This ‘must be worrying’ for the BoC: How markets and economists are reacting to Canada’s surprisingly strong jobs report

Canadian job growth continued to be more robust than economists were expecting last month, even as fears of an economic slowdown mount. But economists say the labour market strength isn’t enough for the Bank of Canada to lift its pause in monetary tightening – and money markets remain convinced that interest rate cuts will be made before the end of this year.

The economy gained a net 34,700 jobs, almost entirely in the private sector, and the unemployment rate held steady at 5.0%, near a record low for the fourth consecutive month, Statistics Canada reported this morning.

Analysts surveyed by Reuters had expected a net 12,000 jobs would be gained in March and the unemployment rate would edge up to 5.1% from 5.0% in February.

Financial markets are taking the stronger-than-expected jobs data in stride.

While the Canadian dollar initially spiked in the minutes after the 830 am ET jobs data release, it soon headed in the other direction and at last check is down slightly for the day, at 74.09 cents US. The Canada two-year government bond, which is sensitive to bets on future Bank of Canada moves to its overnight rate, was up a modest 4 basis points to 3.611% by shortly after 9am, outpacing a slight rise in the equivalent U.S. bond.

The stronger-than-expected data also had minimal impact on where money markets see future moves by the Bank of Canada.

Implied probabilities for future rate moves based on trading in swaps markets still suggest the Bank of Canada will cut its trend-setting overnight rate by a quarter of a percentage point by September, and a full 50 basis points by the end of this year, according to Refinitiv Eikon data. Cementing those bets this week has been a recent string of weaker-than-expected U.S. economic reports, especially in the labour and manufacturing sectors. Federal Reserve policy moves have considerable influence on future actions by the Bank of Canada, and right now, money markets are placing equal odds on either a 25-basis-point interest rate hike – or no move at all – at the Fed’s next meeting in early May.

Here’s how money markets are pricing in further moves in the Bank of Canada overnight rate for this year as of 1030 am ET. The current Bank of Canada overnight rate is 4.5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing.

Here’s how economists and market analysts are reacting:

David Rosenberg, founder of Rosenberg Research

Canada’s job miracle is a mirage. … The robust headline figure masks some less favourable developments occurring beneath the surface. The industry composition of the job growth pointed to a weakening economic backdrop and nearly half the employment creation was in part-time positions as well as in the 15-24 years age cohort. In light of these trends, alongside slowing wage growth, we don’t believe there is enough in this report to sway the Bank of Canada away from its pause strategy.

All of the employment gain and then some occurred in one sector — transportation and warehousing. A 5% chunk of the employment pie saw job creation of +40.6k and the other 95% posted a 5.9k job decline. A highly skewed and misleading report. Services-producing industries on the whole saw a 75.5k gain in the month of March, aided as well by business support (+30.5k), and finance/insurance/real estate (+18.5k). The rest of the services subindustries were uninspiring — particularly, health care (-12.8k); and “other” services (-11.1k). And retail/wholesale trade (-2.4k) posted back-to-back declines and have been down in 9 of the past 10 months, reflecting the squishy-soft consumer spending backdrop.

The sharp fall-off in the cyclically-sensitive goods-producing industries (-40.9k; sharpest drop since April 2020!) immediately caught our attention — as it points to unfavourable read-throughs on the health of the economy. Before the pandemic, we hadn’t seen a monthly plunge this large since April 2009 when the Global Financial Crisis was reaching its maximum pain-point. Every subsector in this grouping was lower on the month, with the bulk of the losses observed in construction (-18.8k) as the residential real estate market continues to reel from last year’s rate hikes (and more pain likely lies ahead on this front as the lags continue to work their way through the economy). Natural resources (-10.6k) and manufacturing (-6.1k) also posted notable declines. …

That being said, the workweek did rise 0.4% on the month — clearly a positive feature of this report. In fact, hours worked were 5.0% higher on the quarter (annualized). So, there are upside risks for Q1 real GDP growth relative to the +1.0% QoQ (annualized) consensus estimate (which only makes sense if productivity fell out of bed last quarter).

Stephen Brown, deputy chief North America economist, Capital Economics

The unemployment rate remained very low at 5.0% in March but, with wage growth slowing and the survey indicators pointing to a sharper decline ahead, the Bank of Canada is unlikely to be too concerned. We expect the Bank to keep policy unchanged again next week.

The 34,700 rise in employment in March was stronger than the consensus estimate of a 12,000 gain, but less than the prior six-month average increase of 58,000. The gain was driven entirely by the service sectors, with transportation & warehousing employment surging by 41,000, support services employment by 31,000 and finance & real estate employment by 19,000. By contrast, employment declined in each of the goods producing sectors, with construction employment falling by 19,000, as the weather-related jump at the start of the year went into reverse. Despite another record-breaking surge in the population, of 81,000, the labour force increased by just 21,000 as the participation rate declined, which kept the unemployment rate unchanged at 5.0%. Hours worked rose by 0.4% m/m although, as that appears to have been driven by the lower productivity sectors, GDP probably only inched up, at best, last month.

The big surprise was the decline in wage growth to 5.2% y/y, from 5.4%, which implies that average hourly earnings fell by 0.1% m/m in seasonally adjusted terms. While slower wage gains may seem at odds with the low unemployment rate, they match the message from the Business Outlook Survey released earlier this week, which showed a significant easing of labour shortages. That evidence of easing labour market conditions is one reason to expect the Bank of Canada to keep policy unchanged again next week, despite the low unemployment rate and the economy’s strong start to the year.

James Orlando, director, TD Economics

The Bank of Canada knows the economy is running too hot. Continued labour market strength is boosting the incomes of Canadians, enabling them to increase their spending notwithstanding the high interest rate environment. Today’s report corroborates the signal we have been getting from credit/debit card spending data, and supports our forecast for Canadian GDP to come in around 2% for the first quarter of 2023. That is not the kind of growth the BoC wants to see when it is trying to ensure that inflation gets back to target. Although today’s report isn’t enough to get the Bank off the sidelines, the fact that nothing so far seems to be able to crack the Canadian jobs market juggernaut must be worrying.

Jay Zhao-Murray, FX Market Analyst at Monex Canada

The clashing signals from job and wage growth roughly net each other out. The labour market is still tight, but further job gains aren’t necessarily generating further wage pressures–a key consideration for inflation. For the Bank of Canada, the data unlikely moves the needle and we continue to expect them to hold rates at their next meeting. Instead of prioritizing the macroeconomic data, financial stability considerations are more likely than not to determine the next course of action once the Bank departs from its current stance of holding rates. Given the still tentative backdrop in financial markets, especially given the emergence of recession risk south of the border, we think the BoC will temper its hawkish bias at its next meeting on Wednesday. The risk of remaining hawkish is simply too great. …

The knee-jerk market reaction saw USDCAD fall, but sceptical traders quickly pushed back, reversing the immediate loonie strength. The rationale is fairly straightforward: unexpectedly strong job growth normally means a stronger economy, higher inflation, and potentially a hawkish monetary policy response. The immediate algo-driven reaction was simply what would make sense in normal times. But given the unlikeliness of the Bank of Canada hiking with a possible crisis brewing, the move’s reversal is also perfectly logical. In interest rate markets, the yield on GGBs rose by a few basis points, although they are close to unchanged on the day. Futures for the TSX equity index haven’t moved much since the data release.

Andrew Grantham, senior economist, CIBC

While the Bank of Canada is expected to remain on hold next week, the still low unemployment rate and strong wage growth will likely see policymakers maintaining a bias towards further hikes, rather than hinting at the cuts markets have been pricing in, within the statement.

Derek Holt, vice-president, Scotiabank Economics

Canada’s jobs juggernaut continues to roll onward with convincing momentum. There are definitely forward-looking risks to the outlook, but at least so far the Canadian job market and the Canadian economy remain highly resilient. This continues to counsel against expecting rate cuts anytime soon. … A fly in the ointment was that wage growth cooled again but overall the numbers support a continuation of the conditional pause.

Douglas Porter, chief economist, BMO Economics

The Canadian jobs machine just keeps on keeping on. The combination of still-strong job growth, a tight jobless rate, and +5% wage growth is likely still too hot for the Bank of Canada’s comfort. Even so, this generally solid report will not prompt the BoC off the sidelines. However, we’ll likely need to soon see some softening in growth and the labour market to help ensure that underlying inflation is headed back to the Bank’s 2% target.

Royce Mendes, managing director & head of macro strategy at Desjardins Capital Markets

The robust employment report suggests that economic momentum seen in January and February continued into March. That said, although the data are inconsistent with the Bank of Canada’s goal of cooling the labour market and the economy more broadly, the numbers shouldn’t change the modus operandi of the Bank of Canada. Look for policymakers to hold the line next week, leaving the policy rate at its elevated level and quantitative tightening on autopilot, as they wait for tighter monetary conditions to work their way through the economy. They’ll keep the door open to more hikes, but the recent banking sector turmoil raises the bar to unleash any more rate increases.

Matthieu Arseneau and Alexandra Ducharme, economists with National Bank Financial

It is true that such gains would usually have caused the central bank to question the current pause in monetary policy tightening. But these huge employment gains must be placed in the current Canadian demographic context. In the first three months of the year, the population 15+ grew by 204K, by far the largest quarterly increase on record. As a result, the ranks of the labour force swelled by 216K, preventing the unemployment rate from falling despite stellar job creation.

And there were some encouraging elements in this morning’s report for the central bank, particularly regarding the wage pressures that are partly responsible for the recent inflation surge. Even though the unemployment rate remains near historic lows, average hourly earnings of permanent employees moderated faster in March than the consensus of economists had expected. The Bank of Canada’s recently released Business Outlook Survey has eased our fears of a prolonged wage-price spiral. Intentions to raise wages have returned to more normal levels, which is consistent with declining business concerns about the severity of labor shortages. Other indicators also suggest that the strength in hiring in the first quarter may be temporary. Sluggish business formation and declines in corporate profits and business investment in the third and fourth quarters point to a soft patch in the labor market in 2023. All in all, the Bank of Canada should maintain its pause in monetary tightening given the encouraging developments on the inflation front. The rate hikes have been very aggressive and will continue to weigh on the economy given the lag in their pass-through, not to mention the turmoil in the U.S. banking sector, which also calls for caution.

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