Monday, December 16, 2024

Hiring rebounds in September, fuelling speculation of Bank of Canada’s next move

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Canadian employment rebounded in September and the unemployment rate ticked lower, further fuelling the debate over whether the Bank of Canada will step up the size of its interest-rate cuts later this month.

After a summer lull, employment jumped by nearly 47,000 in September, easily outpacing analyst expectations of a 27,000 gain, Statistics Canada said Friday in a report. The unemployment rate edged lower to 6.5 per cent from 6.6 per cent. Analysts were expecting the jobless rate to rise to 6.7 per cent.

The surprisingly robust report led investors to dial back bets on an oversized half-percentage-point rate cut on Oct. 23 that had been growing in recent weeks. However, a pair of central bank surveys, published later on Friday, pushed market predictions in the opposite direction.

These quarterly surveys showed Canadian business and consumer sentiment remained weak over the summer, while expectations of future inflation have largely returned to normal levels.

“Friday’s two key economic Canadian releases nearly fought to a draw, in the market’s eye,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note to clients.

The net result left investors divided, with market pricing suggesting that the Bank of Canada’s choice between a quarter-point and half-point cut this month is essentially a coin toss.

The central bank has cut interest rates by a quarter-percentage-point three consecutive times since June, bringing its benchmark policy rate to 4.25 per cent. As inflation has fallen back to a more normal level – hitting the bank’s 2-per-cent target in August – monetary policy makers have become increasingly concerned about weak economic growth and rising unemployment.

Governor Tiff Macklem said last month he wants to see economic activity pick up so that inflation doesn’t overshoot the 2-per-cent target on the way down. He said the bank is paying particularly close attention to what’s happening in the labour market.

Canada’s job market has been softening for the better part of two years, as employers cope with higher interest rates and weaker consumer spending. Over the past year, the economy had added a net 313,000 positions, compared with 542,000 in the previous 12-month period.

The unemployment rate has risen 1.7 percentage points since a record low in 2022, as population growth has outpaced job creation.

Friday’s jobs numbers suggest that the labour market may be on a somewhat stronger footing than economists and central bankers had thought, although the picture is mixed.

Canada added 112,000 full-time jobs, while part-time jobs fell by 65,000. These gains were concentrated in the private sector, with notable increases in several industries, including information, culture and recreation, wholesale and retail trade, and professional services.

Average hourly wages rose by an annual 4.6 per cent, down from a 5 per-cent gain in August – an encouraging sign for the Bank of Canada as it looks to tame price growth.

On the downside, total hours worked fell 0.4 per cent in September. The labour force participation rate – the share of the population either working or actively looking for a job – dropped to its lowest mark in more than three years.

This is “an indication that workers are becoming increasingly discouraged about job prospects,” Katherine Judge, an economist at CIBC Capital Markets, said in a note to clients.

“Overall, the mixed report isn’t enough to make a [half-point] cut a sure thing in October,” Ms. Judge wrote.

Meanwhile, the two Bank of Canada surveys published on Friday suggest that the broader Canadian economy remains in funk.

The quarterly survey of companies, conducted in August, found a slight improvement in sentiment following the first two rate cuts this summer. But Canadian companies still expect weak customer demand, and they’re reluctant to expand their operations, either by investing in new equipment or adding to their headcount.

“Firms noted that high interest rates have continued to weigh on sales over the past year, particularly for firms linked to discretionary consumer spending,” the survey said. “Businesses also reported that customers are choosing cheaper options and said discounts are becoming necessary to attract an increasingly budget-constrained consumer.”

The consumer survey painted a similar picture. Canadians are becoming less pessimistic about their financial situation, the survey said. But more than half of the respondents still expect a recession in the next year and most plan to reduce their spending and save more.

The upshot is that both consumers and businesses now think inflation will remain largely under control. Nearly two-thirds of the companies surveyed think inflation will be between 2 per cent and 3 per cent over the next two years. That’s good news for the central bank, which has worked hard to anchor inflation expectations following the surge in prices in 2022 and 2023.

“With inflation and wage expectations cooling (albeit the former more so than the latter), the Bank can feel comfortable focusing on reducing policy restrictiveness. These reports continue to lean dovish, keeping the door open for a 50 basis-point cut,” Bank of Montreal economist Shelly Kaushik wrote in a note to clients. (A basis-point is one-100th of a percentage point).

“For now, we continue to expect a 25 bp cut on October 23; but given the stronger-than-expected Labour Force Survey, the decision will boil down to next week’s inflation report.”

Statistics Canada will report September inflation data on Tuesday. Bay Street analysts expect annual Consumer Price Index growth to come in slightly under 2 per cent, with headline inflation pulled lower by a decline in gasoline prices last month.

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