The Canadian economy gained a net 150,000 jobs in January, smashing expectations, while the jobless rate held steady at 5.0 per cent, according to Statistics Canada Friday.
The job gains were a remarkable 10 times what Bay Street was expecting. Analysts had forecast a net gain of 15,000 jobs and for the unemployment rate to edge up to 5.1 per cent in January.
But there was some comfort for policymakers and inflation watchers in wage trends. The average hourly wage for permanent employees rose 4.5 per cent in January on a year-over-year basis, down from 4.8 per cent in December. Also, Statscan revised December’s net gains downward to 69,200 jobs.
Shorter-term government of Canada bond yields spiked on the huge beat, and so did the Canadian dollar. Shortly after the 830 am ET data release, the loonie was trading at 74.83 cents US, up more than half a cent. The five-year government of Canada bond yield - which is influential on fixed mortgage rates - rose as much as 14 basis points to 3.33%, narrowing its gap to the equivalent U.S. Treasury yield.
Money markets also completely priced out interest rate cuts in 2023. In fact, they are now pricing in modest odds that a further hike in rates could arrive this spring.
As of 905 am ET, here’s how interest rate swaps, which are based on market expectations about future rate decisions, are pricing in where the Bank of Canada overnight rate will reside over the course of the year, according to Eikon data (while the Bank of Canada moves in quarter point increments, credit market implied rates fluctuate more fluidly).
The current overnight rate is 4.5 per cent. Prior to this morning’s 830 am ET jobs data, money markets were pricing in a reasonable chance of rate cuts by the December meeting. And prior to last Friday’s very strong U.S. employment report, a rate cut was being priced in as early as September of this year.
Money markets are still pricing in only small odds that the Bank of Canada will hike interest rates again at its next interest rate announcement on March 8. They currently suggest an 85 per cent chance that the bank will hold rates steady, and a 15 per cent chance of another rate hike. Some economists believe if a further rate hike arrives, it would not be until the next Monetary Policy Report is released in April, when the bank provides a full update on its economic projections. That would also give the bank time to digest additional economic data to come.
Here’s how economists are reacting:
Derek Holt, vice-president and head of capital markets economics, Scotiabank
I wish the BoC would just stop giving forward guidance. Stop. Please. You’re no good at it. Your models can’t forecast inflation. Here’s another illustration of how the BoC should be taking steps one at a time, being more circumspect and taking in new information during unique times as it arrives on a meeting-by-meeting basis. There is greater risk to falling behind developments amid regime shift and not tightening enough to ensure that inflationary forces have been countered than there is in overtightening by not waiting for the full lagging effects of adjustments to date. The BoC may be faced with yet another credibility challenge via its ‘conditional’ pause that mainstreet heard as ‘done.’
Instead, the labour market continues to tighten and the details support robust GDP growth such that the balance of risks facing inflation remain skewed higher than the BoC’s forecasts. ...
March is out of the question for the BoC but if we keep getting data that is even remotely like this then don’t rule out a return with another hike as soon as April with a fresh set of forecasts. Markets are now pricing a very decent chance at this and it fans my marketing narrative that the BoC may well not be done and shouldn’t view itself as being done. I’m also deeply skeptical that the BoC would cut this year and think markets are too aggressively pricing cuts next year.
Macklem did, however, express this as a “conditional pause” and the condition keeps getting blown away by jobs and growth. There is a lot more data to consider into the next MPR meeting but the other consideration is that the Fed is leaving the BoC in the dust especially after this morning’s upward US revisions to core CPI in November and December and a strong UofM sentiment reading including higher 1-year inflation expectations. I can see the Fed’s terminal rate at 5.5–6% in which case the BoC fans import prices via CAD if they go to sleep which further unmoors inflation expectations.
Stephen Brown, deputy chief North America economist, Capital Economics
The surge in employment and rise in hours worked in January suggest that economic activity continued to expand at the start of 2023 and present clear upside risks to our forecasts for GDP growth. Nevertheless, we disagree with the market-implied view that these developments will force the Bank of Canada to raise interest rates further.
While we have misjudged the economy’s near-term momentum, we would still push back against the idea that this means the Bank will be forced to raise interest rates further, as the rise in short-term Canadian interest rates today implies.
For a start, the Bank remains focused on measures of labour market slack rather than employment gains. While the Bank probably wants to see a small rise in the unemployment rate eventually, we think it would need to fall – it was unchanged at 5.0% in January – to justify further hikes. Other measures of economic slack, including vacancies and surveys of labour shortages, have eased in recent months – obviously in part thanks to strong immigration and employment.
There was little in the wage data to concern the Bank either. Granted, the decline in the annual rate to 4.5%, from 4.7%, was largely due to base effects and wage growth will rebound this month. But downward revisions mean that it should still be less than the 5.2% rate previously reported for December. Moreover, the 3-month annualised rate was 4.5% in January, a marked slowdown from 6.5% in October.
The Bank used its new Summary of Deliberations this week to stress that it needs to see “an accumulation of evidence to determine whether further rate increases would be required”. While that phrasing is open to interpretation, it seems likely that the Bank wants to see how economic and price developments play out over at least the next three months before committing to any further policy moves. The surveys suggest that employment growth will slow sharply and we see scope for services (excluding housing) inflation to fall at a faster pace than the Bank anticipates, which should persuade it that lower headline inflation will be sustained.
Douglas Porter, chief economist for BMO Capital Markets
Canadian employment soared 150,000 in January, the largest non-pandemic monthly rise on record and a loud echo of the rollicking U.S. jobs report a week ago. Even in percentage terms, the 0.75% m/m gain is larger than anything seen in the 40 years before COVID. Clearly, a relatively mild winter helped, but the underlying jobs picture remains incredibly robust. Much of the huge increase reflects a massive advance in the underlying labour force (the participation rate jumped 3 ticks to 65.7%), as the unemployment rate was unchanged at a tight 5.0%. The big job gain was mostly in full-time positions (+121,100), so total hours worked rose at a very strong 0.8% m/m, pointing to solid GDP growth in Q1—that may be an exaggeration of the economy’s underlying strength, but it’s also pretty far from the start of a recession. ...
Note that actual, or non-seasonally adjusted, employment fell by 125,000 in January—prior to the pandemic, a “normal” January would see a job loss of 250,000-to-300,000 in unadjusted terms. So, evidently, there simply were far, far fewer layoffs than in a normal year at the start of 2023. Instead of an actual hiring boom, what we instead saw last month was a layoff freeze, given how hard it is to find workers in the current environment. To be clear, this is not to dismiss the strength in the headline number; the data are seasonally adjusted for a reason. It’s more to explain what the underlying story may be in this complicated backdrop.
Bottom Line: One always has to take care when reading a Canadian employment report—for example, the prior month’s huge gain was itself revised down (earlier) by more than 30,000 jobs. Still, even if there are some misgivings about the massive headline gain, the labour market is sending precisely zero signs of economic stress. For the Bank of Canada, the strong report must make them at least a tad nervous about their freshly-minted pause—we said the bar for any move would be very high, but the employment gain is pretty towering indeed. This is actually the last jobs report the Bank will see before it next decides in March, but their upcoming decisions will largely be determined by inflation, and the employment data may prove to be just loud noise, provided inflation continues to ebb. ....
Regardless of the precise explanation behind the relentless strength in the jobs market, a key takeaway is that the economy is a long way from recession at the moment. Accordingly, we are adjusting our economic forecast to reflect that rather loud reality, by pushing out the expected mild contraction by a quarter. We now look for GDP to post moderate growth in Q1, and then slip into slight declines in the next two quarters, before growth resumes in Q4. It’s a similar story for the U.S. economy, in light of a decent start to the year for most indicators. The effect of the firmer start to 2023 means that full-year GDP growth is now pegged at 0.7% in both countries (up from 0.5%). Full disclosure: that is exactly in line with the latest Blue Chip Consensus estimate for the U.S., while the Canadian call is a touch below the Bank of Canada’s recent estimate of 1.0%.
James Orlando, senior economist with TD Economics
It was a blowout report for the Canadian labour market. The 150k jobs gain is one thing, but the fact that gains were concentrated in full-time jobs in the private sector, alongside people working more hours, makes this an even more impressive report. Although the seasonal adjustment should be called into question, the sheer size of this print points to a further boost to consumer spending and overall GDP to start the year.
Today’s report is sure to raise eyebrows at the Bank of Canada. Their conditional pause on further rate hikes is predicated on a slowing of economic growth and an easing in the labour market. The Bank won’t adjust course after one report, but it will be closely watching to see if this trend of massive job gains continues.
Andrew Grantham, senior economist, CIBC Economics
We should always treat the Labour Force Survey with caution. Having said that, the surge in hiring is clearly a sign that the economy is stronger than expected and isn’t on the verge of a recession that, up until recently, had been the consensus view for the first half of the year. The good news from an inflation point of view is that the surge in hiring wasn’t driven by a further tightening in the labour market, but rather strong labour force growth which has been helping to fill previously open vacancies. We still forecast that the Bank of Canada will remain on pause in terms of interest rates for the remainder of this year. ...
The Bank of Canada’s conditional pause on interest rates was likely done partly so that policymakers didn’t feel the need to respond to any single strong data print, no matter how strong, but rather assess how the economy is faring over the course of a few months. However, that won’t stop markets reacting to today’s strong data by pricing in a greater probability of further hikes, and pricing out rate cuts.
Royce Mendes, managing director and head of macro strategy at Desjardins Securities
The massive job gain looks like a clean print. We had been wondering whether weakness in January 2021 and 2022 might have caused the seasonal adjustment factor to have become a bit overzealous. However, that does not appear to have been the driving force behind today’s beat. As a result, we wouldn’t fade the market’s knee-jerk reaction to price in higher yields. While Canadian central bankers emphasized they would need an “accumulation of evidence” that the economy was not following the path laid out in their projections, today’s data is a big piece of evidence that it is not.
Matthieu Arseneau and Alexandra Ducharme, economists at National Bank Financial
The labor market starts the year with an enormous print, registering its strongest gain in 11 months and ten times what was expected by consensus. Not only is the overall figure spectacular, so are the details, with headcounts being highly concentrated in private and full-time jobs. Indeed, after a mid-2022 slump, full-time employment and private employment rose respectively for the fifth and fourth consecutive month in January, both reaching record levels. On a sectoral level, for a fourth month in a row, no less than 10 sectors over 16 registered a gain during the month which demonstrate the widespread nature of the recent surge. The only good news for the central bank trying to curb wage inflation is that the unemployment rate has remained unchanged thanks to a substantial increase in the participation rate and a record increase in population (since 1976). ...
Despite January’s astonishing print, we continue to believe that moderation is in the cards. Keep in mind that Labour Force Survey data can be very volatile, and we recommend to wait the release of the next few months of data to confirm the sustainability of this strength. We continue to expect a hiring freeze over the next few months in a context of an extremely restrictive monetary policy.
Taylor Schleich, director, economics and strategy, at National Bank Financial
This is certainly not a number the Governing Council would like to see as it signals the labour market (and broader economy) is hotter than they’d thought, even if it’s just one data point from a notoriously volatile survey. Nonetheless, we’ll comfortably fade any bets on a March hike as Governor Macklem and the BoC have repeatedly stressed that they’ll need to see an accumulation of evidence that the economy is running hotter than they’d expected. Even if inflation and growth data come in steamy later this month, that shouldn’t be enough to meet the “higher bar” for further hikes (the BoC’s words, not ours). We will, however, readily concede that discounting the probability of higher rates in April/June is appropriate. We still don’t view this as a likely outcome (see our detailed take on this morning’s data and broader employment outlook here), but one can’t totally dismiss January’s headline job gains.
Jay Zhao-Murray, market analyst at Monex Canada
Although the Bank of Canada is closely monitoring the labour market, since its tightness is a key pillar underlying the risk of persistent services inflation, there are three key reasons why this report may not be as worrying for the central bank as it seems on its face. First, December’s strong print was heavily revised downward a week later, and we may get a repeat of that scenario this month. Second, wage growth eased from 4.8% to 4.5% on a year-over-year basis, meaning that it is trending toward a pace of growth consistent with 2% inflation. Third, employment rose the fastest among those without permanent residency status, and the temporary nature of these jobs means that the Bank has less reason to respond.
Nevertheless, the sizable overall increase in jobs will keep Tiff Macklem on edge as it highlights more robust demand conditions than potentially expected, while it also dispels some chance of an early pivot to rate cuts. ... While the reaction in financial markets is understandable given the data, the pattern of recent revisions to the Labour Force Survey data suggests this should be approached with caution.