The Canadian economy added 59.9k jobs in June, a 0.3% increase that strongly beat the consensus estimate of 20k. Jobs added were concentrated in full-time work (+110k), a clear signal that employers still have enough confidence in the economy’s near-term prospects to hire permanent employees despite survey measures suggesting otherwise.
The robust increase in employment largely reflects an even greater number of workers entering the labour force (+114k), pushing the unemployment rate two tenths higher to 5.4%. While this should help ease the shortage of skilled workers and weigh on wage growth, the fact that the labour supply grew faster than the population (+83.6k) means that the job market is still enticing enough to bring a greater proportion of Canadians back into work. Furthermore, while StatsCan reported last month that seasonally adjusted job losses in May were driven by a slow start to the summer jobs season for students, this month showed a reversal with a 29.8k increase for June. In our view, the main sign of softness is in wage growth, where average hourly wages are back to levels last seen in March, which have declined by 26 cents to $33.12 from April’s high, leading year-on-year growth (+3.9%) to miss expectations by 5 tenths of a percentage point.
All things considered, however, this report strengthens the case for the Bank of Canada to follow up its June hike with another next Wednesday, while softness in wage growth compounds our view that this will likely be the last hike of the cycle. This would leave the BoC terminal rate at 5%.
Student hiring is actually quite normal
Last month’s report was a useful reminder that seasonally adjusted data must be taken with a grain of salt, especially following massive structural changes to the economy post-Covid. We found that despite reports that calendar-adjusted youth employment fell by -77k in May, StatsCan’s model overemphasised more recent data, when job growth was atypically strong due to the post-Covid recovery effect. In fact, on an unadjusted basis, job growth for youth aged 15-24 was close to 200k last month and less than 10% shy of the historical average for May, whereas the downward seasonal adjustment was the most punitive in recent history. Today’s report showed that the seasonal adjustment worked in the opposite direction in June, with the seasonal threshold at 88.3k compared with the 2010-2023 average of 112k (which accounts for recent years of abnormal data). In terms of non-seasonally adjusted data, student employment increased by 118.1k jobs, slightly above the 2010-2019 average of 115.3k (which excludes the pandemic era).
Given that student hiring is much more seasonal than for most workers, given the nature of the school year, the distortions driven by StatsCan’s adjustment model last month were far smaller for employment across all age groups, with both raw and adjusted data indicating that core employment was strong.
Today’s report should dispel fears about the “slow start” to student hiring raised last month, and compounded with another strong increase in core-aged employment in June, this adds to the case for the Bank of Canada to deliver another 25bps next week, raising the policy rate to 5%.
Raw data shows that youth hiring was slightly above pre-pandemic averages in June
Employment trends remain intact in June
On an industry basis, the aggregate increase in jobs occurred in many of the same areas where we’ve seen consistently strong labour demand year-to-date. On a seasonally adjusted basis, the two strongest increases were in wholesale and retail trade (+32.6k) as well as manufacturing (27.3k), where hiring in 2023 has run well above historical averages. On top of this, the healthcare (+20.7k) and transportation (+10.4k) industries also saw statistically significant increases. Both the goods (+18.7k) and services (+30.9k) sectors saw robust employment gains, with the larger services sector naturally leading the charge. One counterpoint to our view is that the breadth of job increases across individual industries wasn’t that strong, with only 7 of 15 industries showing net increases. Nevertheless, for most industries, the fluctuations in hiring didn’t meet the threshold of statistical significance, with construction (-13.5k), educational services (-14.0k), and agriculture (-6.0k) being the only industries where job losses met that threshold.
Markets finally buy into our view of a final hike next week
Upon the release of the report, markets finally began to buy into our view that the Bank of Canada is set to hike once more in July. Earlier this week, overnight swaps priced roughly even odds for a hike versus no change, whereas they now see a two-thirds chance of a hike.
While we still view the market-implied odds as being slightly under-priced, we believe that they are now much closer to our subjective probability.
Along with a softer jobs report released simultaneously for the US, the yield spread between US and Canadian 2Y yields has tightened by about 8bps in favour of Canada, leaving the loonie half a percent stronger on the day against the greenback, reversing almost all of yesterday’s losses.