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Summary
- Friday’s headline employment data was strong, adding 47k jobs of which 112k were full-time.
- The unemployment rate unexpectedly declined to 6.5% as the labour force participation rate fell further to 64.9%.
- Meanwhile the BoC’s Business Outlook Survey showed signs of a recovery, but demand remains weak. Finally, inflation expectations continued to decline, while hiring intentions remained muted.
Market Implications
- A weak inflation outturn may be required to convince the BoC to cut by 50bp next week.
- We remain long Corra M5 and long the Corra Z5Z6 Steepener – see here.
Canada Labour Market Data Beats, Details Mixed
Last Friday’s Canadian labour market data was a mixed bag. The headline numbers were positive, as employment rose by 47k versus the 27k expected supported by a big increase in full-time jobs (Chart 1).
The overall pace of job creation improved to 22k vs the sub-10k average of the last two months. It remains below the 12m average of 30k, however.
Meanwhile, the unemployment rate fell to 6.5% versus 6.6% previously and 6.7% expected (Chart 2). The declining labour force participation rate (LFPR) was a key contributor as it declined to 64.9% from 65.1% last month. The change in the working age population was around 110k, and the third highest in the past year. The job market is still unable to absorb this increase in population which may be one reason for the decline in the LFPR.
The breakdown in job creation was strong, with full-time jobs rising by 112k, versus part-time jobs which fell by 65.3k (part-time job losses largely reversing the gains from last month). Digging deeper, just three sectors drove these gains. These were Trade Services (22k), Support Services (21k) and Tech (22k). Several other sectors including healthcare saw declines in employment. This brings our 3m diffusion indicator, which looks at the number of sectors adding jobs less shedding jobs, to 0 – the lowest since 2016 (outside of Covid) (Chart 3).
Signs indicate wage growth is peaking. The YoY change in wages for permanent workers slowed to 4.5% from 4.9% last month. Meanwhile, the 3m seasonal average fell to just 2.2% from over 3.3% last month. Given the elevated unemployment rate, wages should continue to slow.
What does this tell us?
- The labour market remains in excess supply. Demand for labour is too weak to absorb the workforce increase.
- This month’s improvement in full-time employment is positive. The headline number of 44k is fine, but not game-changing for the BoC. Promising areas exist under the hood, such as in construction where job growth has stabilised (Chart 4). This could be the impact of lower rates feeding through.
- This labour report is noisy and does not provide the conclusive report we expected to drive a 50bp cut in October. For now, it looks like a coin flip with a dovish CPI outturn likely required to push the BoC all the way.
BoC Survey Shows Continued Weakness, Further Disinflation, But Tail Risks Fall
Following the labour market data, the BoC released its quarterly Business Outlook Survey. Here, the outturn was more dovish. The headline survey remains negative, at -2.3, up slightly from last quarter’s -2.9 but showing more of the same. Demand remains weak, and price pressures continue to ease.
In normal circumstances, the BoC would look on a recovery favourably. However, given the BoC’s current desire for above-trend growth, we see this as adding to the case for a 50bp cut.
Here are our three takeaways:
- Sales growth is unlikely to improve, but downside risks have also fallen. Indications of future demand have recovered somewhat, and are positive. However, this has been driven by a reduction in participants indicating downside risks rather than upside (Chart 5). This tells us that while overall demand remains tepid, it is no longer getting worse.
- Hiring and capex intentions remain weak. Despite lower rates, the number of firms looking to invest remains subdued. Further, hiring intentions are also muted, while the number of firms that see employment falling has risen to the 70th percentile suggesting further weakness in the labour market.
- Inflation expectations continue to normalise. The weighted average inflation expectation has fallen to 2.2% from 2.7% last quarter and 2.9% last year. This suggests easing inflationary risks ahead. This decline has been driven by fewer participants seeing prices rise by more than 3% in the year ahead. However, the number of participants still seeing price hikes of 2-3% remains high but signals that the upside risks to prices have diminished.
The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)