Bank of Canada Faces Pressure to Cut Interest Rates Amid Weakening Labour Market

The Bank of Canada is now seen having a 38% chance of announcing a quarter-point rate cut at its next policy meeting on September 17, up from 35% prior to the weak Canadian employment data this morning. The economy added just 3,000 jobs in July, a sharp deterioration from a net addition of 83,000 jobs in June. Analysts polled by Reuters had forecast that the economy would add 13,500 jobs. The unemployment rate remained steady at a multi-year high level of 6.9%, with Statistics Canada reporting a significant decline in employment, particularly in the private sector. Economists are now calling for more rate cuts, with some predicting a 100bp cut this cycle.

Key Takeaways:

• The Bank of Canada is now seen having a 38% chance of announcing a quarter-point rate cut at its next policy meeting on September 17, up from 35% prior to the weak Canadian employment data this morning.
• The economy added just 3,000 jobs in July, a sharp deterioration from a net addition of 83,000 jobs in June.
• The unemployment rate remained steady at a multi-year high level of 6.9%, with Statistics Canada reporting a significant decline in employment, particularly in the private sector.
• Economists are now calling for more rate cuts, with some predicting a 100bp cut this cycle, beginning with a 25bp cut in September.
• The decline in employment was concentrated in the private sector, with 34,000 jobs lost in information, culture and recreation, 22,000 jobs lost in construction, and 19,200 jobs lost in business, building and other support services.
• The provincial breakdown showed that most of the weakness was in British Columbia and Alberta, with wildfires potentially hitting the latter and some weather-sensitive sectors more broadly.
• The decline in employment was also concentrated among youth aged 15-24; employment of other age groups was little changed.
• The unemployment rate held steady at 6.9% as falls in employment were more than offset by an unusually large 0.2%-point drop in labour force participation, with the labour force falling by 33,000 even as the population grew by 37,000.

Statistics:

• 38% chance of a quarter-point rate cut at the Bank of Canada's next policy meeting on September 17 (implied probability in swaps markets)
• 40.8k jobs lost in July, the largest decline in employment since mid-pandemic shutdowns in early 2022
• Unemployment rate remained steady at 6.9% (a multi-year high level)
• Labour force participation rate fell by 0.2% points
• Labour force fell by 33,000 even as the population grew by 37,000
• Total hours worked fell by 0.2%
• 4 basis points decrease in the two-year Canadian bond yield

Sources:

• "Canadian employment falls by 40.8k jobs in July" by Bloomberg, citing Statistics Canada
• "Bank of Canada faces pressure to cut interest rates amid weakening labour market" by Reuters, citing economists' forecasts
• "Bank of Canada's easing bias may continue as weak labour market data support rate cuts" by National Bank Financial, citing the Bank of Canada's monetary policy report
• "Canadian labour market remains softer than usual, but July data is consistent with our base-case" by Royal Bank of Canada, citing the Canadian unemployment rate and Labour Force Survey data