Statistics Canada revealed an overall stronger-than-expected January labour report this morning, with the number of new jobs more than double economists’ expectations and the unemployment rate posting its first decline in 13 months. At least two economists immediately trimmed their forecasts for how much the Bank of Canada will cut its trend-setting interest rate over the course of this year.
Canada’s economy added a net 37,300 jobs in January, while the unemployment rate edged down to 5.7% from 5.8% in December. Economists were looking for an unemployment rate of 5.9%.
Beneath the surface, however, there were signs that the jobs market isn’t as robust as the headline figures suggest, and that inflationary pressures may be easing. Average hourly wage growth for permanent employees slowed to 5.3% in the month from 5.7% in December. And fewer people were seeking jobs, with the participation rate falling to 65.3% from 65.5% - accounting for much of the drop in the unemployment rate.
Markets didn’t display a lot of reaction to the jobs data, which was released simultaneously with revisions to U.S. 2023 inflation numbers - a closely monitored report that presented few surprises. Bonds yields continued to be modestly higher across the curve in Canada, as they were in the U.S. The Canadian dollar initially strengthened on the headlines and later retraced much of that as traders absorbed the details of the report.
But over the past week, traders in money markets have been continuing to scale back their pricing of rate cuts this year by the Bank of Canada. Overnight swaps markets now suggest a rate cut isn’t likely until June - and even then the odds are down to a coin flip. For 2024 as a whole, less than 100 basis points - or one percentage point - of easing is now priced into credit markets.
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 9 am Friday. 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 markets were pricing in monetary policy changes just prior to the data:
The jobs report has prompted some economists to scale back their forecasts for when - and by how much - the Bank of Canada will cut interest rates this year. Here’s how they are reacting in written commentaries following the data:
Andrew Grantham, senior economist, CIBC Capital Markets
Latest data suggested that Canadian labour market conditions tightened slightly in January, but remain looser than they were a year ago. The 37K increase in employment was better than the 15K expected by the consensus, although job gains were generally tilted towards part time (+49K) rather than full time positions (-12K). ... Wage growth for permanent employees slowed to 5.3%, from 5.7%, which was in line with expectations but still above levels that policymakers will be comfortable with, while hours worked increased by a robust 0.6% on the month. Today’s data suggest that the Bank won’t be in a rush to cut interest rates, and we maintain our expectation for a first move in June. Given indications from today’s data and previously released GDP figures that the Canadian economy is in somewhat better shape than previously expected, we now forecast 25bp fewer cuts by the end of the year (finishing at 3.75% rather than 3.50%).
Royce Mendes, managing director and head of macro strategy, Desjardins Securities
Despite all of the job gains coming in part-time work, total hours worked were up a solid 0.6% during the month. The monthly rate of population growth surged in January to a rate not seen since the data series began in 1976. The economy added a whopping 125K new people aged 15 and older. That said, the healthy job gains combined with a decline in labour force participation to push the unemployment rate down one tick to 5.7%.
Wages continued to grow at a strong pace. Average hourly earnings advanced by 5.3% on a year-over-year basis. Wage growth is, however, being buoyed by cost of living adjustments built into many workers’ contracts. With inflation down to more normal levels, those increases should fade as the year progresses.
The employment data suggests that June is now more likely for the first Bank of Canada rate cut of this cycle than April. That said, recent announcements of layoffs at major companies across industries in Canada still suggest that the economy is set for a bumpy ride as the past effects on high interest rates continue to weigh on activity. As a result, we’re still looking for 125bps worth of rate cuts this year, just 25bps less than before.
Douglas Porter, chief economist, BMO Capital Markets
Beyond the shiny headlines, the details were underwhelming, with all of the job growth in part-time positions (up 48.9k) and/or in the public sector (+47.6k). Notably, the working age population still careened higher by 125,500 in a single month (and up a towering 1 million from a year ago; prior to the past year, the adult population had never grown by 500,000 in a year.... just to put it in perspective). ...
Even with the drop in the jobless rate, average hourly wages also dipped slightly. However, that’s small comfort to the BoC at a still-hot 5.4% y/y pace. Similarly, total hours worked rose 0.6% m/m, and now sit 2.6% above the Q4 average (annual rate), pointing to decent overall growth in Q1. Amid this mixed bag of indicators, we look to our overall scorecard for the report, which weighs 8 key indicators, and it yields a 55.9—or slightly better than average, but close to neutral. Sounds exactly right. ...
Perhaps the key takeaway from this mixed report is that there are no obvious signs of stress for the economy, at least in these results. A decent job gain, a slide in the jobless rate, and persistent 5% wage growth are hardly the stuff of an urgent call for rate cuts. The Bank of Canada is likely to view this report as further reason for a patient policy stance.
James Orlando, director and senior economist, TD Economics
While falling unemployment is a good sign for the strength of the job market, the underlying details were weak. All the job gains were part-time, with the vast majority coming from cyclically insensitive public sector hiring. This along with the regular seasonality issue with January job reports (remember the head fake we got last January?), we’d argue that it is not the type of report that makes us think the Canadian labour market is in for a renewed upturn. Case in point, the lower unemployment rate was helped by weaker participation – not a typical sign of a strong labour market.
The Bank of Canada won’t change course after today’s report. The data are simply too volatile and don’t paint a clear picture of the state of the Canadian economy. This leaves the BoC to continue fixating on the state of inflation. With headline and core inflation rates stuck around the mid-3% level, the Bank needs to see improvement before it can be convinced that it will reach its goal of price stability. This has markets pushing back on the timing of rate cuts, with June or July as the most likely start date.
Matthieu Arseneau and Alexandra Ducharme, economists with National Bank Financial
In normal times, a 37k increase in employment combined with a one-tenth drop in the unemployment rate would cause us to breathe a sigh of relief and believe in the continuation of the economic cycle. Not in these unusual times, and especially not in a month when the population aged 15 and over grew at a record pace of 125K (a six standard deviation move, past 20 years). The 37K gain therefore remains well below the 77K jobs that would have been needed to keep the employment rate at the same level. The sizable three-tenths drop in the participation rate over two months means that the unemployment rate probably understates the fragility of the labor market. There is a risk that the participation rate could reverse in the coming months as the pressure to find a job increases for some individuals over time. ...
The composition of new jobs is far from reassuring. Part-time jobs improved the overall picture, while full-time jobs fell for the second month in a row. What’s more, businesses appear to be in a hiring freeze. In fact, the public sector added 48,000 jobs in January, while non-public employment fell for the second month in a row. This weakness in the business sector comes as no surprise and is consistent with data from the Bank of Canada’s Business Outlook Survey. Labor shortages are a thing of the past, with 27% of firms now reporting that they are experiencing labor shortages, a far cry from the 46% recorded at the start of the rate hikes (chart). What’s more, the high proportion of firms experiencing a decline in sales (40%) and the gloomy outlook could mean outright job cuts in the coming months.
David Rosenberg, founder of Rosenberg Research
The broad contours of labor market change we saw in December — sanguine headline numbers with non-confirmations abounding in the details — carried through into January, although the numbers were generally larger. The key driver of labor market ratios in Canada in the current high-immigration period is the population and the labour force themselves. ... There was great news for bond markets on the wage front (although it will look like a mixed signal to the BoC when taken with the headline unemployment number). Average hourly earnings fell -0.02% MoM despite the drop in the unemployment rate. There is very little to be concerned about with regard to wage pressures on inflation in the outlook.
But as with U.S. nonfarm payrolls, Canada is seeing a growing divergence between the headline labor market statistics (positive) and what the underlying marginal changes in key elements of the reports show (cyclical cracks widening).
Simon Harvey, head of forex analysis at foreign currency firm Monex Canada
Having told a compelling story over the course of the fourth quarter, the labour market data is now also falling victim to mixed messages. ... On the surface, the data suggests that the narrative of weak consumer demand sustained throughout the back-end of last year is now no longer true. However, some caveats need to be applied. First, while Stats Canada doesn’t provide industry level breakdowns of employment type, the overall gain in employment was wholly driven by part-time jobs (+48.9k). We think it is fair to assume that most of the part-time job gains were concentrated within wholesale and retail trade given how cyclically sensitive the sector is. As such, a single month uptick following a sustained downtrend in employment should be discounted as job gains can quickly be reversed. Second, strong employment gains in retail trade aren’t necessarily reflective of a rebound in consumer demand. If that was the case, we doubt job losses in accommodation and food services would have accelerated from an average pace of -2.766k in the fourth quarter to -30.3k at the start of the year. ...
For the Bank of Canada, we think the argument to remain on hold at April’s meeting contrary to our base case is weak when looking directly at the headline data seeing as the details of today’s report paint a considerably softer picture. That said, the mixed messages and the need to read between the lines across all macro indicators now poses a substantial risk to our dovish BoC view, especially as central banks, led by the Federal Reserve, require “confidence” that inflation will track back to target before letting the genie out of the bottle with their first rate cuts. In terms of USDCAD, the market’s reduced confidence in the BoC’s easing cycle means the considerable upside adjustment towards 1.38 that we expect in the first quarter is becoming less likely. That said, we think the economic backdrop isn’t yet conducive to turn bullish on the loonie, meaning USDCAD could well find itself stuck in a tight trading range around current levels until either the data cuts in a more definitive direction or the BoC provides firmer guidance.
Charles St-Arnaud, chief economist, Alberta Central credit union
Today’s Labour Force Survey data points to a robust labour market in Canada. However, job creation remains below population growth. While this would normally suggest an increase in the amount of slack in the economy, a lower participation rate, employment rate and unemployment rate indicate that it may not be the case in January. ...
We think the BoC is unlikely to contemplate rate cuts until inflation has been brought sustainably below 3%. This is unlikely to happen until late spring, while a resilient labour market reduces the likelihood of an early rate cut. We believe that June will likely be the time for the first cut. Whether the country experiences a soft or hard landing in 2024 depends heavily on the health of the evolution of the labour market ie whether we see a hiring freeze or broad-based layoffs as the economic activity slows further.
Nathan Janzen, assistant chief economist, Royal Bank of Canada
The Canadian labour market data is notoriously volatile, but details underlying the January upside employment growth (and downside unemployment rate) surprise were also firm. The increase in hours worked is consistent with GDP ticking higher early in 2024, and adds to early signs that housing markets have perked up. Growth in the economy still looks softer accounting for surging population growth. Canadian GDP is on track to post a 7th consecutive per-capita decline in Q1/2024. But stronger than feared economic data both in Canada and abroad are leaving central banks with flexibility to be patient before starting to ease off the monetary policy brakes. The data today will reinforce that near-term interest rate cuts from the Bank of Canada are unlikely. Our own base case assumes the first interest rate cut from the BoC in June.
Bryan Yu, Chief Economist, Central 1 credit union
January’s key labour market takeaway is one of surprising resilience despite domestic headwinds facing the economy ahead. While we anticipate a slowdown in coming months as past interest rate hikes pass through to renewing mortgages and consumption, there seems to be life yet in the. Headline wage growth remains too high, and the unemployment rate is heading in the wrong direction but could change quickly. The murky but steady condition are likely to mean a rate cut will need to wait until mid-year at the earliest.
Derek Holt, vice-president, Scotiabank Economics
Slowing, eh? Moose droppings on that! Canada just added another 37k jobs last month after the prior month was revised up to a small gain of 7k following earlier seasonal adjustment revisions. The overall details were somewhat mixed but generally solid enough to make me happy enough for now and for the BoC to check the box and move on.
Darcy Keith