Canada Jobs Surge Cuts Rate Cut Odds, Market Skepticism Remains

Key Takeaway

• Canada's job report for April showed a surprising addition of 90,400 jobs, reducing the likelihood of a June rate cut from 60% to 44%.
• Discrepancies between labor force and payroll data suggest potential overestimation of job growth, highlighting underlying market weaknesses.
• Despite strong April job growth, concerns about youth unemployment and job security temper expectations for the Bank of Canada's monetary policy direction.

Market Reaction to Job Data

The Canadian dollar saw an uptick against the U.S. dollar following a labor report that exceeded expectations significantly. The report, released by Statistics Canada, showed an addition of 90,400 jobs in April, a figure that starkly contrasts with the anticipated increase of 20,000 jobs based on forecasts. This surge in employment figures led to a reevaluation of the Bank of Canada's (BOC) monetary policy, with traders scaling back their expectations for a rate cut in June. Previously, the market had priced in a more than 60% chance of a rate reduction, which has now been adjusted to about 44%. The employment gains were notably concentrated in part-time positions and were predominantly seen in sectors such as professional/tech/scientific services, food & accommodation, and health care, which have shown volatility in recent months.

Discrepancies Highlighted in Job Growth

Despite the positive headline job growth numbers, discrepancies between different sets of labor data have raised questions about the robustness of the job market's recovery. A significant gap has been observed between the labor force survey, which reported a gain of 183.8k jobs over six months ending in February, and payroll data indicating only 17k jobs added during the same period. This discrepancy, highlighted by Fred Demers of BMO, suggests potential overestimation of job growth by the labor force survey. The divergence between these datasets reached a peak in November, with a gap of 205.7k jobs, pointing to underlying weaknesses in the job market that are not immediately apparent from the headline figures.

Indicators of Labor Market Weakness

Further analysis of the Canadian job market reveals several indicators of underlying weakness. Youth unemployment has increased at a rate approximately four times faster than the overall rate for all age groups. Additionally, perceived job security among Canadians has fallen to its lowest level since the onset of the pandemic, as per a Bloomberg-Nanos poll. These factors contribute to a more nuanced understanding of the labor market's condition, suggesting that despite the strong job growth reported for April, there are significant concerns regarding employment stability and market health.

Market Implications and Rate Cut Expectations

The unexpected strength in the April job report has led to a shift in market expectations regarding the BOC's interest rate decisions. Initially, there was a strong speculation that the BOC might cut interest rates by June 5, with overnight swap markets pricing in a two-thirds chance of such an event. However, the strong jobs report has tempered these expectations. Additionally, global monetary policy dynamics, including the potential for US interest rates to remain high for an extended period, have been identified by Goldman Sachs as a factor influencing the Canadian dollar. This context underscores the complexity of the factors at play in determining the future direction of Canada's monetary policy and currency valuation.

Street Views

• Charles St Arnaud, Credit Union Central Alberta (Neutral on Canada's labor market and interest rate outlook):

  "It [the jobs report] is a statistical aberration, which is unlikely to materially shift the central bank’s thinking."