Canada’s job losses in July were unexpected, and the central bank is expected to pause interest rate hikes.

Canada's job losses in July were unexpected, and the central bank is expected to pause interest rate hikes.

Canadian Economy Unexpectedly Sheds Jobs, Raising Questions About Interest Rates

The Canadian economy took an unexpected hit in July, shedding a net 6,400 jobs. This setback, coupled with a slight increase in the jobless rate to 5.5%, has fueled speculations that the Bank of Canada may pause its interest rate hike campaign. Analysts had initially predicted a net gain of 21,100 jobs, making this decline quite surprising. Furthermore, this marks the second month out of the past three where the country’s labor market has lost jobs, as revealed by Statistics Canada.

Despite the decline in job numbers, Canada’s labor market has displayed resilience due, in part, to strong immigration. This resilience has prevailed even as the central bank raised its key overnight rate ten times since March 2022. However, concerns about inflation levels, which currently remain above the Bank of Canada’s 2% target, led to rate hikes in June and July. The bank has stated that it will closely monitor incoming data in order to assess future rate moves. Its next announcement is scheduled for September 6.

Interestingly, the latest data has caused a shift in the market’s expectations for upcoming rate hikes. Before the release of the job numbers, there was a 32% chance of a rate hike in September. However, this percentage has now dropped to 28%. Similarly, the market’s expectations of at least one more rate hike by the end of the year have decreased from 80% to 60%.

Doug Porter, the chief economist at BMO Capital Markets, believes that the economy is showing signs of softening. He points out that the unemployment rate has increased by six tenths of a percentage point since July 2022. Porter suggests that the central bank might view this as a reason to pause on the rate hike front.

The Canadian dollar also witnessed a slight decrease, slipping to C$1.3375 against the U.S. dollar, or 74.77 U.S. cents.

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Royce Mendes, the director and head of macro strategy at Desjardins, asserts that the recent data strengthens his view that the central bank has completed its rate hike cycle.

While the headline figures indicate some sluggishness in the labor market, the average hourly wage for permanent employees saw a significant rise. In July 2022, there was a 5.0% increase in average hourly wage compared to the same period the previous year. Although this marks a slight dip from the 5.1% and 5.2% increases in May and April, respectively, it still remains higher than June’s 3.9% rise. The Bank of Canada pays close attention to this figure when formulating its monetary policy decisions.

Stephen Brown, the Deputy Chief North America Economist at Capital Economics, expresses doubt that the jump in year-over-year wages will be sustained. Brown believes that the softer labor market data supports the assessment that the Bank of Canada is unlikely to follow through with their current plan to raise rates further.

It is worth noting that despite the July job losses, Canada’s monthly employment growth has averaged 22,000 in 2022, according to Statscan.

Looking ahead, the Bank of Canada has two critical data sets to consider before its September 6 rate announcement: July inflation figures, scheduled for release on August 15, and second quarter growth numbers, which will be published on September 1. These data points will provide further insight into the country’s economic performance and potentially influence future monetary policy decisions.

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