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Money markets are now pricing in even greater odds for a further 25-basis-point rate hike by the Bank of Canada later this month, following stronger-than-expected jobs data this morning. Several economists are also becoming convinced that the country hasn’t reached peak rates quite yet.

Positioning in credit markets now suggests a 75 per cent probability of a further rate hike at the bank’s next announcement on Jan. 25, according to Refinitiv Eikon data. Prior to the employment data at 830 am ET, it was at 62 per cent.

Just a month ago, credit markets were pricing in less than 50 per cent odds for a further rate hike - with bond traders positioned for a strong likelihood that the bank was finished with the current tightening cycle.

The Bank of Canada’s key overnight lending rate currently stands at 4.25 per cent. Implied bets in credit markets suggest the bank will most likely be done with hiking rates following a 25 basis point increase this month. But interest rate probabilities also now suggest the bank may not start the cycle of cutting rates anytime this year. That marks a change from just a month ago, when bond traders were pricing in fairly good odds of at least a 25 basis point cut near the end of 2023.

Statistics Canada said a net 104,000 jobs were created in December, which far exceeded forecasts calling for a net gain of 8,000 jobs.

The unemployment rate also unexpectedly declined to 5 per cent, from 5.1 per cent in November. The Street was expecting the rate to go up to 5.2 per cent.

The employment gain was largely driven by full-time work, particularly among youth aged 15 to 24, and was spread across industries, Statscan said.

But in a possible encouraging sign for the Bank of Canada, the average hourly wage for permanent employees rose 5.2% in December on a year-over-year basis, down from 5.4% in November.

Canadian bond yields rose after the 830 am ET jobs report, but retraced much of that move as traders also took in a mixed U.S. nonfarm payrolls report. The Canadian dollar strengthened as the expected difference in interest rate peaks between the US and Canada narrowed. In mid-morning trading, the loonie was fetching 73.93 cents US, up about a third of a cent for the day.

Here’s a snapshot of how economists are reacting to the Canadian jobs report:

Andrew Grantham, senior economist, CIBC Capital Markets:

The Canadian labour market remains much stronger than expected and (so far) apparently resilient to rapidly rising interest rates. While strong hiring at least partly reflects companies needing to compensate for increased staff absenteeism, the tick down in the unemployment rate close to its record low sees us now forecasting a final 25bp hike from the Bank of Canada at its meeting later this month. (Previously, CIBC was forecasting a hold)

Stephen Brown, senior Canada economist, Capital Economics:

The surge in employment in December and renewed fall in the unemployment rate suggests that the Bank of Canada will raise interest rates again later this month, although the fall in wage growth means policymakers should be comfortable with a smaller 25 bp move.

The resilience of the labour market is a risk to our view that the Bank of Canada will pause its tightening cycle after a final 25 bp hike this month, even as the slump in natural gas prices raises the chance that CPI inflation will fall faster than the Bank anticipates.

James Orlando, senior economist with TD Economics:

The surge in employment and rise in the labour force make this an incredibly positive print. The fact that most of the gains were full-time positions in the private sector and spanned many industries further supports the robustness of today’s numbers.

Today’s report reinforced expectations that the Bank of Canada will continue hiking its policy rate at its meeting in late January. Though the BoC has signaled it could go either way with its next policy decision, the continued strength in employment means that the Bank isn’t done yet.

David Rosenberg, economist and founder of Rosenberg Research:

The just-released Labour Force Survey showed an incredible +104k run-up in employment for the month of December, making a mockery out of the consensus estimate of only +5k — this was the second 100k-plus employment report in the last 3 months. ...

The really key statistic from the report is the slowdown in hourly wage growth, which dropped to +5.2% YoY from +5.6% — though still elevated, this was the most benign pulse since May of last year. So, while one month does not make a trend by any means, this was an encouraging development nonetheless and should provide some comfort to the Bank of Canada. ...

Overall, this was an undoubtedly positive report for Canada — not just because of the massive headline gains but also the favorable distribution towards full-time employment and the uptick in the labor force participation rate. That being said, as recessionary pressures mount on a global scale, it’s only a matter of time before the Canadian labor market starts to feel the pinch. And when that does occur, look for wage growth, which has already begun to slow, to come down markedly — causing the Bank of Canada to reconsider continuing on its current path of interest rate hikes in the process.

Douglas Porter, chief economist, BMO Capital Markets:

While it’s always dangerous to read too much into a single Canadian jobs report, it’s safe to conclude that the economy still had some serious zip at the end of last year. True, the labour market is typically the last to turn when conditions soften broadly, but there is precisely zero hint of any such softening in the jobs data. At the very least, today’s robust results support the view that the BoC will hike rates again later this month. We are calling for a 25 bp rise to 4.5% and then a move to the sidelines to reassess. Suffice it to say that with wages still running around 5% and the jobless rate holding at 5%, the risk is heavily tilted to the need for the Bank to ultimately do even more to quell underlying inflation pressures.

Matthieu Arseneau and Alexandra Ducharme, economists with National Bank Financial:

Not only is the overall figure spectacular, so are the details. After a slump earlier this year, full-time and private employment rose for the fourth consecutive month in December to record levels. Surprisingly, the sector that contributed the most to the increase in employment in December was construction, despite the weakness in the residential sector.

While this morning’s data is undoubtedly very strong, we continue to believe that the labor market will moderate in the coming months. While headcount continues to grow, aggregate hours worked have essentially stalled since Q1. Historically, consumers have been clairvoyant in perceiving reversals in the labor market. The most recent conference board data tells us that optimism about the labor market outlook is waning, with the indicator back to its 2019 level after reaching all-time highs in 2021. The CFIB survey indicates that small businesses still perceive significant labour shortages but hiring intentions are fading. Indeed, the number of companies planning to increase their workforce is similar to those planning to decrease it, which points to a hiring freeze at the aggregate level. This morning’s data does not change our view that the Bank of Canada must be cautious before considering further rate increases following the very aggressive tightening orchestrated in 2022. In a context of extremely restrictive monetary policy and consumers being struck simultaneously by loss of purchasing power, an interest-payment shock, and an unprecedented negative wealth effect, we continue to expect near stagnation of the economy in the first half of 2023.

Derek Holt, vice-president, Scotiabank Economics:

The trade-off is that this makes it even more likely that the Bank of Canada hikes again on January 25th in keeping with the bias I’ve had since the BoC’s December communications including on statement day and subsequent communications plus following the December 21st inflation report. Governor Macklem and Deputy Governor Kozicki made it abundantly clear in their round of communications in December that they were open to either a hold or a hike this month and it would depend upon the data leading up to the meeting.

Well, hot core CPI followed by hot jobs lean toward continued hiking. That said, before firming up a call, I would still like to see the CPI inflation figures two Tuesdays from now and the BoC’s surveys including measures of wage and inflation expectations the day before. Macklem’s panel appearance next week might be risk, but low risk.

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