Canadian labour market ends 2024 on a strong note, calling for another BoC rate

Canada’s labour market finished last year on a strong note, adding four times more jobs than expected and calling into question another Bank of Canada rate cut later this month.

 

The Canadian economy added 91,000 jobs in December, the largest monthly increase in nearly two years, Statistics Canada reported Friday. The unemployment rate ticked down to 6.7 per cent from 6.8 per cent the month before.

 

The gains were broad-based across industries and provinces, suggesting that the Canadian economy has begun to respond to the Bank of Canada’s monetary policy easing cycle, which began last summer and picked up pace through the fall.

 

“This was as positive a labour market report as we could expect. Despite all the negative talk on Canada’s economy, the country keeps adding jobs. Importantly, these jobs were largely full-time, and in cyclically sensitive industries,” Toronto-Dominion Bank senior economist James Orlando wrote in a note to clients.

 

Employment gains were led by educational services, transportation and warehousing, finance, real estate, health care and social assistance. Full-time positions increased by 56,000, with the rest of the gain in part-time positions. Total hours worked rose a substantial 0.5 per cent month-to-month and were 2.1 per cent higher compared with a year earlier.

After the data, financial markets trimmed their bets on another quarter-point rate cut from the Bank of Canada at its next meeting on Jan. 29, although they are still pricing in a 60-per-cent chance of a cut, according to LSEG data.

 

The central bank itself signalled last month that further rate cuts were no longer a sure thing at every meeting now that the policy rate is at 3.25 per cent, the upper end of the bank’s estimate of the “neutral” resting point for interest rates.

 

With the unemployment rate at 6.7 per cent, there is still some slack in Canada’s labour market – something central bankers have said they want to address. And while the overall jobs report was strong, annual average hourly wage growth slowed to 3.8 per cent from 4.1 per cent in November. That’s positive from the central bank’s perspective as it looks to squeeze the last bits of inflation out of the service sector.

 

“Given the still-elevated unemployment rate and the cooler wage readings, the latest labour market data still leave the Bank of Canada in a position to cut rates,” Royce Mendes, head of macro strategy at Desjardins wrote in a note to clients.

 

“With more aggressive tariff threats weighing on business confidence and the recent rise in global bond yields tightening domestic financial conditions since the last policy decision, our rates outlook remains intact. We still see the Bank of Canada cutting rates later this month, but then pausing in March,” he added.

 

The United States also saw a surprisingly strong jobs report on Friday, adding 256,000 jobs in December, far more than forecasters expected. That pushed U.S. bond yields even higher as markets bet that the U.S. Federal Reserve is nearing the end of its easing cycle.

Treasury yields have moved up sharply in recent months as the U.S. economy has continued to churn out strong data and president-elect Donald Trump has doubled down on his tariff and tax cut promises, which many economists think will be inflationary.

 

The Bank of Canada needs to manage a number of factors emanating from south of the border. The divergence between U.S. and Canadian interest rates, combined with the threat of tariffs, has led the Canadian dollar to depreciate against a surging U.S. dollar. Additional rate cuts could further weaken the loonie, potentially adding to inflation for imported goods.

 

At the same time, the risk of tariffs after Mr. Trump assumes office poses a clear downside risk to economic growth, business investment and jobs in Canada.

 

“The BoC doesn’t make political calls on the outlook,” wrote Mr. Orlando of TD. “However, post inauguration on January 20th, they may have sufficient information on whether lower interest rates are necessary to shore up the economy. This will need to be balanced against any reaction on the Canadian dollar, that might also be providing a buffer on trade at that time.”

 

 

 

 

This article was first reported by The Globe and Mail