Canada’s bumper job growth doesn’t change the outlook for the BoC

After months of relatively benign employment growth in the context of a working population that is growing at 3.3% per year, the Canadian economy was seen adding 90.4k jobs in April.

With those active within the labour market only increasing by 73k last month, this saw the unemployment rate hold steady against expectations of a continued increase and the recent uptrend that has been in place since April 2023. While there were always risks to today’s employment figures, particularly as last month saw youth employment contract by -28k due to temporary seasonal factors, that doesn’t necessarily take away from the strength of today’s positive beat as only 39.7k of the 90.4k jobs created related to youth workers. Instead, most of the employment gains were concentrated amongst core workers, specifically males (+41.0k, +0.6% MoM) in full-time positions (+41.4k, +0.7% MoM).

With full-time job growth elevated within core working ages, the readthrough from today’s jobs report is structurally positive for the Canadian economy, especially after months in which employment growth has not only lagged overall population growth, but has also exhibited a weak composition.

The details of today’s jobs report were also firm in terms of wage growth and hours worked. While the hourly wage rate cooled from 5% in March, the 0.2pp drop to 4.8% YoY was slightly more moderate than expectations. Moreover, total hours worked rose by 0.8% in April, with one-in-four workers reporting that they have had to come into work or connect remotely at short notice more than once in the past month. Taken together with the strong job creation, this is suggestive that firms are somewhat supply constrained, with data showing the Canadian economy is beginning to reaccelerate, contrary to expectations.

That said, 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.

Despite this, markets have taken an alternative view.

Pricing of a cut from the BoC next month has dropped 20 percentage points to just 45%, while the tail risk of two consecutive cuts has been completely removed. This move in short-term interest rates has led front-end Canadian bond yields to rise 6bps, outperforming US counterparts by 4bps, and leading the loonie to post moderate gains of just 0.2%. While the move in rates doesn’t align with our more cautious view on near-term BoC policy, the tempered rally in CAD is more sympathetic, especially given the risk associated with US inflation data next week.

Although markets have become less confident on the dovish outlook for the BoC over summer, that has yet to transpire into significant CAD strength as USDCAD remains within recent ranges

 

 

Author: 

Simon Harvey, Head of FX Analysis

 

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