Canada’s economy unexpectedly shed a net 2,200 jobs in March, while the jobless rate increased to a new 26-month high of 6.1%. Traders in money markets immediately raised their bets that the Bank of Canada will start cutting interest rates in June.
The jobs report was much weaker than markets were positioned for. The Street had been expecting a net gain of 25,000 jobs and the unemployment rate to rise to 5.9% from 5.8% in February.
With the 0.3 of a percentage point rise - the biggest jump since August 2022 - the unemployment rate is the highest since the 6.5% recorded in January 2022. Before the COVID-19 pandemic, Canada’s jobless rate was last as high as 6.1% in November 2017.
Friday’s jobs report is the last major data to be released before the Bank of Canada’s next rate announcement on Wednesday. While economists and money markets are assigning low odds of a rate cut next week, reaction to Friday’s data suggests it can’t be completely ruled out, either. Markets are now pricing in about a 22% probability of a cut next week, rising to about 70% odds of a cut in June. Prior to Friday’s jobs data, markets were pricing in about a 60% chance of a June cut.
Nevertheless, Canadian government bond yields are higher this morning, as the U.S. simultaneously released stronger-than-expected jobs data. U.S. Treasuries set much of the direction for Canadian bonds. Both the Canadian two-year and five-year yields are up about 3 basis points. That’s about half the rise being seen, however, in yields of their U.S. Treasury equivalents.
Reaction in currency markets to the weak Canadian/strong U.S. jobs numbers was even more apparent. The Canadian dollar immediately lost almost half a cent against the greenback, trading at 73.32 cents U.S. post jobs reports.
The following table details how swaps markets are pricing in further moves in the Bank of Canada overnight rate, according to Refinitiv Eikon data as of 1016 am ET Friday. The current Bank of Canada overnight rate is 5 per cent. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
And here’s how markets were pricing in monetary policy changes just prior to the jobs data being released
Friday’s data also firmed the belief of many economists that a rate cut is on its way in June. Here’s how economists and market strategists are reacting in written commentaries:
Olivia Cross, North America economist, Capital Economics
The jump in the unemployment rate in March, together with evidence of easing wage pressures, raise the chance of the Bank of Canada surprising markets with a rate cut next week, although our base case remains that the Bank will begin its loosening cycle in June. ...
The big news was that another large rise in the labour force caused the unemployment rate to jump by 0.3%-pts to 6.1%, the highest since late 2021. And there were signs that growing labour market slack is reducing upward pressure on wages. Although average hourly earnings growth ticked up to 5.1% y/y, that was largely due to unfavourable base effects, with average hourly earnings unchanged on the month in seasonally adjusted terms. What’s more, the unchanged level of total hours worked suggests that the strength of GDP growth in January and February was not sustained at the end of the first quarter. Growth is still on track to accelerate over the quarter as a whole, to around 2.5% annualised, but momentum going into the second quarter looks much weaker.
Andrew Grantham, senior economist with CIBC
The cracks that had been emerging within the Canadian labour market suddenly got a lot wider. Employment edged down by 2K in March, against consensus expectations for a 25K increase. While that admittedly isn’t a large decline given the volatility of monthly labour market data, it came in contrast to a further sharp rise in the population. ... Over the past 12 months the unemployment rate has now risen by 1%. Accommodation & food services and retail & wholesale led the employment declines by industry, suggesting sluggishness in consumer spending is impacting hiring plans. Offsetting those declines, health care saw the largest increase on the month. While markets had been pushing back expectations for a first Bank of Canada interest rate cut following strong GDP data to start the year, today’s labour force data should see them pulling those expectations forward again closer in line to our expectation for a first move in June.
David Rosenberg, founder of Rosenberg Research
The March Labour Force Survey may go down as the report that confirmed the decisive crack in the labor market. Employment shrank by -2.2k, making a mockery of expectations of a +25k gain. The +40.7k rise in employment in February went unrevised, but is looking like a one-off. March brought the first drop in employment in eight months (and before that, since September 2022). Combined with continued immigration-driven labor force growth, sent the unemployment rate up +0.3 percentage points to 6.1% (vs 5.9% expected) — that’s the first print above 6% since November 2021. This report provides yet another clear signal for the Bank of Canada to lay the table for cuts at next week’s meeting — there is now basically nothing standing in their way.
There were significant net employment losses in key demand-sensitive private services industries, which previously had been supporting employment as firms hoarded the labor that was so hard-won during the 2021/2022 shortages. ...
The only wrinkle in the report was a slight rise in average hourly wages of permanent employees (the BoC’s main wage gauge), which ticked up from +4.9% YoY to +5.0%. That’s around the mid-point of the range since mid-2022, so hourly wages are still moving sideways. Average hours worked per permanent employee was unchanged (after falling in February), but the drop in employment meant that total hours worked in the economy fell by -0.3% in March, the first aggregate hours decline since November. Since the Bank of Canada’s previous meeting, we’ve seen a sharp fall in core inflation and now a meaningfully dovish labor market report. Governor Macklem will need to get creative if he wants to find new excuses to move off on rate cuts. But the real economy is sending a strong message that ultra-tight policy is no longer needed, and its time the Bank responded.
Derek Holt, vice-president, Scotiabank Economics
Canadian jobs were flat last month, but the underlying details were better. ... The high degree of noise around the household survey positions the 95% confidence interval at between 59k lost jobs and a gain of 57k, lending caution to alarmist headlines.
There are several reasons to fade the headline flatness. One is that self employed drove the weakness with a 29k drop. ... Second, the soft headline was driven by youths and in generally unusual fashion. ... · Third, there’s something about Quebec and its youths in particular that drove the softness. Quebec saw 18k fewer jobs while Ontario (+26k) and BC (+7k) posted gains and others were roughly unchanged. Now, why did youths, especially in Quebec, drive so much of the softness? One possibility is that Quebec’s March break was a week before the Labour Force Survey reference week. ...
I don’t think this changes anything for the BoC. They look at trends, not single months. They look at the broader picture and other parts of it are more important than March jobs, like the fact their GDP forecast is being blown out of the water, the terms of trade is rising, and that fiscal contributions to future growth have to be raised. Then there is the fact that a very resilient US economy and strong jobs south of the border (+303k payrolls this morning) add to arguments for the Fed to be in no rush which— notwithstanding the BoC’s arguments for independence—probably add to cautions this side of the border.
James Orlando, senior economist, TD
This continues the trend over the last year, where Canadian firms have been unable to absorb strong population-driven labour force growth. While this has brought the labour market into balance, it also means that more Canadian workers are unemployed (280k more since the beginning of 2023). To make matters worse, hours worked fell for the first time in four months. This throws some cold water on expectations that the recent string of hot economic data prints to start 2024 will be sustained.
Today’s report casts a cloud over the Canadian economy, but it is unlikely to change the Bank of Canada’s (BoC’s) thinking when it meets next week. ... Recent data outside of this weak employment report has been quite strong. This validated the Bank’s decision to remain patient with the start of rate cuts. While it has afforded the central bank some extra time to wait to ensure inflation remains on its downward trajectory 2%, markets are increasingly betting that the BoC will pull the trigger on its first rate cut in June.
Douglas Porter, chief economist, BMO
We would suggest that the job market is officially no longer tight, and may be quickly tipping the other way. Canada has blown through the Sahm Rule, which posits that when the three-month average jobless rate (now 5.9%) rises by 0.7 ppts or more from the low of the prior 12 months (5.0%), is consistent with a recession. Of course, the antidote to that news is that the monthly GDP results have suddenly perked up since the start of 2024. ...
To some extent, it almost feels like Canada was due for a sour jobs release, given the softness in underlying growth over the past year. Still, it’s a bit of a surprise in light of the solid start to 2024 on the growth front. Probably the two most important stats from this report are: 1) the 1 point rise in the unemployment rate over the past year to 6.1%, and 2) the stickiness of wages at 5.1% in the face of that softness. That combination leaves the Bank of Canada in a tricky spot, with the job market clearly softening, yet still spinning off strong income gains. On balance, the BoC will likely view the overall results as pointing to more disinflationary pressure ahead, and will await the next couple of inflation prints, but a June cut is looking a bit more likely now. So, even with an upgrade to GDP, the door is open wide for the Bank to sound more dovish at next week’s policy meeting.
Nathan Janzen, assistant chief economist, RBC
The rise in the Canadian unemployment rate and pullback in hours worked in March are reasons to take substantially firmer looking GDP growth numbers in early 2024 with a large grain of salt. The number of job openings has continued to decline as labour demand softens and the unemployment rate increase has been larger than in other advanced economies in the wake of higher interest rates. Labour markets still haven’t collapsed in a way that would force the Bank of Canada to react quickly or aggressively with lower interest rates, but a rising unemployment rate and further signs that inflation pressures are broadly consistent with our base-case assumption that the central bank will shift to cuts by mid-year.
Simon Harvey, head of forex analysis, Monex (a foreign exchange firm)
While today’s jobs data isn’t dire enough for the BoC to renege on its forward guidance and cut rates next week, it is weak enough to confirm our view that June’s decision to cut will be the first of a sequence. Not only did the labour market fail to add jobs in March, but the “hidden slack” that we had been warning of is starting to become more visible as those under 25 have begun to enter the job market en masse. Ultimately, today’s data confirms that the Canadian economy isn’t as strong as official GDP data and the BoC are making out, and that substantial rate cuts are needed to avoid a more sinister unwind. As markets come around to this inevitability and start to price increasingly diverging paths for the BoC and Fed, widening rate differentials should lead USDCAD up to our 3-month forecast of 1.38 (72.46 cents US). The currency pair is already cutting in this direction, breaking through the key resistance level of 1.3619 that had proven a cap for the pair since December following today’s release.
Matthieu Arseneau and Alexandra Ducharme, economists with National Bank Financial
Young people are paying the highest price for the slowdown in the job market, with the employment rate down by 4.8 percentage points since the start of monetary tightening. This is the biggest decline ever seen outside of a recession and similar in magnitude to the 5.4 percentage point decline seen during the 2008-2009 global financial crisis. Recent immigrants (less than 5 years) are also showing a marked drop in the employment rate (-2.3 pp since their 2023 peak on a 3-month moving average basis compared to -0.9 pp for people born in Canada). Since the interest rate hikes began impacting this population in 2022, their unemployment rate has risen 3.6 percentage points (vs. 0.5 for population born in Canada). Private-sector employment has made up for prior month’s job losses, but the fact remains that this segment is experiencing a slump that began in mid-2023 and is raising eyebrows in the current demographic context. None of this is surprising, and is consistent with the Business Outlook Survey data published earlier this week. Since the tightening of monetary policy, the proportion of companies experiencing labor shortages has plunged drastically (48% to 27%). On the contrary, almost half of companies are concerned about customer demand (18% in Q2 2022) in the current uncertain environment. They are right to be concerned, as monetary policy remains extremely restrictive, and in such a context we continue to anticipate a further deterioration in the labor market, with the unemployment rate approaching 7% by the end of the year.
Charles St-Arnaud, chief economist, Alberta Central
The report also showed that wage growth for permanent workers increased to 5.0% y-o-y, still higher than justified by productivity growth and catch-up in purchasing power. However, we estimate that the 3-month annualized change of the seasonally-adjusted series eased to 2.4%, suggesting some deceleration in the coming months. Moreover, a wide range of wage measures eased in March, indicating that the accumulated slack in the labour market is finally holding back wage growth.
The Bank of Canada will welcome signs of slower wage growth, even though it continues to grow at levels disconnected from productivity gains. Moreover, there are increasing signs that the slack built up in the labour market over the past year is helping to ease some of the wage pressures.
We think the weak employment report for March is unlikely to sway BoC into an earlier-than-expected rate cut; after all one month of data doesn’t make a new trend. Comments from the BoC suggest that inflation, especially its measure of core inflation and the breadth of the inflationary pressures, remains key for the timing of the first rate cut.
We think the BoC is unlikely to contemplate rate cuts until core inflation and its momentum have been brought sustainably below 3%. We expect this to happen around April or May, opening the door to a rate cut at the June meeting.
Bryan Yu, chief economist, Central 1 (credit union)
The March labour market report was mixed but broadly downbeat. Conditions have arisen for wage growth to cool given the sharp upturn in unemployment rate. That said, with wages still relatively firm, and the Bank of Canada’s survey of consumers suggesting workers are still expecting elevated wage growth, this dynamic is slow to play out. Nevertheless, we do believe labour market weakness will translate into further deceleration. A weaker economy and slowing inflation pressure in our view will translate into a June Bank of Canada cut.
Darcy Keith