April’s surge in Canadian employment looked anomalous when it was announced last month, even with the employment data proving choppy of late. This observation has today been proven correct as the pace of employment growth cooled once again from 90.4k to 26.7k in May, significantly undershooting the overall level of population and labour supply growth, which stood at 97.6k and 54.5k respectively.
This resulted in the unemployment rate rising yet another 0.1percentage points to 6.2%, leaving it 1.1pp above the lows seen during the post-pandemic recovery and back at levels last seen in 2017 when ignoring the lockdown periods throughout 2020-early 2022.
May also saw the strong composition of April’s employment report get eroded. Full-time employment for 15 years and over fell by -35.6k last month, almost reversing April’s 40.1k expansion. Specifically, however, the contraction in full-time employment in core aged workers (25-54 years), where the bulk of the structural wage gains take place, was even more substantial, falling 53.8k to reverse April’s gain of 50.6k. Although the data must be taken with a pinch of salt given how volatile it is on a monthly basis, as evidenced by the fact that the contraction in core-aged full-time positions was entirely concentrated in female workers where there has also been a significant increase in involuntary part-time employment, the outcome of today’s jobs report remains clear.
Slack continues to build in the Canadian economy across an array of macroeconomic indicators. This should sustain the trend of disinflation and keep the Bank of Canada on track to cut rates at a faster pace than most of its peers.
The cyclical weakness of the Canadian economy wasn’t only visible across demographics in May, but also across sectors. Out of the industries that recorded employment growth last month, only accommodation and food services (+12.9k) and manufacturing (+8.1k) were procyclical industries. This looks even less impressive when considering that accommodation and food services employment remains some 9% below pre-pandemic levels. Of the other procyclical industries, wholesale and retail trade (-6.3k), transportation and warehousing (-20.6k) and construction (-29.6k) saw employment levels contract.
The only area of contention in today’s employment report comes from the wage figures. Average hourly earnings growth accelerated from 4.7% to 5.1% YoY, implying a strong 0.7% MoM increase in seasonally adjusted terms. However, we are inclined to discount the signal from the wage measure as the data hasn’t been consistent with the trend of growing labour market slack nor has it been corroborated by data showing increasing core price pressures.
In response to today’s labour market report, Canadian bond yields have risen and the loonie has outperformed against the dollar across the G10 complex.
Given this isn’t supported by the domestic labour market data, which clearly adds to the case that the BoC may need to cut rates more than once before the Fed meets on September 18th, we suspect this is once again the product of the hotter US data. As we noted in our latest CAD outlook, there seems a reluctance amongst market participants to price significant divergence in BoC and Fed policy despite the stark contrast in their respective economic climates.
While this has been confirmed by today’s market response, we remain optimistic that continued economic divergence will ultimately prompt a further widening in rate spreads, although it will likely require another inflation and labour market report to trigger it. As a result, we remain positive on our 1.38 USDCAD call over 3-months.
Author:
Simon Harvey, Head of FX Analysis