Key Takeaways
- The Canadian job market failed to sustain its momentum from June.
- The surprising weakness raises the odds of a September interest rate cut from the Bank of Canada.
- Upcoming Inflation and GDP reports will provide a clearer picture of the outlook.
In a shocking reversal from June, the Canadian economy shed 41,000 jobs in July, defying the FactSet consensus estimate of 15,000 gains, signaling labor market weakness and sparking renewed bets for an interest rate cut at the Bank of Canada’s next meeting in September.
As the economy continues to battle the effects of an unrelenting trade war, the Canadian labor market saw the largest month-over-month decline in seven years, led by job losses in the information, culture and recreation, and construction sectors. The unemployment rate remains unchanged from the previous month at 6.9%, just below the estimate of 7.0%, as unemployed Canadians continue to struggle to find work.
According to Statistics Canada’s July Labor Force Survey, the drop was driven largely by losses in the private sector, which added more than twice as many jobs as the public sector last month.
The jobless rate has been ticking higher this year, rising from 6.6% in February to its highest level of 7.0% in May before declining to 6.9% in June, just off its multi-year high.
The U-turn has stoked expectations of an interest rate cut at the Bank of Canada’s next meeting on Sept. 17. Following the report, traders in overnight swaps increased the odds of a rate cut to 40% from 30%.
The Canadian dollar fell to 1.3754 against the US dollar, or 0.72 US cents, while the S&P/TSX Composite Index edged higher by 55 points, or 0.2%, to 27,816.03 soon after the report.
However, analysts remain divided in their outlooks. Their forecasts range from there being no further cuts for the rest of the year to a cut as early as September. Some scenarios incorporate cooler inflation and slower GDP numbers as conditions for the resumption of the central bank’s easing cycle. The Bank has held its policy rate steady at 2.75% at its last three meetings after cutting in January and March.
Below are excerpts from economists’ commentary on the July jobs report.
Inflation Slowdown Remains Key to September Rate Cut
Doug Porter, chief economist at BMO Economics
“This is an unambiguously weak report ... although it comes hard on the heels of an unambiguously strong report. Taken together, the overall picture is a soft economy, running with some excess capacity, not surprising in light of the trade uncertainty. For the Bank of Canada, this acts as a heavy counterweight to the outsized strength in June, but it will still need to see inflation slow notably over the next two prints for a September cut to be a high likelihood. We expect that the job market slack will put downward pressure on inflation, eventually, supporting the case for a return to modest rate cuts. And it appears that the trade uncertainty will be with us for some time yet.”
Labor Market Weakness Justifies September Rate Cut
Alexandra Brown, North America economist at Capital Economics
“The Labor Force Survey has once again made a mockery of the economist consensus. We are now a bit more confident in our view that the Bank of Canada will resume cutting next month, although a surprisingly strong CPI print next week could prompt another pause.
“Worryingly, the decline in employment was concentrated in the private sector, where it was broad-based by industry, and was entirely driven by full-time employment.”
Job Market Weakness Supports September Cut Outlook
Andrew Grantham, senior economist at CIBC Economics
“The Canadian labor market came back down to earth with a bump in July. There’s still more than a month to go until the Bank of Canada’s next interest rate decision, and therefore a lot more data to be released between now and then, including another employment report, two inflation releases, and quarterly GDP. However, today’s weaker-than-expected employment figure is nevertheless supportive for our call of a 25-basis-point interest rate reduction at that September meeting.”
June Job Growth Proved to be a Flash in the Pan
Tiago Figueiredo, macro strategist at Desjardins Capital Markets
“The Canadian labor market’s hot start to the summer appeared to be short-lived. The latest employment reading suggests that June’s spike in hiring may have been a mirage, and that the economy needs more monetary stimulus. With the unemployment rate hovering around cycle highs, GDP expected to contract in Q2, and a trade deal between the US and Canada looking further in the distance, we still expect the Bank of Canada to resume its easing cycle in September.”
Incoming CPI Data More Relevant to the Policy Outlook
David Doyle, head of economics at Macquarie Group
“Canada’s labor market is likely to continue to struggle. Softness may not translate into a rapid rise in the unemployment rate, given the sharp slowdown in population growth resulting from the shift in immigration policy. Market odds of a September Bank of Canada cut moved up slightly on the release to 39%. Our sense is that the incoming CPI data will be more impactful in terms of the policy outlook. As we outlined following the July decision, we anticipate 50 basis points of cuts from the Bank of Canada ahead, with the most likely timing being the October and December meetings.”
Upcoming Two CPI Reports Will Have Greater Influence on the Policy Path
Taylor Schleich, director, economics and strategy at National Bank of Canada
“A month ago, we were left scratching our heads after an extremely impressive and unexpected 83K jobs were added in June. Ultimately, it was right to be skeptical of this strength as job growth turned sharply negative in July. “ While these data don’t directly speak to inflation, a softer labor market should help limit price increases going forward. Of course, a weakening labor market generally makes remaining sidelined uncomfortable.
“While employment is one of the four indicators guiding monetary policy, it’s the next two CPI reports that should have the most impact on the September decision. We think today’s data warrants higher September rate cut odds, but if the next CPI report comes out soft, we should see the meeting’s easing probability rise above 50%.”
Labor Market Weakness Won’t Compel the BoC to Cut Rates
Michael Davenport, senior economist at Oxford Economics
“Canada’s labor market snapped back to reality in July. July job losses were all full-time positions, and concentrated in information, culture and recreation, and construction. Somewhat surprisingly, trade-intensive sectors like transportation and warehousing added jobs last month, despite the trade war. We think layoffs will continue to build, and forecast that about 140,000 job losses will lift the unemployment rate to the mid-7% range later this year.
“We don’t think today’s job numbers will do much to change their thinking. Despite a weakening labor market, the Bank of Canada will likely continue to hold the policy rate at 2.75% given still elevated trade policy uncertainty, dueling forces on inflation and growth from the trade war, and major fiscal stimulus in the pipeline.”
No Further Interest Rate Cuts Expected
Claire Fan, senior economist at Royal Bank of Canada
“The July labor market data is consistent with our base-case that assumes the bulk of tariff-related damage could already be done. Leading indicators of hiring demand (business sentiment, job openings data) continue to stabilize in the summer after more pronounced cooling in the spring. We look for the Canadian unemployment rate to peak soon around 7%, and do not expect further interest rate cuts from the Bank of Canada.”
July Jobs Data Don’t Move the Needle on September Rate Cut
Derek Holt, vice president and head of capital markets economics at Scotiabank
“Nothing hangs on just this one report. This is one of two job reports before the next Bank of Canada decision on September 17, along with a bevy of other macro indicators (CPI, GDP etc.) and potential developments around trade and fiscal policies.
“It’s probably because of these points that market moves were minor following the release. There is only about 10 basis points priced in for the Bank of Canada September meeting. The loss would have been greater if not for the highest seasonal adjustment factor on record.”
The July Jobs Report Won’t Persuade Policymakers to Cut Rates
Leslie Preston, managing director and senior economist at TD Bank
“Canada’s labor market gave back half of June’s outsized job gains in July. We expect the stagnation in labor force growth to continue, which will keep the unemployment rate from rising too high, despite weak labor demand.
“Today’s jobs report likely won’t move the needle much on the Bank’s thinking on the economy relative to its recent monetary policy report. We think a strong argument for further rate cuts remains in Canada, we’ll see if the Bank of Canada agrees.”
