News & Analysis

Although markets were already anticipating a sizable slowdown from June’s solid job gains, the net employment number was even more supportive of a hold from the BoC as it showed 6.4k jobs were lost on net over the course of July.

This undershot the median expectation for a 25k increase and came in even weaker than the lowest survey estimate. With population growth still strong (+81.9k), the labour force participation rate edged down a tenth to 65.6%. The decline in employment outweighed the decrease in participation, leading the unemployment rate to tick up to 5.5% with its third consecutive increase. All things considered, this is notably higher than the 5.0% level where it sat during the first four months of the year.

July marks the second month where employment fell this year, but unlike in May when the decline was mostly among youth and influenced by quirks with StatsCan’s seasonal adjustment model, today’s data offers a clearer signal of a true softening in the labour market.

This is highlighted by the change in jobs for core-aged workers (-31.3k), a noteworthy decrease and the first since February where it fell by a statistically insignificant 2.7k. Considering that a softer job market should help to close the output gap and put downward pressure on inflation, particularly in services, today’s report underscores our view that the Bank of Canada’s recent upgrade to their inflation forecasts were too aggressive, and will likely be undershot.

This supports our view that the Bank of Canada is unlikely to hike rates again this cycle, but the risk still remains. This is especially the case given the surprising surge in wage growth for permanent employees, which rose from 3.9% to 5.0% YoY in July alone.

The construction industry stands out as the main source of job losses in July

On an industry basis, the most noteworthy change was in the construction sector, which led the losses with a -44.7k job decline. The decline in construction is likely related to the lack of appetite to build homes, with housing starts looking pessimistic on the future supply of new housing. Other industry changes paled in comparison, ranging from -16.7k in the public sector to +25.1k in healthcare and social assistance. StatsCan reported that out of 16 industries, only half of the changes in employment were statistically significant, and those 8 were evenly split across increases and decreases. Outside of construction and the public sector, the two remaining industries where job losses were significant were information, culture, and recreation (-15.8k) and transportation and warehousing (-13.9k), while the three other industries outside of healthcare with significant gains were education (+18.8k), finance (+15.0k), and agriculture (+11.6k).

It is worth noting that yet another CPI report will arrive ahead of the Bank of Canada’s September meeting, which will clarify the signal for the economy as a whole.

Given that today’s data sends conflicting signals about where monetary policy should be, with core-aged job losses arguing for a pause and wages arguing otherwise, the tentative nature of the report should be taken cautiously. This is especially the case given the Bank of Canada’s explicit preference to balance the risks of over and under-tightening, which Governor Macklem repeatedly emphasised at the previous interest rate meeting last month. Markets are now pricing a 23% chance of a hike next month, down 10 full percentage points from yesterday. Should core inflation show progress after having been stuck between 3.5% to 4% for many months, Bank officials will likely have enough confidence to keep the policy rate firmly at 5%.

While volatility in USDCAD picked up from yesterday, the loonie was left unchanged against the dollar after markets quieted down, but is trading poorly against every other currency in the G10. Given that US employment missed expectations but still posted a sizable increase of +187k and the Canada-US yield spread widened in favour of the US, it is quite notable that the loonie hasn’t performed even worse.

Over a tactical horizon, this could lead to further USDCAD upside, but momentum is quite minimal at the moment.



Jay Zhao-Murray, FX Market Analyst


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