A stronger-than-expected Canadian jobs report has prompted a reassessment in money markets of when the Bank of Canada is likely to start cutting interest rates. Economists are also rethinking their predictions.
Implied probabilities in swaps markets now suggest less than a 50 per cent chance the Bank of Canada will cut its key lending rate at its next policy meeting June 5. Immediately prior to the data, those odds were pegged at about 58 per cent, and in recent days had risen to above 70 per cent, with traders bolstering their bets in particular after a surprisingly weak employment report last Friday in the U.S.
Swaps markets are now implying 70 per cent odds for a cut at the bank’s July meeting. And they are fully pricing in two rate cuts by the end of this year.
Canada’s economy added 90,400 jobs in April, five times what was expected by analysts, and the unemployment rate unexpectedly held at 6.1 per cent. But wages grew at the slowest pace in 10 months. The average hourly wage growth for permanent employees slowed to an annual rate of 4.8 per cent from 5 per cent in March.
The Canadian dollar immediately spiked on the data, rising to 73.30 cents US, up from 73.10 cents, reflecting the lower probability of near-term cut rates. There was a sharp reaction in bond markets as well, with the Canadian government 2-year bond yield rising a further 5 basis points after the data. It’s up about 10 basis points in total for the day now, at 4.309 per cent, narrowing its spread to the U.S. equivalent bond.
The following table details how swaps markets are pricing in further moves in the Bank of Canada overnight rate, according to Refinitiv Eikon data minutes after the Canadian jobs data were released. The current Bank of Canada overnight rate is 5 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 how markets were pricing in monetary policy changes just prior to the data being released:
Here’s how economists are reacting in written commentaries this morning:
Royce Mendes, managing director and head of macro strategy, Desjardins Securities
Hiring surged in April, but so did population growth, leaving demand and supply in the labour market roughly unchanged. ... The private sector made the largest contribution to the gain, but the public sector and self employment also increased. Broad based growth across services sectors was seen in April. Total hours worked also rose sharply.
That said, the rise in employment didn’t alter our view of the labour market. Another apparent spike in population growth and a tick up in labour force participation meant that the supply of workers kept up with the demand. As a result, the unemployment rate remained at 6.1% and the employment rate remained at 61.4%. Moreover, wage growth for all employees slowed from an annual pace of 5.1% in March to 4.7% in April, with wages flat in the latest report.
While the headline number will garner most of the attention, the details of this report suggest that the labour market is actually exhibiting some evidence of slack. Still, after an increase of 90K jobs, the upcoming CPI report will take on even more importance in the Bank of Canada’s decision-making process, as policymakers debate whether or not cut rates in June.
Yields are higher across the Government of Canada yield curve. But we’re not convinced that this report will materially change the Bank of Canada’s assessment of the labour market. So we’re sticking with our call that the central bank cuts rates in June.
Stephen Brown, deputy chief North America economist, Capital Economics
The surge in employment in April shows that the fall in March was just a blip and suggests that the Bank of Canada is now more likely to wait until the July meeting to cut interest rates, rather than moving in June as we expected.
Following the surprise 2,200 fall in March, the 90,400 jump in employment in April was far stronger than the consensus forecast for an 18,000 rise, and caused the six-month average gain to pick up to 33,000, from 22,000. The sectoral moves were in some respects a mirror image of the weakness in March, with professional services and accommodation & food services employment both bouncing back strongly. There was some weakness in the goods-producing sectors, however, with construction employment falling by 11,000. Despite an even larger increase in the labour force, of 108,000, the unemployment rate was unchanged at 6.1%.
Although 50,000 of the overall increase was driven by part-time employment, total hours worked still increased by a strong 0.8% m/m, which presents a clear upside risk to our forecast that GDP will be unchanged this quarter. While the Bank can take some comfort from the slowdown in average hourly earnings growth to 4.8% y/y, which implies that earnings were unchanged on the month in seasonally adjusted terms, the big picture is that the resilience of the labour market affords the Bank more time to wait to ensure that the recent run of favourable CPI data will be sustained. That makes it more likely that the Bank will wait until the late July meeting to cut interest rates, as there are three CPI reports ahead of that meeting but just one before the early June meeting.
Douglas Porter, chief economist, BMO Capital Markets
Today’s showy headline jobs increase will give the Bank of Canada some pause, since it reinforces the point that the economy is clearly not rolling over. Still, the reality is that economic slack is still rising, with the jobless rate up 1 point in the past year and the number of unemployed jumping 24% y/y, helping cool wages. That may be the main takeaway for policymakers. Markets are now back to viewing the June rate decision as a toss-up, with the April CPI on May 21 looming even larger. Our call is for a rate trim, but that will require a seriously cool core CPI result.
James Orlando, senior economist, TD Economics
What?!! Following March’s slight contraction, today’s big jump was more than 4x the consensus expectation. Even for this notoriously volatile data, this was a shocker. Our own Chief Economist’s immediate reaction was that “this is bananas!” Bananas indeed. This was the largest employment gain in 15 months. And with the cyclically sensitive private sector driving the increase alongside a huge jump in hours worked, it looks like second quarter GDP won’t have too much of a drop off from the above-trend expectation for the first quarter.
This report is likely to raise eyebrows at the Bank of Canada. The central bank has been looking for evidence that inflation will continue moving towards the 2% target. With the labour market showing renewed strength, there is potential for consumer spending to rise in the coming months, forcing inflation higher. This will be a concern for the BoC, which has seen this narrative play out in the U.S. over 2024. Financial markets have reacted, moving more decisively towards July as the start date for rate cuts (instead of June). We’d agree as this would give the BoC a little more time to ensure inflation remains on the right track.
Nathan Janzen, assistant chief economist, Royal Bank of Canada
The Canadian employment growth numbers continue to look less impressive once accounting for surging labour force growth as the population continues to expand. The unemployment rate has risen more in Canada than in most other advanced economies in the wake of higher interest rates, and wage growth is showing further signs of moderating. Labour markets have softened enough to lower inflation risks going forward and justify a pivot to interest rate cuts from the Bank of Canada - but the bottom also still hasn’t fallen out in a way that is forcing the central bank to act urgently. Our own base case assumption is that the BoC will be in a position to cut the overnight rate in June. But with labour market data for April surprising on the upside, that is also contingent on the next round of inflation numbers continuing to flag easing in price pressures.
Andrew Grantham, senior economist, CIBC Economics
While today’s increase in employment was much better than expected, this strength appears to largely reflect a further surge in the base population as the labour force count catches up with the quarterly population tally. With the unemployment rate remaining higher than it was at the start of the year and wage pressures easing slightly, the data is still consistent with a gradual loosening of labour market conditions. We continue to forecast a first interest rate cut at the next meeting in June, although after today’s data that call relies even more heavily on core measures of inflation remaining subdued within the next CPI print.
Matthieu Arseneau and Alexandra Ducharme, economists at National Bank Financial
All in all, it was the demographic surge in April that was the big surprise in this report. Indeed, growth in the population aged 15 and over rose by 112K, the second-highest increase on record after the 125K recorded in January. It is therefore important to adjust our labor market evaluation standards in this highly atypical context. At the current rate of population growth, the labor market needs to generate 60K jobs to maintain the employment rate, rather than the 20K needed with more normal population growth. By this criterion, job creation in April was good, but no more. Moreover, despite this seemingly exceptional gain, the unemployment rate remained essentially unchanged, meaning that the labor market did not tighten in April after cooling off since the start of the monetary tightening cycle (unemployment rate is up 1.3 percentage points (pp) since July 2022). For the time being, the easing of the labor market is characterized by the difficulty of individuals to enter the Canadian job market, as evidenced by the sharp rise in the unemployment rate for young people and recent immigrants. The deterioration is particularly acute in Toronto as shown by the unemployment rate reaching 7.9%, up 2.3 pp from recent trough. Back at the national level, the percentage of unemployed people finding work is currently at its lowest level in in over a decade excluding the pandemic episode. For the time being, the number of layoff is limited, as shown by the separation rate (voluntary departures and redundancies), which remains very low on a historical basis. Some may welcome the rebound in private sector employment, but we remain sceptical about the sustainability of this upswing. Goods-producing industries posted contractions in April, which is not surprising given the labour hoarding that occurred in 2023 in many of these sectors. With more than 50% of SMEs [small and medium-sized enterprises] indicating that they are concerned about their sales, we doubt that there will be a sustained upturn in corporate hiring in the months ahead.
Derek Holt, vice-president, Scotiabank Economics
We cannot dismiss such a gain as just white noise or sampling error. Folks who do so do it in cherry-picking fashion. ... The 95% confidence interval around the change in employment in a given month is estimated by Statcan to be about +/-57k. Therefore, at a reported 90k pace last month, there would have been a material job gain during April of between 33k and 147k in 95 times out of 100 in repeated labour force survey sampling. I’m unaware of any argument that would lend confidence to expressing skepticism in the tails. So respect the data. ...
With cautions, at the margin this is further evidence that the BoC’s narrative coming into the year that H1 would be the worst period for growth is wayyyy off. Q4 GDP beat the BoC’s expectations by a percentage point, Q1 is tracking at least 2 ppts above the BoC’s January forecast before they revised it higher but with high ongoing uncertainty including on inventory effects, and now we have VERY tentative evidence that Q2 is doing likewise with upside risk to the BoC’s April MPR forecast of 1.5% q/q SAAR [seasonally adjusted annual rate] GDP growth in Q2.
If we get another upside surprise to GDP relative to the BoC’s expectations then it would seriously dent their enthusiasm that the economy is creating disinflationary slack and thus lend less confidence to their view that Canada is on a sustainable move toward 2% inflation.
Simon Harvey, head of forex analysis, Monex Canada (Foreign exchange firm)
We don’t think today’s jobs report will stop the Bank of Canada from cutting rates next month. After all, the strength in the April employment figures should be viewed in the context of a general trend of labour market conditions easing and core inflation pressures substantially cooling. Moreover, job creation in cyclically sensitive industries such as accommodation and food services, while strong at +24k in April, has only reversed losses in March (-27k) and has yet to bring overall employment back to pre-pandemic levels (-8.1%), suggesting that underlying consumer demand conditions remain weak. Furthermore, while the strength of core full-time employment was elevated this month, the overall job figures are flattered by further job creation in less structural part-time positions, especially amongst youth workers. StatsCan also noted in today’s press release that despite the unemployment rate holding steady at 6.1%, its highest level since November 2017, it has increased significantly across all demographic groups in the past twelve months.
In this general context, and set against April core inflation data that should remain weak when it is released on May 21st, we don’t think the Bank of Canada has grounds to delay the start of its easing cycle. That said, it certainly casts doubt over our view that the BoC will need to conduct back-to-back rate cuts this summer due to cyclical weakness, although we think it remains premature to change our view despite the BoC stressing gradualism with its easing cycle as there remain two labour market reports, and more crucially three core inflation prints, ahead of the July 24th decision. Just as one swallow doesn’t make a summer, one anomalously strong employment report change the overall outlook for the same period.
Charles St-Arnaud, chief economist, Alberta Central (credit union)
The Bank of Canada will welcome signs of slower wage growth, even though it continues to grow at levels disconnected from productivity gains. Moreover, there are increasing signs that the slack built up in the labour market over the past year is helping to ease some of the wage pressures.
We think the rebound in the employment report for April is unlikely to sway BoC into a pause. The BoC remains focused mostly on inflation. The breadth of inflation is gradually easing and returning to its historical average, while core inflation is returning below 3% and its momentum is also below 3%. With this in mind, we continue to believe the BoC will cut at the June meeting, unless we get a positive surprise when inflation for April is released on May 24th.
Bryan Yu, chief economist, Central 1 (credit union)
The strong job gain in April was certainly a surprise and suggests the economy continues to have legs to absorb some of the increased capacity from booming population. This complicates the Bank of Canada’s June rate decision and prospects of a rate cut. That said, with the unemployment rate still elevated, ongoing progress on wage growth, and easing inflation trends we continue to anticipate a rate cut in June. However, we can expect communication to be a bit more hawkish as the Bank downplays the pace of future cuts.
Darcy Keith