Mixed signals from the Canadian labour market

The October jobs report delivered a mixed bag of signals for the BoC.

While the net change in employment dropped sharply from September, undershooting market expectations, this is something we had predicted given the impact of seasonal adjustment to last month’s print. More surprisingly, the unemployment rate stabilised, which combined with a jump in average hourly earnings, is likely to give the BoC pause for thought.

We continue to think that a further 50bp rate cut is more likely than not in December, provided other data releases between now and then show clearer signs of an underlying slowdown. But risks of a step down in the easing pace have risen in our eyes following today’s labour market report.

Looking at the data in more detail, the headline drop in employment change does look large at first glance. September saw 46.7k jobs gains. This month, that was down to 14.5k. However, as we noted last month, the strength in the headline figure was misleading – fewer temporary jobs added over the summer means fewer job losses in September, translating into phantom job gains on a seasonally adjusted basis.

Factoring this in, last month’s print was soft, and today’s reading is a continuation of that trend. In short, the employment data suggests that the labour market remains soft, and September’s figure was an aberration.

We think a similar story can be told about this month’s unemployment reading too, which stabilised at 6.5%. Markets had expected to see a rise in the unemployment rate to 6.6%. This, however, stemmed from a further fall in the participation rate, which fell 0.1pp to 64.8%. This was the lowest reading since 1997, pandemic period excluded. We are also inclined to think that composition effects underpinned at least some of the rise in wages, which jumped from 4.6% YoY in September, to 4.9% in this latest set of figures.

All told, while we are inclined to view today’s readings as indicative of further labour market softening under the surface, final interpretation will likely depend on the broader evolution of data over the coming weeks.

A rebound in inflation pressures and an improved jobs report next month, and today’s data is likely to look like the start of a turnaround for the labour market. Conversely, a further softening across other indicators and the October jobs data appears consistent too. We think the latter outcome is the more likely one too, given the anaemic picture outlined in the BoC’s Q3 Business outlook.

Nevertheless, today’s data is likely to give the Governing Council some pause, and marginally raises the risk that they fail to deliver another 50bp cut next month. With this in hand, Loonie traders are keeping their powder dry today, with USDCAD trading water post-release.

Author: 

Nick Rees, Senior FX Market Analyst

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