Canada Employment Preview: Little signs of softening

Statistics Canada will issue its Labour Force Survey for June on Friday July 5^th at 8:30 am EDT, 12:30 pm GMT.

Forecast

The Canadian economy is predicted to add 10,000 jobs in June after creating 27,700 in May and a record 106,500 in April.  The unemployment rate is expected to rise 0.1% to 5.5%. The participation rate was 65.7 in June and average hourly wages rose 2.55% on the year. Full-time employment climbed 27,700 in June, part-time was unchanged.

Canadian labor economy

The Canadian economy has been creating employment at a near record pace this year. The 3-month moving average has been above 40,000 for five of the last seven months for the best sustained run since 2002. This business creativity has dropped the unemployment rate to a 45 year low at 5.4% in May.  The 12-month moving average for the job creation is at its highest level since early 2003.

Reuters

Reuters

Reuters

The employment gains have come despite a declining rate of GDP expansion. Quarterly annualized growth has dropped from 2.5% in the second quarter of last year to 2.1% in the third, 0.3% in the fourth and 0.4% in the first three month of this year.  The 3-month moving average for new workers has gone from 14,200 in the second quarter of 2018 to 25,300 in the third, 32,600 in the fourth and 38, 500 in March this year.

Reuters

The surge in hiring coincides with the sharp rise in the Ivey purchasing managers’ composite index which has jumped from 48.2 in December, below the 50 expansion-contraction division, to 61.8 in May.  The June Ivey survey will be released at 10:00 am EDT, 14:00 GMT on Friday July 5^th after the employment report.

Reuters

Core annual inflation was running at 2.1% in May, just over the mid-point for the Bank of Canada’s 1-3% range and 2% target, having jumped from 1.5% in April. Inflation accelerated throughout last year with the 12-month moving average climbing from 1.08% in January to 1.48% in December and to 1.59% in May of this year.

Reuters

The strength of the economy is particularly impressive given the background of the US-China trade dispute and its impact on Canada’s largely resource based economy.

Bank of Canada

The Bank of Canada (BoC) elected not to reduce its overnight target rate from 1.75% at its meeting on May 29^th, though noting it was “especially attentive” to developments in household spending, the oil market and the global macro environment.”

Since then the US Federal Reserve has widely hinted that a rate cut is in the cards, with the Fed Funds futures labeling the odds for at least a 25 basis cut at the July 31^st FOMC at 100%.  The Reserve Bank of Australia has cut twice from 1.5% to 1.0%.  The Reserve Bank of New Zealand refrained from reducing its 1.5% rate on June 26^th but it had already cut once on May 8^th and will be tempted when it meets again on August 6^th.

Reuters

If the economy stays solid the BoC may soon find it is the only major central bank not at least contemplating a rate cut.

Canadian Dollar

The reticence of the Bank of Canada to join the central bank rate party has given the Canadian Dollar a firm footing against the US Dollar for the past six weeks.  From a low of 1.3517 on May 31^st the loonie has gained 3.4% against greenback with the bulk of that increase coming after the FOMC meeting on June 19rh.

If the BoC again refrains from cutting rates or at least making some rhetorical flourishes on easing, the Canadian Dollar could rise to its range of early last year around 1.2500.   

At the moment the consideration of an ever stronger Canadian Dollar on the world market is the only logic for a BoC rate reduction.                                           

Conclusion

A weaker than expected employment change may give a small fillip to the chance of a BoC rate cut, but after the recent yearlong strength one poor report is unlikely to change the bank’s or the market’s minds. 

Over the past 12 months the Canadian businesses have delivered almost four times the consensus estimate for new jobs each month. The average monthly forecast was 10, 400 and the production was 38,500.

FXStreet

With such a record the risk for a better than anticipated employment change is considerable.