing February's 2.6% increase. Exports also declined, falling 1.7%, although this was after 12 straight monthly gains. The drop in exports reflected declines in automotive and aircraft exports. Imports of capital goods declined in March.

The oil import price posted another record in March, increasing to US$89.85/bbl versus US$84.76/bbl in February, although the value of petroleum imports dropped in March suggesting a drop in import volumes.

Although the level of exports was lower in the first quarter than originally estimated by the BEA, imports were substantially weaker, suggesting an upward revision to first-quarter GDP to around the 1% area from 0.6%.

Stripping away price effects, the real (chained 2000 dollars) deficit was 3.7% lower, on average, over the January/March period compared to the fourth quarter. This falls in line with our forecast calling for net trade to be a significant add to U.S. economic growth this year. Although a fiscal stimulus-related pop in imports may occur in the third quarter, it does not change our view that export growth will outpace that of imports in 2008. The strength in net trade is expected to be a partial offset to the weakness in other areas of the economy, like residential construction.

RBC's U.S. confidence index rebounds in May
The RBC CASH Index for May rose for the first time in five months and by the largest amount in seven months. The overall index rose 9.5 points to 39 from 29.5 in April. Although the improvement is encouraging, the level of the index represents the third lowest reading in confidence on record and still well below a recent peak in this measure of 103 recorded in February of 2007.

The improvement in the overall index resulted from three of the four major sub-components registering a higher reading. The biggest improvement occurred in the expectations sub-component. Although the index remained in negative territory at -24.1, this represents a marked improvement from a record low reading in April of -48.3. The investment sub-component improved as well, but more moderately, to 60.7 in May from 56.4 in April, which implies a slightly greater willingness for households to make major purchases. The current conditions sub-component rose modestly as well to 57.4 from 54.6 over the same period. The jobs sub-component was the only one to move lower; it dropped in May to 93.7 from 97 in April. Employment can often lag other economic indicators through the business cycle and, thus, may show stronger readings in subsequent months.

The rise in confidence as implied by the RBC Cash Index is encouraging because it is occurring at a time when the government starting to distribute the tax rebate cheques. The intent of this fiscal stimulus is to get households spending to prevent weakness in the first half of this year and a likely decline in activity in the second quarter from persisting over the second half of the year. However, the level of confidence still remains close to record low readings. As a result, the success of the fiscal stimulus in boosting consumer spending will be better assured if this index continues to trend higher in subsequent months.