Jobs data for September came in much stronger than expected on both sides of the border this morning - at least on a headline basis. Money markets have reacted: Bond yields moved sharply higher to fresh 16-year highs as traders immediately priced in higher odds that central banks will hike interest rates again.
Canada’s economy added a net 63,800 jobs in September, more than tripling expectations, while the jobless rate stayed at 5.5%, Statistics Canada data showed. Also not welcome news for inflation watchers: the average hourly wage for permanent employees rose 5.3% from September 2022, up from the 5.2% annual rise in August.
The details of the report, however, showed unevenness in the job market. Part-time employment growth continues to outpace full-time work. Employment in services sector increased by a net 74,300 jobs, but almost all of this came from educational services, and there were 10,500 positions lost in the goods sector.
U.S. nonfarm payrolls data, released at the same time, also showed stronger-than-expected employment growth. That sent the benchmark U.S. 10-year yield up 15 basis points to 4.86%, a new 16-year high. The Canadian 10-year yield rose 16 basis points to nearly 4.30%, just shy of 16-year highs.
Shorter-term bonds, which tend to be more sensitive to central bank policy moves, also had a big move. The Canada two-year bond yield was up about 13 basis points to 4.93% - though this was below the 5% level it had reached earlier this week.
Bond yields came off their highs at midday, but were still higher for the session. Equity markets initially tanked on the data, but they reversed into the green as investors digested the details of the employment reports. Some market observers noted stocks were becoming oversold in recent days and bargain hunters were making an appearance ahead of the weekend.
Implied interest rate probabilities in swaps markets are now pricing in close to a 40% probability the Bank of Canada will hike interest rates by another quarter percentage point at its next meeting on Oct. 25, according to Refinitiv Eikon data. That’s up from 28% odds just prior to today’s 830 am ET jobs report. Money markets are also now pricing in greater than 50% odds of a hike by the end of the year.
For the U.S., traders put the chance of an at least 25-basis point rate hike in November and December at around 28% and 45%, respectively, according to CME’s FedWatch tool.
While the strong data very much keeps the door open to further interest rate hikes by both the Bank of Canada and the Federal Reserve, economists are quick to point out that the recent rise in longer-term bonds yields are having the effect of tightening financial conditions on their own. That may diminish the need for further central bank increases to short-term borrowing rates.
The following table details how money markets are pricing in further moves in the Bank of Canada overnight rate, according to Refinitiv Eikon data as of 1045 am ET. The current Bank of Canada overnight rate is 5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
And here’s how the swaps pricing looked just prior to the inflation report:
Here’s how economists are reacting to the Canadian jobs report:
Andrew Grantham, senior economist, CIBC Capital Markets
While September’s gain in employment easily outpaced consensus expectations, there was some weakness within the detail which should limit the implications for the Bank of Canada. The 64K increase in employment during September was three times the consensus expectation (+20K), and broadly matched the pace of labour force growth to keep the unemployment rate steady at 5.5%. However, the increase in jobs was not exactly broad based, and instead largely driven by a 66K gain in education which can be volatile at this time of year. Apart of that outsized move, increases in other areas such as transportation & warehousing were broadly offset by declines in other, including finance, real estate & leasing. Overall employment growth was also tilted more towards part time than full time in September. Wage growth remained stronger than policymakers would like to see, ticking up slightly to 5.3% relative to consensus forecasts for a 5.1% rate, but that still reflects some of the previous tightness in the labour market as well as wage adjustments following last year’s surge in inflation. With the unemployment rate off last year’s lows and job vacancies continuing to fall, wage inflation could ease fairly quickly next year. ...
With GDP having basically stalled in Q2 and Q3, and without a clear indication that it was accelerating again heading towards the final quarter, we still see the Bank of Canada remaining on hold despite the stronger-than-anticipated inflation readings recently.
David Rosenberg, founder of Rosenberg Research
The slowdown in Canada may be clear when it comes to output, spending and incomes but is hard to find in the employment data, which has negative implications when it comes to productivity. Indeed, while the build-in for Q3 real GDP growth is running at a paltry +0.1% annual rate, the comparable trend in employment growth is at +1.5%. Moreover, hours worked also ticked lower by -0.2% on the month, the first contraction since May and bringing the third quarter down to a +1.4% pace (annualized) from +1.8% in Q2 — slowest since 2021Q2. So companies are expanding payrolls, but are limiting the number of hours worked. Not a particularly positive readthrough on corporate profitability given its relationship with productivity. ...
What will certainly catch the BoC’s eye is on the wage front, with average hourly earnings of permanent employees jumping +0.7% MoM (seasonally adjusted) after a +0.8% increase in August and +1.0% in July. As a result, the year-over-year trend accelerated to +5.3% from +5.2% prior, the fastest pace since February. Unsurprisingly, odds of a rate hike at this month’s meeting (October 25th) rose ..... This latest BoC pause may be short-lived, based on what markets are thinking.
Olivia Cross, North America economist, Capital Economics
The strong headline employment gain in September was entirely due to a rebound in educational services employment, with employment elsewhere edging down. That suggests labour market conditions continue to ease beneath the surface, particularly as the month-on-month growth in average hourly earnings also slowed and average hours worked were little changed. ...
Hours worked were little changed in September so GDP probably didn’t fare as well as the headline employment gain might suggest, although the trade data from yesterday still reduce the chance of a second quarterly contraction in GDP.
The strength of the headline employment gain also meant that the unemployment rate remained at 5.5% in September, despite a 71,800 increase in the labour force. Nonetheless, strong labour force growth still means that labour market conditions are easing, with the earlier data showing that the vacancy rate fell by 0.4%-points to 3.9% in July – bringing it closer to the pre-pandemic norm. Improving labour supply may now be feeding through to wages. The monthly seasonally adjusted increase in earnings softened to 0.2% m/m, from 0.5% in August, even as base effects pushed the annual growth rate up slightly to 5.0% in September, from 4.9%. That should give the Bank of Canada some confidence that, despite strong employment gains, further interest rate hikes are not required.
Royce Mendes, managing director & head of macro strategy at Desjardins Capital Markets
Employment growth blew past expectations in Canada, but the details show less momentum in September. The headline job gain of 64K came as a result of a 66K increase in the education sector. That offset an unusual decline in August, which was tied to the seasonal adjustment process used by Statistics Canada. As a result, while taken together the past two months have clearly shown significant strength in hiring, the September reading is weaker than the headline suggests. A curious decline in hours-worked also takes some shine off of the headline employment print for September. That said, wage growth accelerated a touch to reach 5.0% on a year-over-year basis, a pace still inconsistent with the Bank of Canada’s 2% inflation target.
The unemployment rate remained steady at 5.5% in September, with population growth continuing to surge. The rapid pace of increase in the size of Canada’s working age population has meant that the labour market hasn’t tightened all that much in recent months, despite some heady gains in employment.
Given the recent rise in global bond yields, the Bank of Canada still has reason to leave rates unchanged. Higher bond yields further out the curve are a substitute for policy rate increases and may even be more powerful in terms of their effect on the economy. As a result, while we await the release of the September inflation data, we’re sticking with our call that the Bank of Canada holds rates steady later this month.
James Orlando, director & senior economist, TD Economics
The Bank of Canada has been looking for evidence that past rate hikes are starting to bite. Today’s employment report muddies the outlook. Financial markets are cementing pricing for another 25bps rate hike in the coming months, causing the Canada 2-year yield to surge over 15bps this morning. There will be a lot more data coming out between now and the next BoC rate decision (CPI, housing, retail sales) and the Bank will likely need to see significant weakness in these reports to prevent it from pulling the trigger on another hike.
Douglas Porter, CFA, chief economist, BMO Capital markets
There is little debate that the gaudy headline job growth overstates the strength of the labour market, juiced by a seasonal spike in education jobs and by surging part-time employment. Still, the fact that overall employment is up 2.8% in the past year and average wages are rising 5.0% y/y means that labour income is still powering ahead. In turn, that suggests that the economy is not seriously buckling, yet. We don’t believe this is enough to tip the scales for the Bank of Canada, but it will keep their tightening bias firmly in place.
Matthieu Arseneau and Alexandra Ducharme, economists with National Bank Financial
Labour Force Survey data can be volatile and sometimes surprise economists. September is one such month. With many signs pointing to a softer labor market, employment posted a solid gain in September. But this needs to be put into context. Historically, a gain of 60K jobs should translate into a decline in the unemployment rate, while the latter did not move an iota in September due to continued spectacular population growth. It is therefore important to revise upward the threshold for a good employment report. In fact, employment was barely above the pace that would be expected in a context of explosive population growth. What’s more, the details of the report are far from spectacular, with 3/4 of the jobs added being part-time. We also note that private employment has weakened in the third quarter, reflecting a great deal of caution in an uncertain economic climate, with profits declining for the past four quarters. Indeed, private payrolls were essentially flat in September after declines in the previous two months. Of the 104K jobs added over the past two months, 77K were in the self-employed category. Such a composition of job creation would not be a concern were it not for the current stage of the business cycle. Another sign that the labor market may not be as strong as first thought is the decline in hours worked in September, despite the spectacular job gains. The labor market did not ease in September, but we continue to believe that it will over the next 12 months. According to the latest CFIB survey, labor shortages are easing and concerns about weak domestic demand rose sharply in Q3, which does not suggest a hiring spree in the coming months. As a result, SMEs [small and midsize enterprises] intend to raise wages more slowly than they have recently, which is good news for the wage pressures currently fuelling inflation.
Derek Holt, head of Capital Markets Economics, Scotiabank
While I think the 64k rise in total employment during September had generally soft details under the hood, the broad trend in employment gains this year remains explosive and it’s the wage figures that were the most eye popping and relevant consideration. I’ve got to tie a string to my finger to remember the next time not to say it’s unlikely to get another ripping wage gain after the latest one, because it just happened again. ...
63,800 jobs created in September after 39,900 were created in August is certainly nothing to spit at. The 104,000 jobs in the past two months lifts the year-to-date employment gain to 387,800. There isn’t much one can say that would reject the significance of creating ~400k jobs ytd, or over half a million at an annualized rate.
But let’s try dampening some of the enthusiasm anyway. All of the gain in September was traceable to two things that are to be treated skeptically in my opinion. Education sector employment was up by 66k after it fell by 44k in August. Teacher jobs are apparently the riskiest and most volatile on the planet. Who knew??! What I think is happening here is that Statcan is having a lot of difficulty with its seasonal adjustments around the start of the school year given the changed timing of education sector contracts now versus history. Ergo, fade the numbers, their bosses are not so volatile as to fire and rehire them all at the start of each school year.
Secondly, self-employed was up by another 26k. These are important jobs in Canada, but this is the softest of the soft data. It’s self disclosed, and always to be treated carefully.
There isn’t much left after taking away those two categories as the rest of the breakdown was a series of milder ups and downs that cancelled each other out (chart 4). Overall, the goods producing sector lost 10,500 jobs mostly due to construction that fell 17,500 with a partial offset provided by an 8,800 increase in manufacturing employment.
Jay Zhao-Murray, forex analyst at Monex Canada (foreign currency firm)
With today’s gravity-defying employment gains and an economy that is still producing uncomfortably high levels of core inflation, it is beginning to look like Canada’s monetary policy is still not restrictive enough even as lagged data indicate that output growth has stagnated. In our view, the Bank of Canada has two options. It can either resume its hiking cycle at its meeting in three weeks, which could become the most likely outcome if September’s inflation data continues to show core inflation running above the range that held for most of the year, or it could signal that rates will remain elevated for an even longer period than markets expect. Markets will be even more sensitive than usual to data surprises over the coming weeks given that monetary policy uncertainty has sharply risen.
Bryan Yu, chief economist, Central 1 (credit union)
September’s strong pace of headline hiring growth and wage growth may provide fuel for rate hike speculation, but it is clear the details were far weaker below the surface. The combination of flat hours worked, job quality erosion, and concentrated industry gains points to moderation in strength. Coupled with broader signs of slower economic activity, we expect that the Bank will continue to hold off on any rate moves at its next policy rate decision.
Arlene Kish, director, Canadian economics, S&P Global Market Intelligence
The September Labour Force Survey headline results, while not completely robust, are indicative of an economy that is remaining afloat. The Bank of Canada is looking for signs that labor demand is easing. The shift to part-time employment gains is indicative of the population’s in-migration advances. Yet wage inflation is growing solidly. Striking workers are pushing for strong wage growth and getting it. Labor costs will continue to drive consumer prices higher as businesses are likely to pass on these input costs to consumers. Businesses have yet to lower prices—something that the Bank of Canada is anticipating. The September consumer inflation results released on October 17 will show if firms’ pricing behavior has shifted. Until then, the tightening bias cranked higher. While it is not a firm outcome, the Bank of Canada will probably increase the overnight rate at the October 25 policy announcement and expand on its decision in the Monetary Policy Report. The 2023 employment growth outlook is unchanged at 2.4% and the jobless rate average will be maintained at 5.4%.
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Finally, here’s what economists are saying about the U.S. jobs report:
Paul Ashworth, chief North America economist, Capital Economics
The surprisingly strong 336,000 increase in non-farm payrolls in September adds to the evidence on real activity that the economy is holding up well despite the headwind from higher interest rates.
The gains in the preceding two months were also revised up by a cumulative 119,000, which is the first upward revisions this year. September’s bumper increase in payrolls was broad based. ... Aside from the payrolls figures, however, this employment report was indicative of a labour market that is coming into better balance. The household survey measure of employment increased by only 86,000 and, with the labour force increasing by 90,000, the unemployment rate remained at 3.8%. In addition, average hourly earnings increased by a muted 0.2% m/m, with the annual growth rate slowing to a two-year low of 4.2%.
Overall, the report suggests the labour market is enjoying a soft landing. If payrolls continue to rise at an elevated pace, then the Fed might be tempted to push on with further rate hikes. That said, with wage growth and price inflation rapidly fading and the rise in long yields triggering a significant tightening in financial conditions, we still think the Fed is done hiking.
Royce Mendes of Desjardins Capital Markets
Further signs of immaculate disinflation continue to show up in US economic data. ... Nevertheless, wages rose just 0.2%, missing expectations for an increase of 0.3%. That left the annual pace of average hourly earnings growth unexpectedly decelerating a tick to 4.2%, the slowest pace since mid-2021. While some Fed officials will still see that as inconsistent with their 2% target, worries about a wage-price spiral appear to be unfounded.
The unemployment rate remained unchanged at 3.8%, but that was just the result of weakness in the household survey used to calculate that measure. As a result, once again the ADP report proved to be a poor measure of non-farm payroll growth in September. If anything, the US economy looks to have picked up momentum during the month. While inflationary pressures are still abating, Fed officials will likely be concerned that progress will stall given the strength in the economy. Another rate hike will be on the table in November. However, the recent rise in bond yields will make it a more complicated decision.
Thomas Feltmate, director & senior economist, TD Economics
Job growth was considerably stronger than expected in September, expanding by the fastest pace since January. Sizeable revisions to the prior months also contributed to an abrupt U-turn in what had previously looked like a steady downward trend in the pace of hiring. While wage growth came in under expectations, Fed officials won’t be able to look past the fact that labor force growth is slowing at a time when job openings remain elevated, which if left unchecked, will likely pressure wages higher over the coming months.
This morning’s employment report provided another shot in the arm to Treasury yields, with the 10-year rising to 4.85%. Even with the recent tightening in financial conditions and inflation trending favorably in recent months, this morning’s report showed clear evidence that the labor market remains far too hot. At this point, another rate hike in November seems inevitable. And while next week’s CPI report will provide another key piece of the puzzle, policymakers are likely to put more weight on today’s employment numbers as the continued labor market resilience remains an upside threat to inflation.
Scott Anderson, chief U.S. economist, BMO Capital Markets
This was an extremely strong U.S. employment report that, along with recent economic data, suggest a significant acceleration in economic activity in the third quarter. As of September, the U.S. economy was still growing well above its long-term potential rate. It also keeps the probability of another rate hike from the Federal Reserve very much on the table at the upcoming October 31/November 1 meeting.
Jocelyn Paquet, economist with National Bank Financial
Nonfarm payrolls came in much stronger than expected in September as they reaped their largest gain in 8 months. The positive surprise was even bigger taking into account revisions to the previous months’ data. The details of the BLS report were, for the most part, very encouraging. The monthly gains were driven by the private sector, where payrolls advanced the most since January. True, job creation remained dependent on client-facing industries such as health/social services and leisure/hospitality but, judging from the diffusion index, gains were still the most widespread in 8 months. Cyclical industries also showed good results, with both manufacturing and construction posting healthy progressions.
The establishment survey also signaled an acceleration in growth at the end of Q3. As payrolls advanced at a healthy clip and average weekly hours stayed unchanged at 34.4, aggregate hours (a good proxy for GDP growth) indeed rose 0.2% m/m. This followed a 0.4% gain in August and translates into a 1.5% annualized increase in Q3 as a whole.
Taken in isolation, the data mentioned so far ought to be enough to convince the Federal Reserve to go ahead with the additional rate increase flagged in its latest dot plot. But recent developments on the bond market means another hike by the central bank is not yet a certainty. To be sure, the violent rise in interest rates in the long end of the curve led to a much greater tightening of financial conditions than could have been expected in a context where policy rates would have increased by 25 basis points in isolation. And while this might not be enough to convince policymakers to stay on the sidelines for the remainder of the year, it will surely be used by some FOMC members as an argument in favour of caution. To defend their position, dovish policymakers will also be able to point to the household survey, which showed much more subdued job gains in September. But more importantly, they will highlight the significant deceleration in wage growth reported today. For the second month in a row in September, average hourly earnings rose just 0.2%, which translates into a 3.4% annualized gain over the past three months. This was down from 4.4% in August and not too far above the pre-pandemic average for this indicator. ...
The employment reports published this morning have certainly increased the chances of seeing the Fed proceed with an additional rate hike but, in our opinion, such a course of action at this juncture would only increase the chances of seeing the American economy tip into recession in the first half of 2024.