Traders in money markets are now putting significantly higher odds that the Bank of Canada will deliver another large 50 basis point rate cut in December following weaker-than-expected jobs data this morning. Many economists concur that a large rate cut is in the offing.
Canada added 14,500 jobs in October and wages of permanent employees rose, as the economy grappled to absorb the slack built up due to a rapidly rising population amid an overheated market. The unemployment rate stayed unchanged from September but hovered around a 34-month high of 6.5%, Statistics Canada said. Analysts polled by Reuters had estimated a net addition of 25,000 jobs and the unemployment rate to edge up to 6.6%.
Implied probabilities in overnight swaps markets put the odds of a 50 basis point rate cut on Dec. 11 at 58%, and about 42% for a 25 basis point cut.
That’s similar to where probabilities stood just prior to the jobs data being released. But on Thursday, markets were evenly split on whether it will be a 50 or 25 basis point cut. And earlier this week the market-implied odds were favouring only a 25 basis point cut.
The Bank of Canada will have another jobs report to analyze before making their decision on interest rates next month, so these probabilities are bound to change. But here’s how implied probabilities of future interest rate moves stood in swaps markets following today’s 830 am ET data, according to LSEG data. The overnight rate currently resides at 3.75 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.
The second table to the bottom is a breakdown of probabilities for the size of a cut on Dec. 11.
And here where the probabilities stood Thursday afternoon:
Here’s how economists are reacting in written commentaries:
Andrew Grantham, senior economist with CIBC
Canadian employment growth was lackluster in October, with the unemployment rate only holding steady because of a further decline in labour market participation. The 14.5K increase in jobs was roughly half the consensus expectation (+27K) although some of the detail was a little better with all of the employment growth driven by full time (+26K) and aggregate hours worked rising by 0.3%. Employment increased for young people, although the ratio of 15-24 with a job remained well below year-ago levels. There was little change in employment in the core aged (25-54) workforce but the employment ratio continued to fall due to population growth. By sector, the largest gain in jobs was seen in business, building and support services. The overall unemployment rate held steady at 6.5% (consensus 6.6%) but only because participation fell further. Average hourly earnings for permanent workers unexpectedly accelerated to 4.9%, from 4.5%, but the Bank of Canada has been mix-adjusting this series using more detailed data so this may not be a big concern for policymakers. With one more employment report before the Bank’s next interest rate decision, today’s release was never going to close the book on the 25 vs 50bp cut debate. The mixed nature of today’s data didn’t help, but we continue to lean towards another 50bp move.
Thomas Ryan, North America economist, Capital Economics
The muted rise in employment in October was even weaker than it seems, as, like in September, it was propped up by strong gains in youth employment. While the unchanged unemployment rate will reassure the Bank that the floor isn’t completely falling from under the labour market, this weak job gain paired with the recent slew of weak activity data reinforce our view that the Bank will cut interest rates by 50bp at its December meeting.
At first glance, the 14.5k rise in headline employment doesn’t seem that bad, even if it is a big slowdown from the 46.7k gain the month before. However, employment was propped up by another strong 33.0k rise in employment for those aged 16 to 24, whereas prime-age employment (25-54) fell by 11.1k. This casts doubt on our view that youth employment rose so strongly in September because of a seasonal quirk. Elsewhere, the Bank has said that it will be taking its cue on pace of interest rate cuts from the strength of private sector hiring, so the slightly healthier 20.5k rise in private sector employees in September will be reassuring for the Governing Council, although that is still weak versus September’s standards.
Population growth remained elevated last month at 85.2k, but again that did not translate into a strong rise in the labour force which only grew by 15.4k, keeping the unemployment rate at 6.5%. Finally, even though the Bank seem to be more concerned about the downside risks to inflation, the tick-up in annual average hourly earnings growth to 4.9%, from 4.5%, suggests that elevated price pressures must remain a consideration.
James Orlando, director and senior economist, TD Economics
Another solid jobs report in October. Job gains were concentrated in full-time positions, with the cyclically sensitive private sector pulling the weight. Employees were working more hours and saw wage growth increase. Not to mention, we are seeing employment for youth starting to bounce back. All told, this report speaks of a labour market that continues to exude decent strength.
To cut by 50 bps or 25 bps? That’s the question for the Bank of Canada. It recently accelerated the pace of rate cuts, with inflation stabilizing around the 2% target. Yet the labour market hasn’t been forcing the BoC’s hand. Today’s report should encourage the bank to revert back to a 25 bp cut in December (our call), even if it means eating some crow on its one off 50 bp move previously. That said, if it is dead-set on getting its policy rate back into its neutral range (2.25% to 3.25%) by year-end, a 50 bp move would be the choice. Investors are uncertain which way the BoC will go, and given recent rhetoric from the central bank, it too doesn’t seem to know which way it will go either.
More to come