Canada added 40,000 net jobs in August, doubling the median expectation for a 20,000 increase. This fell slightly short of the increase in labour supply, with a 54,200 increase on that front, leaving the unemployment rate unchanged at 5.5%.
The report marks a continued slowdown in the pace in which the labour market is normalising, but we are still looking at a softer market than we were at the start of the year. For instance, the ratio of new hires to new entrants over a rolling 3-month window was about equal in Q1. That same ratio steadily declined throughout the year, but jumped up to one hire for every two entrants across the summer months. While this markets a slowdown in the pace in which slack is re-emerging in the labour market, the recent trend isn’t overly worrying as firms are still hiring at a pace below population growth.
Labour market slack continued to build in August, just at a slower pace
Instead of the unemployment rate, traders instead focused on the net employment and wage figures, both of which suggest the Canadian economy isn’t necessarily tipping into recession.
However, the data isn’t as strong as the headline figures suggest. A significant chunk of this month’s employment gains appear to be a reversal from July, with a 30k gain in construction jobs for August recouping two thirds of the previous month’s losses, and a 37k increase in core-aged work more than reversing July’s 31k decline. What is of concern for the Bank of Canada, however, is the fact that average hourly earnings rose by 23 cents to $33.47, beating the April’s high of $33.38. Wages are now 4.9% higher on average than a year ago, a rate that is still inconsistent with 2% inflation.
Responding to the still positive net employment figure and uptick in wage growth, markets have raised the odds of an October hike from the Bank of Canada, inviting the loonie to post its strongest intraday gain in a week. But with those odds now sitting at 30%, it’s clear that markets are still unconvinced that the Bank will be spurred into action, especially since Macklem’s speech yesterday sounded like he wants the hiking cycle to be over. We share the market’s view for the next meeting, as signs of economic resilience will need to be confirmed in the next string of data releases for the BoC to shift stances once more. We have previously argued that job gains are now slower and less consistent than they used to be at the start of the year, and today’s print isn’t enough to change our minds.
Dialling into the details of the employment report further, the partial rebound in construction wasn’t even the largest driver of employment gains by industry, coming in second place.
Instead, the main source of job gains was in the professional, scientific, and technical services sector, where employment rose by 52k. After languishing all year, August saw the professional services sector overcompensate for all of the job losses previously sustained. Between January and July, the industry had shed jobs in every month but one (a measly 5k gain in March), with year-to-date losses having totalled 36k. The breadth of job gains across industries was modest, with just over half (9 of 16) industries posting increases. To the downside, the greatest job losses were in educational services (-44k) and manufacturing (-30k).
StatsCan noted that labour market churn has fallen, suggesting that work is now more difficult to find.
The share of job-seekers who were unemployed in July and remained jobless in August was 57.8%, up from 53.4% a year earlier. Furthermore, the job-changing rate dropped to 0.4%, which is well below January’s peak of 0.8% and the pre-pandemic 2017-19 average of 0.7%. The fact that workers are having a tougher time finding jobs is an obvious sign that labour market slack is building, and workers will now find it harder to find wage increases by laterally job-hopping. This is yet another reason why we do not expect the BoC to react just yet. On a more positive note, however, the fact that the labour market is slowing but not crumbling raises the odds that the central bank can engineer a soft landing, which has long been Governor Macklem’s goal.
The immediate response in markets saw USDCAD fall by about 60 pips, firming up the loonie to levels it traded at during the start of the week.
In the hour following the data release, however, traders faded about half of the loonie’s gains. A similar trend was seen in the bond market, where Canadian 2-year yields spiked on the announcement before giving up some gains. The yield on 2-year notes is now only 1.5bps higher than yesterday, but despite the small magnitude, this still stands out on an international basis where most countries’ yields have slipped. The retracement in the response of Canadian assets to today’s report highlights how the underlying details are somewhat softer than the net employment and hourly wage measures show.
Jay Zhao-Murray, FX Market Analyst