Money markets are pricing in lower odds that the Bank of Canada will cut interest rates again later this month following a robust jobs report today that showed nearly quadruple the number of new jobs created in December than forecasted.
The economy added a net 90,900 jobs last month, largely full-time work, according to Statistics Canada data. The job gains were spread across several industries, the agency said. The unemployment rate ticked down to 6.7%. Analysts polled by Reuters had forecast a net gain of 25,000 jobs and that the unemployment rate would rise to 6.9% from the near eight year high of 6.8% in November.
The robust jobs data show the economy ended the fourth quarter on a high note, easing the pressure on the Bank of Canada to continue rapid rate cuts to spur growth.
U.S. jobs data for December released at the same time also came in stronger than anticipated. The readings on the labour market in the two countries are sparking a sharp rise in bond yields in the U.S. and Canada, where 10-year yields are both up about 10 basis points. The U.S. 10-year yield is at its highest since 2023 - a development not being welcome in equity markets, where major stock indexes are down more than 1%. The Canada 10-year yield, at 3.456%, is at its highest since this past June.
Prior to the data, money markets were putting about 70% odds the Bank of Canada will announce a quarter point cut in its overnight rate at its next meeting at the end of this month. Now, they are putting nearly equal odds on a rate cut or no move at all.
Here’s how implied probabilities of future interest rate moves stood in swaps markets moments after the jobs report, according to LSEG data. The overnight rate now resides at 3.25 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.
And here’s what they looked like just prior to the 830 am ET data:
Here’s how economists are reacting in written commentaries to the Canadian jobs report:
Bradley Saunders, North America economist, Capital Economics
The huge gain in employment in December supports our view that labour market conditions are strengthening, despite the recent upward trend in the unemployment rate. While weakness in private sector hiring still gives reason to think the Bank of Canada will cut rates by 25bp at this month’s meeting, the odds of a pause have now clearly increased.
The 91,000 rise in employment was the largest in two years and far above both the consensus forecast for a 25k gain and our own above-consensus 38k expectation. While an improvement on November’s figures, the breakdown again showed a larger rise in public sector employment (40,000) than private sector employment (27,000), which chimes with timelier indicators suggesting that private sector hiring slowed towards the end of last year. Data on firms’ hiring intentions – due to be released next week as part of the latest Business Outlook Survey – will be one to watch.
Nevertheless, the report was largely positive. At the industry level, the rise in employment was broad-based, with the largest increases coming in education and transportation and warehousing (both 17,000) – the latter due to locked-out port workers returning to their jobs – which outweighed declines in employment in wholesale and retail trade (-7,800) and professional services (-11,200). Interestingly, total hours worked rose by 0.5% last month despite the strike among postal workers.
Otherwise, the 67,000 rise in the population in December was the smallest in two years, and suggests the government’s new immigration policies are beginning to have an effect on the volumes of people entering the country. This meant that the labour force also grew by 67,000 which, paired with the larger rise in employment, caused the unemployment rate to drop back to 6.7%, reversing some of November’s 0.3%-point surge. We expect this pattern to continue in the coming months, which is why we are forecasting the unemployment rate to peak at 7.0% before falling back again towards the end of the year.
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
Total hours worked in the economy were up a very robust 0.5%, likely in part due to employees returning to jobs after labour disputes. Despite the sharp increase in employment, the 12-month rate of average hourly wages for all employees decelerated down to 3.8%, the slowest pace since May 2022. Our tracking for Q4 GDP now stands at roughly 2 ½%, above the central bank’s forecast of 2.0%.
Given the still-elevated unemployment rate and the cooler wage readings, the latest labour market data still leave the Bank of Canada in a position to cut rates. With more aggressive tariff threats weighing on business confidence and the recent rise in global bond yields tightening domestic financial conditions since the last policy decision, our rates outlook remains intact. We still see the Bank of Canada cutting rates later this month, but then pausing in March. In our base case, which includes at least some tariffs Canadian exports to the US, we still believe that the policy rate will need to fall to around 2.00% in this cycle.
James Orlando, director and senior economist, TD Economics
This was as positive a labour market report as we could expect. Despite all the negative talk on Canada’s economy, the country keeps adding jobs. Importantly, these jobs were largely full-time, and in cyclically sensitive industries. The growth in hours worked was also encouraging, as this will help support the continued resurgence in consumer spending. Wage growth has also been moving towards the level that is consistent with inflation stabilizing around the Bank of Canada’s 2% target.
Today’s report puts a January rate cut into question. Despite fears related to U.S. action against Canada, the BoC doesn’t make political calls on the outlook. However, post inauguration on January 20th, they may have sufficient information on whether lower interest rates are necessary to shore up the economy. This will need to be balanced against any reaction on the Canadian dollar, that might also be providing a buffer on trade at that time.
Andrew Grantham, senior economist, CIBC World Markets
Overall, today’s report was clearly better than anticipated and, if mirrored by other data, could signal a slower pace of interest rate cuts ahead than we were previously anticipating. However, with rates still above the mid-point of the neutral range, unemployment elevated relative to a year ago, and huge uncertainty emanating from the threat of US tariffs, we continue to forecast a 25bp reduction at the January meeting and a 2.25% trough for the overnight rate later this year.
Douglas Porter, chief economist, BMO Capital Markets
While one could quibble about a few of the details, most aspects of the report were sturdy—full-time employment rose 57,500, and hours worked jumped 0.5% m/m. Our scoring system would rate the overall report at a gaudy 80.1 (on a scale from 0 to 100). The solid result is fully consistent with the view that the economy was picking up through late last year after a sustained struggle. ...
Bottom Line: The Canadian job market ended 2024 on an upbeat note, in line with our view that the broader economy was getting up off the mat. Having said that, the Labour Force Survey is notoriously volatile, and we certainly can’t pin too much on a single reading. Moreover, the possibility of U.S. tariffs loom over the economy as we begin 2025, and even the uncertainty may weigh on activity. Still, the solid job gains will prompt some meaningful doubt on whether the Bank of Canada will cut again in January following the hyper aggressive 100 bps of cuts in Q4. The fact that the Fed looks to move to the sidelines for a spell, and the Canadian dollar is struggling mightily may also chill the BoC for now.
Nathan Janzen, assistant chief economist, Royal Bank of Canada
The December labour market numbers are clearly firmer than expected, with headlines and details broadly better than feared. Still, the data is notoriously volatile, and the unemployment rate is still up almost a percentage point from a year ago and at its second highest level (outside of the 2020/21 pandemic) since 2017.
We continue to think it is unlikely that the broader uptrend in the unemployment rate has ended (the 3-month average rate continued to rise in December) with hiring demand (job openings) still running well below year-ago levels.
The Bank of Canada already flagged in December that with interest rates no longer clearly at ‘restrictive’ levels, and inflation running back around the central bank’s 2% target, the pace of rate cuts will be more gradual, and contingent on the evolution of economic data, going forward. We continue to expect that ultimately the BoC will need to cut the overnight rate to slightly ‘stimulative’ levels this year - below the 2.25% to 3.25% the BoC currently estimates as the likely range for the current neutral rate.
Marius Jongstra, vice president of market strategy, Rosenberg Research
Hours worked rebounded by +0.5% in December following November’s -0.2% falloff. But zooming out to Q4 overall reveals just a puny +0.1% annualized increase on this front, the weakest pulse since 2023Q4. 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. And again, surely not to be of much concern to the BoC.
In fact, there had been a sufficient build-up of prior labor market slack that, even with an acceleration in job gains, hourly wages for permanent employees slowed to +3.7% YoY from +3.9%, undercutting the +3.8% expectation in the process. We have not seen the pace this low since April 2022. For all employees, wages grew by just +0.2% MoM. It has been at this pace, or lower, in three of the past four months. Nothing here to shift the Bank away from rate cuts, even if the pace is slowing.
Matthieu Arseneau and Kyle Dahms, economists with National Bank Financial
The government sector was a major contributor to December’s recovery, with almost half (44%) of the increase in December coming from the hiring of civil servants. Over two months, 60% of the increase in jobs has come from this segment of the labour market, meaning that the recent momentum is not due to a change in sentiment among private employers. Against this background, we need to be cautious before concluding that December’s performance heralds a rebound in the months ahead. The data on job vacancies does not point to a wave of private sector hiring in the coming months consistent with the weakness in profits. We have been saying for months that Canadian companies appear to be overstaffed, which should limit hiring appetite even if economic growth picks up against a backdrop of less restrictive monetary policy. What’s more, the risks to our growth scenario have increased in recent weeks as Canadian companies could face tariffs from the new US administration at a time when their inventories are very full. According to Statistics Canada, no less than 8.8% of Canadian workers are vulnerable to this threat, as they are employed in industries that were dependent on US demand for Canadian exports. Given these many uncertainties and the Bank of Canada’s desire to create conditions conducive to above-potential growth, we continue to believe that the Bank of Canada will have to cut its policy rate to the lower end of its neutral range (between 2.25 and 3.25%) by the summer (assuming today’s report isn’t the new normal for Canada’s labour market).
Tu Nguyen, economist with assurance, tax and consultancy firm RSM Canada
Average hourly wages rose 3.8% on a yearly basis, down from 4.1% in November and the 5% trend that persisted for a long time. While wage growth still hovers above inflation, the gap is narrowing, which is reflective of the cooler job market. This will give the Bank of Canada more confidence of continued price stability to cut interest rates later this month. ....
As price stability has been restored, more rate cuts are expected in the upcoming months. It is possible that the jumbo rate cuts in late 2024 helped boost employment, and more rate cuts are needed to further boost growth.
Charles St-Arnaud, chief economist, Alberta Central
Overall, the report points to a tightening of the labour market. Nevertheless, it is important to note that the amount of slack remains important, with the unemployment rate close to 7% and the participation rate and employment rate close to their lowest level since the late 1990s.
The Bank of Canada will welcome today’s report as a sign that the Canadian economy could be improving. Nevertheless, it remains to be seen whether it will be sustained. As such, the sharp increase in uncertainty due to the threat of US tariffs will negatively affect business investment and the rest of the economy. We believe the BoC will cut its policy rate by 25bp at its January meeting to 3.00%, bringing rates closer to the mid-point of its estimate of neutral in an effort. This would also be an effort to counteract some of the headwinds of the increased uncertainty.
Derek Holt, vice-president, Scotiabank Economics
Canada’s job market remains on fire as job growth blew past everyone’s expectations. There is just no other way to put it. If the only thing that mattered to the BoC was the state of the job market, then they’d be shelving any talk of further easing. It’s obviously not the only thing that matters as we are likely to find out soon enough, but for now, just can the talk about how the job market is weak. The analysts who have been driving that narrative are simply all wet. ...
Recall that I’m not a believer in the argument that the BoC must cut because of the trend rise in the unemployment rate over time. Most of that rise has been because the pool of temporary (non permanent) residents has grown much faster than their jobs. This reflects overly lax immigration policy on the temp residents side of the picture that is made up of international students, temporary foreign workers and asylum seekers. That policy is tightening and we should see the effects of this through lower temps over 2025. Further, why ease in order to put more temps to work if they produce at a lower level of productivity than others while overstimulating the rest of the population?
David Doyle, head of economics at Macquarie
We interpret these figures with some caution. Given the timing, it is possible that seasonal adjustment challenges played a role in the outsized gain. As we outlined in our team’s Global Economic and Market Outlook, for the BoC ahead, we continue to expect four successive cuts of 25 bps per meeting ahead, with the overnight rate reaching 2.25% in June 2025.
With files from Reuters