Money markets are pricing in modestly higher odds that the Bank of Canada will cut interest rates at its upcoming policy meetings this year following surprisingly weak Canadian employment data this morning.
The economy shed 40,800 jobs in July, a sharp deterioration from a net addition of 83,000 jobs in June. Analysts polled by Reuters had forecast that the economy would add 13,500 jobs. The unemployment rate remained steady but at a multi-year high level of 6.9%, Statistics Canada said.
The Canadian dollar tumbled about a tenth of a U.S. cent on the data release, but later recovered much of those losses. At 920 am ET, it was trading at 72.70 cents US, nearly unchanged for the day. Canadian bond yields softened, with the two-year yield down about 4 basis points, even as the U.S. equivalent yield was slightly higher.
Markets now see about a 38% chance the Bank of Canada will announce a quarter-point rate cut at its next policy meeting on Sept. 17, up from 35% prior to the data. Markets now see a greater than 50% chance that Canadians will be delivered a rate cut by the end of October.
Markets are also nearly fully pricing in one more quarter-point rate cut by the end of this year.
David Rosenberg: A resilient Canadian economy? What a fantasy – and today’s jobs report proves it
Here’s how implied probabilities of future interest rate moves stood in swaps markets moments after the 830 am ET data, according to LSEG data. The overnight rate now resides at 2.75 per cent. 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.
Here’s what they looked like minutes before the data:
Here’s how economists are reacting to the data:
Alexandra Brown, North America economist, Capital Economics
The Labour Force Survey has once again made a mockery of the economist consensus, with the surprise 83,000 surge in employment in June followed by a 40,800 slump last month. We are now a bit more confident in our view that the Bank of Canada will resume cutting next month, although a surprisingly strong CPI print next week could prompt another pause.
Worryingly, the decline in employment was concentrated in the private sector, where it was broad-based by industry, and was entirely driven by full-time employment. Information, culture and recreation shed 34,000 jobs, construction shed 22,000 jobs, and business, building and other support services lost 19,200 jobs. The provincial breakdown showed that most of the weakness was in British Colombia and Alberta, with wildfires potentially hitting the latter and some weather-sensitive sectors more broadly. At the national level, some offsets were provided by educational services and transportation & warehousing, which reported increases of 22,400 and 26,100 respectively. The decline in employment was also concentrated among youth aged 15-24; employment of other age groups was little changed.
The unemployment rate held steady at 6.9% as falls in employment were more than offset by an unusually large 0.2%-point drop in labour force participation, with the labour force falling by 33,000 even as the population grew by 37,000. Total hours worked also fell by 0.2%, which raises the risk of a contraction in GDP July, which would leave our third-quarter forecast of a gain of a little more than 1% annualised looking too strong.
Veronica Clark, economist, Citi
Employment fell by 40.8k jobs in July, the largest decline in employment since mid-pandemic shutdowns in early 2022. While this follows a strong increase in job growth in June, weakness earlier in the year implies employment essentially flat over the last six months. Even with a “breakeven” pace of employment lower due to reduced immigration, this is likely an uncomfortably soft pace for BoC officials. The unemployment rate remained at 6.9% only as participation fell by 0.2pp. We also see evidence in July data that weaker demand, initially concentrated in trade-exposed sectors, may be broadening. Employment was surprisingly strong in some more trade-exposed sectors, with weakness concentrated elsewhere in various services. We continue to expect 100bp more of rate cuts this cycle, beginning with a 25bp cut in September.
Andrew Grantham, senior economist, CIBC Capital Markets
There’s still more than a month to go until the Bank of Canada’s next interest rate decision, and therefore a lot more data to be released between now and then, including another employment report, two inflation releases and quarterly GDP. However, today’s weaker than expected employment figure is nevertheless supportive for our call of a 25bp interest rate reduction at that September meeting.
Leslie Preston, managing director and senior economist, TD Economics
Canada’s labour market gave back half of June’s outsized job gains in July. Employment tallies have always been volatile in the Labour Force Survey, with the unemployment rate being the key metric to watch. The unemployment rate did hold steady, but given it was due to declining labour force participation, is not a very positive sign. We expect the stagnation in labour force growth to continue, which will keep the unemployment rate from rising too high, despite weak labour demand.
The Bank of Canada has a fair bit of time before it’s next rate setting date on September 17th. Today’s jobs report likely won’t move the needle much on the Bank’s thinking on the economy relative to its recent monetary policy report. We think a strong argument for further rate cuts remains in Canada, we’ll see if the BoC agrees.
Douglas Porter, chief economist, BMO Capital Markets
This is an unambiguously weak report...although it comes hard on the heels of an unambiguously strong report. Taken together, the overall picture is a soft economy, running with some excess capacity, not surprising in light of the trade uncertainty. For the Bank of Canada, this acts as a heavy counterweight to the outsized strength in June, but it will still need to see inflation slow notably over the next two prints for a September cut to be a high likelihood. We expect that the job market slack will put downward pressure on inflation, eventually, supporting the case for a return to modest rate cuts. And it appears that the trade uncertainty will be with us for some time yet.
Taylor Schleich, Ethan Currie and Noah Black, economists with National Bank Financial
When it comes to the Bank of Canada, the central bank retained an easing bias last week as they stressed that rate cuts may be necessary if inflation pressures can be contained. While these data don’t directly speak to the outlook for prices, a softer labour market and thus, consumer should be putting downward pressure on inflation. Of course, a weakening labour market generally makes remaining sidelined increasingly uncomfortable. Ultimately, it’s the next two CPI reports that will have the most impact on the September decision but these data warrant higher implied easing odds, in our view. If inflation (particularly in the core) softens in the next release, we should see September rate cut odds rise above 50%.
Claire Fan, senior economist, Royal Bank of Canada
Overall, the Canadian labour market remains softer than usual. But the July labour market data is consistent with our base-case that assumes the bulk of tariff-related damage could already be done -- leading indicators of hiring demand (business sentiment, job openings data) continue to stabilize in the summer after more pronounced cooling in the spring.We look for the Canadian unemployment rate to peak soon around 7%, and do not expect further interest rate cuts from the BoC.