The Canadian economy created 60,000 jobs in June, three times the Street expectation, although the unemployment rate rose and average hourly wages increased at a slower pace than economists had anticipated.
The jobs report is being heavily scrutinized by central bank and market watchers, as it’s the last key piece of economic data before the Bank of Canada’s interest rate decision on Wednesday. While the report showed some pressures easing in the hot jobs market, it was overall perceived by markets and economists as giving a green light to the central bank to hike interest rates further.
The unemployment rate was 5.4%, compared with the estimated 5.3%, and up from May’s 5.2%. Average hourly wage gains during the month came in at 3.9% vs the estimated 4.6%. They rose 5.1% in May.
U.S. jobs numbers were released at the same time this morning, and by contrast, were a little softer than economists were braced for. There, 209,000 jobs were created during the month, modestly lower than the Street consensus of 234,000. And May’s nonfarm payrolls was revised down to 306,000 from 339,000. The unemployment rate held steady at 3.6% while average hourly wages rose 4.4%, higher than economists’ expectations of 4.2%.
Stocks were volatile but overall held relatively steady following the 0830 am ET reports. Reaction in currency and bond markets was more notable. The Canadian dollar spiked about a quarter of a U.S. cent to above 75 cents US and the two-year Canada government bond yield - which is particularly sensitive to shifts in central bank policy - rose about 10 basis points to 4.85%. That was its highest yield in more than two decades. Canada’s five-year bond yield, influential on the setting of fixed mortgage rates and longer-term GICs, spiked to a 16-year high of near 4%.
The U.S. two-year bond yield came under immediate pressure, reflecting the softish U.S. jobs reading, falling back below the 5% level it catapulted to on Thursday.
Meanwhile, money markets are growing increasingly confident a rate hike is on the way in Canada.
Implied interest rate probabilities based on trading in swaps markets as of mid-afternoon Friday show a 67% probability of a quarter point Bank of Canada rate hike next week, according to Refinitive Eikon data. That’s up from about 62% in the minutes after the jobs data was released this morning, and 58% prior to the data being released.
Just days ago, markets had priced in closer to 50-50 odds.
For the U.S., markets see close to a 90% chance the Federal Reserve will hike interest rates again later this month.
Here’s a detailed look at how money markets are pricing in further moves in the Bank of Canada overnight rate, as of 2:40 pm ET. The current Bank of Canada overnight rate is 4.75%. 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 8:30 a.m. ET jobs reports:
Now, here’s how economists are reacting to the Canadian jobs figures:
Nathan Janzen, analyst, RBC Capital Markets
The June labour market data was mixed but shouldn’t be enough to prevent the Bank of Canada from following through with a second straight 25 basis point interest rate hike at the next policy decision next week. There are still signs that the economic backdrop is softening. Consumer delinquency rates are edging higher, job openings are edging lower, and wage growth is slowing. But the BoC highly likely planned more than one interest rate hike when they ended a short pause in increases last month. Economic growth data and ‘sticky’ core inflation readings since then haven’t been soft enough to derail those plans.
David Rosenberg, founder of Rosenberg Research
Canada’s Labour Force Survey provided an upside surprise in June — jumping +60.0k versus the consensus estimate of a smaller +20.0k increase. ... The key, however, was beneath the surface — with more Canadians coming off the sidelines in search of a job: as in, the labour force participation rate perked up to 65.7% from 65.5% — tied for the highest labor-supply metric since February 2022. Ergo, there is now more slack in the Canadian labor market — importantly, exerting downward pressure on wages.
Indeed, the unemployment rate rose to 5.4% from 5.2% as employment lagged the labor force expansion — and is now tied for the highest rate since February 2022. Not to mention up 0.5 percentage points from the cycle low — this should be a recession signal for the Bank of Canada. Hourly wages for permanent employees, as a result, were completely flat on a MoM basis (seasonally adjusted; and flat in two of the past three months) and that brings the year-over-year pace down to +3.9% from +5.1% in May (missing estimates of a smaller deceleration to 4.6%). This represents the weakest wage pulse since April of last year.
From an inflation standpoint, this will be a welcome development for the BoC in advance of next week’s meeting, and after just ending its “conditional pause” back in June.
Royce Mendes, managing director and head of macro strategy, Desjardins Capital
While the unemployment rate did rise to 5.4% from 5.2%, a tick more than expected, that was all due to another monthly surge in the size of Canada’s working-age population. The rapidly growing labour force, which was also helped along by a rise in participation, will further ease some of the labour shortages reported by employers. That said, a growing population will also spur additional demand for goods and services in an economy that’s already running too hot. The latter point is what the central bank will likely focus on in the near-term. The only aspect of today’s jobs report that didn’t suggest that the economy’s temperature was spiking in June was the hours worked number, which suggested a more modest gain in activity than the headline jobs print. But on the whole, this was a very strong labour market update.
This pace of hiring is hardly what the Bank of Canada was expecting earlier in the year when it paused its rate hiking cycle in anticipation of a rebalancing in the labour market. The return to solid job growth in June should, therefore, lock in a second consecutive 25bp rate increase next week as central bankers scramble to tamp down the surprisingly resilient economy and resultant excess inflationary pressures.
Olivia Cross, assistant economist, Capital Economics
The surge in employment in June suggests that another rate hike at the Bank of Canada’s meeting next week is nailed on. That said, with the unemployment rate also increasing and wage growth easing, we remain convinced that the Bank will not need to raise its policy rate above 5.0%.
The 59,900 surge in employment in June was well above the consensus estimate for a 20,000 increase and more than reversed the surprise 17,300 drop in May. Most of the gains were concentrated in the services sector, where employment rose by 50,000. ...
Thanks to rapid population growth amid strong immigration and a rise in the participation rate, the labour force rose by a bumper 114,000, which drove another 0.2% pts increase in the unemployment rate, to 5.4%. That helps explain the sharp slowdown in wage growth to 4.2%, from 5.1% in May – suggesting that monthly wages were unchanged in seasonally-adjusted terms – although there is probably also a compositional effect at play due to the large employment gain in the lower-paying wholesale & retail trade sector. Nevertheless, the rise in the unemployment rate and easing of wage growth will give the Bank of Canada some comfort that, despite continued strong labour demand, CPI inflation should continue to slow toward the 2% target.
Andrew Grantham, senior economist, CIBC Capital Markets
This morning’s data release was no slam dunk for the Bank of Canada, with a rise in the unemployment rate and slowing wage growth suggesting that labour market conditions are loosening. However, the data are probably just strong enough to see policymakers pull the trigger on another 25bp interest rate hike next week, rather than wait until September as we had previously forecast. We still think that the rate of 5.0% reached at the time of the next hike will prove to be the peak, as evidence that the economy is slowing appears to be mounting.
Leslie Preston, managing director and senior economist, TD Economics
A June rebound in hiring keeps Canada’s job market resilience intact. The rise in the unemployment rate over the past two months is coming against a backdrop of job gains, and full-time positions no less, but the labour force growth has been even stronger. Month-to-month swings in job gains are volatile in Canada, but looking at three and six-month trends in hiring, job gains have slowed, in line with our forecast for the unemployment rate to rise towards 6% by the end of this year. ...
We expect the only modest cooling in inflation in wages will tip the Bank in favour of another 25 basis point hike. However, if they opt to skip a meeting, their tone is likely to remain hawkish, and a September hike would remain on the table.
Benjamin Reitzes, managing director, Canadian rates and macro strategist, BMO Capital Markets
This is a solid report overall even if it has some blemishes. The big headline increase and ongoing strength in the labour market likely tilts the balance toward another 25 bp hike at next week’s Bank of Canada policy announcement.
Derek Holt, vice-president and head of Capital Markets Economics, Scotiabank
Canada’s jobs report offered enough to support my pre-existing call for a further Bank of Canada hike next week in the context of the full suite of evidence to date... The details behind the impressive 60k gain in employment were robust and mildly dented by cooler wage growth following a strong prior month. ... The market reaction was somewhat dented by the softer than expected US payrolls figure albeit with stronger US wage growth, but Canada’s shorter term yields rose a touch in absolute terms and more so in relation to a mild rally in US 2s. ...
My fear into these numbers had been that the only driver of a rebound in job growth after losing 17k jobs in May would be a reversal of temporary distortions while the rest of the report would be weak. Instead, there was much more underlying strength to the hiring activity that continues to signal that the labour market remains very strong and very tight. Youth employment rebounded with a gain of 30k that reverses the 77k drop the prior month such that perhaps it’s not as bad of a summer job market as it appeared to be in May. But it’s not just youths that benefited here, as the 25+ age bracket also gained 30k jobs and this time entirely men. Self-employed jobs fell another 19k to add to the 40k drop the prior month and so there was no stabilization effect here, but it was offset by a 79k surge in payroll jobs. Better yet, the torrent of public sector hiring since the start of the pandemic wasn’t the prime factor for once, as private sector payrolls led the gains with a jump of 83k albeit with another 7k public administration jobs. The wealth creating part of the economy generally stepped up to the plate as the core driver. All of the 60k additional jobs in June were in full-time positions (+110k) as part-time jobs fell by 50k and this adds to the quality of the readings.
Jay Zhao-Murray, forex analyst at commercial foreign exchange firm Monex Canada
We expect the Bank of Canada to hike its policy rate by 25 bps to 5% on Wednesday in what is likely to be the final hike of the cycle. ... While the data released since the June meeting suggests that the economy has cooled on the margin, the details have been uniformly stronger than the top-line statistics would indicate, suggesting that the burden of proof to pause hasn’t been met. As such, we expect the BoC to take the policy rate 25bps higher to 5%, which will provide a hedge against any resurgence in inflation pressures in the headline data throughout Q3 and a better vantage point in which to monitor the transmission of previous hikes. ...
The Bank of Canada is loath to frequently change its views, which is best exemplified by officials’ insistence throughout most of 2021 that inflation would be “transitory.” While this strategy has bitten them in the past when those views have been wrong, officials do this because communicating monetary policy decisions to the public is difficult, and frequent view changes do not help to foster public confidence.
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And here’s how they are reacting to the U.S. jobs report:
Andrew Hunter, deputy chief US economist, Capital Economics
The 209,000 rise in U.S. non-farm payrolls in June was the weakest gain since December 2020 and suggests labour market conditions are finally beginning to ease more markedly. That said, it is unlikely to stop the Fed from hiking rates again later this month, particularly when the downward trend in wage growth appears to be stalling.
The softer headline gain, which would have been weaker without a 60,000 rise in government payrolls, reflected a sharp slowdown in jobs growth in the services sector. Wholesale, retail and transport & warehousing all shed jobs last month, while temporary help payrolls also fell, by 13,000. The only private-sector industries not to see a significant slowdown were finance, leisure and health care services. The household employment measure rose by a stronger 273,000, but that only partly reversed the sharp fall in May. Even so, with the labour force rising by a more muted 133,000 – which is little surprise given that the prime-aged participation rate is already back above pre-pandemic levels – the unemployment rate edged back down to 3.6%, from 3.7%.
Although slowing employment growth will be welcomed by Fed officials – particularly following the alarming (and seemingly misleading) surge in the ADP measure reported yesterday – that positive news will have been partly offset by the 0.4% m/m rise in average hourly earnings, with May’s gain revised up to a similar rate. With the annual rate of wage growth unchanged at 4.4%, that is still too strong to be consistent with 2% inflation and suggests a further easing in labour market conditions is still needed.
David Rosenberg, founder of Rosenberg Research
Nonfarm payrolls came in at +209k in June, undercutting the consensus (+230k) for the first time since March 2022. Tack on the downward revisions to the prior two months totaling -110k and the headline was really +99k. Then tack on the fact that on a seasonally-adjusted basis, the Birth-Death model added on +60k. So, accounting for that and the revisions, the “real” number was +39k. In other words, the labour market is cooling off now at a rapid clip, and more is to come based on all the leading indicators of employment at our disposal. ...
On net, just as we saw the two ISM reports (manufacturing and services) head in different directions, there was a ton of shifting pieces within today’s employment data — nothing to get the Fed off its tightening course, that is for sure. And the number did not one iota settle the recession debate — not whether we are in one, but rather if one is lurking around the corner. The best leading indicator in the report is employment in temp-help agency firms, where payrolls fell 13k and are down in five of the past seven months. When the head hunters chop heads, it does tend to mean that other sectors follow suit with a lag.
The index of aggregate hours worked, which represents total labor input into the economy, rebounded +0.4% in June (best print since January) but this came off a string of soft numbers and was completely flat in Q2 in the weakest figure since the second quarter of 2020. This means that without a turnaround in the contraction we have been seeing over the past year with respect to productivity, real GDP growth will come in stagnant for the second quarter. ...
The bottom line here is that this report will satisfy the FOMC hawks, and the Fed is sure to raise rates again this month and will keep expectations of another hike in the market for the next few months. The overall tone of this report suggests that the economy flattened in the second quarter, and I am not convinced this is well appreciated or understood, especially within the confines of the equity market. Nothing in this data is going to change the Fed’s mind, but nothing is changing my mind either that this recession is arriving, albeit with longer lags than we have seen in the past, given how the prior unprecedented fiscal stimulus acted as a powerful and lingering impact this past year. But the fiscal support is now done, but the lags from what the Fed has done and will continue to do will come into full view between now and the end of this year and into 2024. Remember, the Fed staff has continued to pen in a recession beginning in the fourth quarter and for inflation to drop to the 2% holy grail in 2025. So — those of us in the bond bull camp will simply have to remain patient.
Katherine Judge, director, economics, CIBC Capital Markets
Overall, the cooling in hiring is a welcome development, but the pace is still above growth in the working-age population, and combined with continued wage pressures and the drop in the unemployment rate, this leaves the Fed on track to hike rates by 25bps in both July and September to reach terminal.
Sal Guatieri, senior economist, BMO Capital Markets
Flying in the face of most other job indicators, nonfarm payrolls showed some cracks in June, as private payrolls growth slowed sharply, though a lower jobless rate and peppy wage growth still flag a likely Fed rate hike this month. ... Our scorecard gives the June jobs report a barely better-than-average grade of 51.1, the lowest since early 2021.
Bottom Line: The labour market appears to be cooling but not fast enough to prevent another tap on the brakes from the Fed on July 26.
Jocelyn Paquet, economist, National Bank Financial
Taken in isolation, the data mentioned so far ought to be enough to give pause to the Fed. The problem is that, despite an obvious slowdown of payroll growth in June, wages continued to rise at a pace inconsistent with the central bank’s inflation target. ...
This is likely to convince several FOMC members that more rate hikes are needed. To defend their point, hawkish policymakers will surely point to the household survey, which showed healthier employment gains in June. They might also highlight the fact that job creation has been tilted towards full-time positions recently. But as positive as the household survey was, it still contained a few dark points, such as the increase of the U-6 unemployment rate (which includes discouraged and underemployed workers) to a 10-month high and the rise in the number of persons working part-time for economic reasons to its highest level in more than a year. Optimists will surely note the increase in the prime-age (25-54 years old) participation rate to a 20-year high of 83.5% but in our opinion, this seemingly positive development might be hiding a more complicated reality. Almost all the increase in recent months can be explained by a surge in participation among prime age women to a new all-time high. Don’t get us wrong, we’re happy to see more women participating in the labour market but, in the absence of structural reforms to explain this phenomenon, we wonder if this might in fact reflect a deterioration of American households’ finances. It is indeed possible that high inflation and rising interest rates has forced some women to look for a job to help their household pay the bills. Time will tell.