News & Analysis

Canada’s economy added 39,800 new jobs on net in May, more than the 27,500 expected by economists and the 15,300 jobs added in April. The job gain was nevertheless well within the range of forecasts, a range that revealed broad market uncertainty as it spanned a wide range of -1,000 to +80,000 net jobs.

The participation rate held flat yet again and taken together with the rise in jobs, pushed the unemployment rate down to 5.1%, another new all-time low for Canada. The distribution of job gains was far more unexpected than the headline figure: the headcount of full-time employees rose 135,400 vs the 22,600 expected, while part-time employment declined by 95,800 when a gain of 9,900 was expected. That’s a positive sign for the labour market, as full-time jobs are generally higher quality, higher paying, and more desirable roles. On an industry basis, services (+80.9k) were the main driver of job growth, while goods-producing industries (-41.2k) acted as a significant drag.

With discretionary services like wholesale & retail trade (+37.8k) and food & accommodation (+19.8k) posting respectable job gains, we are seeing no sign yet of a change in hiring patterns that could spill into slowing consumer demand conditions.

Wage growth for permanent employees came in at 4.5% YoY, a substantial upside surprise from the 3.8% expected and 3.4% from April. While that’s still running below Canada’s rate of inflation (6.8% YoY in April), implying that Canadian consumers’ purchasing power continues to be eroded by higher and higher prices, it is an unwelcome sign for the Bank of Canada as higher wages push up consumer demand and thus inflation. And with unemployment continuing to break new all-time lows, the lag from a tight labour market where workers have more bargaining power points to yet higher wage growth down the line.

Without some slowing in wage growth, central bankers will continue to worry that the hot labour market is making their job of bringing inflation back down even harder.

As a result, today’s report suggests on the margin that the Bank of Canada is more likely to conduct a 50 basis point hike at its next meeting on July 13. For that reason, we are upgrading our previous call for the July meeting, which we made back on April 7, from 25bps to 50bps, which brings us in line with consensus. However, today’s US CPI data, which was released at the same time, suggests that there are risks of a similar upgrade in the Fed’s projected path. In light of today’s developments, our USDCAD forecasts remain under review.

Jobs gains driven by the services sector in May

Despite today’s jobs report pointing toward higher interest rates in Canada, the market reaction in Canadian assets was overshadowed by the surprise in US CPI.

Canadian bond yields rose 5.2bps at the 2Y tenor and 0.3bps at the 10Y, while US yields climbed 11.7bps at the 2Y and 2.4bps at the 10Y. With the interest rate differential turning more favourable for the US, the loonie depreciated on the announcement, with USDCAD rising to the upper half of the 1.27 handle after substantial short-term volatility. Equity futures are trading lower, with S&P futures down 1.5% and TSX futures down 0.9%.



Jay Zhao-Murray, FX Market Analysis


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