Today’s stronger-than-expected Canadian jobs report shifted bets in money markets for the next Bank of Canada rate move later this month, with traders immediately assigning higher odds that the central bank will opt for a modest 25 basis point reduction to its trend-setting interest rate rather than a larger cut.
But that change in sentiment didn’t last long. Those bets were largely unwound two hours later, when the Bank of Canada released a business outlook survey that showed continued expectations for weak demand. A separate survey of consumers also found that expectations about inflation are returning to a more normal level.
Trading in overnight swaps, which capture market expectations for where monetary policy is heading, by noon ET Friday were back to giving slightly better probabilities to a 50 basis point cut at the bank’s next policy decision on Oct. 23. In the minutes after the jobs report was released at 830 am ET but before the 1030 am ET Bank of Canada surveys, odds had favoured - by about a 63% probability - a 25 basis point cut.
Such swings in market positions based on perceptions of where monetary policy is heading isn’t unusual as new economic readings are released during the trading day. The bottom line is markets believe the Oct. 23 decision is still down to basically a coin flip on whether it will be a 25 basis point cut or a 50. But traders are highly confident there will be some easing of monetary policy. This coming Tuesday will bring the latest Canadian inflation report, and these probabilities will likely change again.
Canada’s economy added a net 46,700 jobs in September, while the jobless rate unexpectedly decreased for the first time in eight months to 6.5%, Statistics Canada said Friday. Analysts polled by Reuters had forecast a net gain of 27,000 jobs and that the unemployment rate would rise to 6.7% from 6.6% in August. Meanwhile, the Bank of Canada third quarter business outlook showed that firms are slightly more optimistic about sales growth than they were earlier in the year, but overall expectations remain subdued.
Here’s how implied probabilities of future interest rate moves stood in swaps markets, according to LSEG data, in the moments after today’s 830 am ET jobs data release. The overnight rate now resides at 4.25%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves. The second table to the bottom is a breakdown of probabilities for the size of a cut on Oct. 23.
Here’s how interest rate probabilities looked prior to today’s jobs data:
And finally, here’s where probabilities stood post the 1030 am ET Bank of Canada surveys:
Here’s how economists are reacting in written commentaries:
Derek Holt, vice-president, Scotiabank Economics
Rate cuts bets were initially pared after Statistics Canada reported strong job growth, but, crazy as it may be, markets swung the other way with selective interpretations of what the BoC’s weak consumer and business surveys indicated.
The jobs details were a bit mixed, but mostly constructive. Canada’s job market remains on strong foundations. Residual risks to Boc pricing included Governor Macklem’s dovish bias and perhaps what happens with next week’s core CPI readings. ... 50 isn’t impossible, but I still just don’t see the emergency that merits such a move.
Warren Lovely and Taylor Schleich, economists with National Bank Financial
While not exactly the last bit of data to dissect ahead of October 23rd, today’s one-two punch of September jobs and Q3 BOS help clarify (to an extent) the BoC’s upcoming policy rate decision. The labour market report arguably sent mixed signals, although the sheer volume of jobs (and the relative composition) was clearly firmer than expected. As for the BOS/CSCE, these surveys highlight a still fragile economic backdrop, one where businesses and consumers remain relatively cautious/apprehensive even if things look a bit better on a quarter-over-quarter basis. The progress on inflation expectations flagged in both the business and consumer surveys is noteworthy. The Bank should have (even more) confidence that excess economic slack and still-weak demand will keep inflation under control (and staying with the target band). We agree. Were it not for today’s reported surge in hiring – and the seemingly more gradual path for the Fed in the wake of sturdy US data – the path would have been cleared for a 50 bp BoC rate cut on October 23rd. But the Bank is perhaps more likely to opt for a more conventional 25 bp rate cut next time out. Saying that, our high-level assessment of Canadian economics risks remains largely unchanged and is biased to the downside. Policy rates are still too restrictive and meaningful relief will likely be needed to forestall a hard(er) landing. So even if the Bank opts for 25 bps at the October meeting, the prospective return of anemic labour market conditions – a clear feature of our base case forecast – could see the Bank of Canada hurrying monetary policy relief along at the final meeting of this year and into the early stages of 2025, getting policy to notional neutral by Spring and improving (but not guaranteeing) chances of an eventual recovery.
Douglas Porter, chief economist, BMO Capital Markets
Friday’s two key economic Canadian releases nearly fought to a draw, in the market’s eye. The September employment report aped its U.S. counterpart, with a solid 46,700 job gain (including a gaudy 112,000 new full-time jobs) and a surprising one tick drop in the unemployment rate to 6.5%. Dulling the strength was a curious 0.4% drop in total hours worked, and some relief from piping hot wages, as average hourly wages eased to 4.6% y/y (from 5.0%). The Q3 Business Outlook Survey reported only modest improvement in sentiment, but a nice turndown in the inflation outlook—only 15% of firms now expect inflation of more than 3% (i.e., above the target zone), compared with 54% at the end of last year. The net result of these two key reports was to leave the market almost perfectly split 50/50 on the 25/50 debate for October.
While the October result is in doubt, the market has zero doubt that the Bank will eventually take a bigger bite out of rates, with almost 75 bps of cuts priced in over the next two decisions. The only warnings we would put out there, and a reason why we have not yet budged off our call for a series of 25 bp moves are:
1) After a very calm summer, there is a lot of evidence and anecdotal reports that the housing market is beginning to stir, and potentially in a big way. An outsized BoC cut risks fanning a flame that’s already firing.
2) The Canadian dollar is suddenly careening lower again, clearly nervous about widening U.S./Canadian short-term spreads (Chart 1). The loonie was working on its eighth consecutive daily drop on Friday, for a cumulative setback of 2% to 72.6 cents (or $1.376/US$). A weaker exchange rate could inflame import costs.
3) After a late-summer lull, energy prices are sparking up again. A major reason why Canadian inflation will drop below 2% next week is thanks to a September slide in gasoline. But given the latest back-up in oil and pump prices, CPI is primed to pop right back above 2% in next month’s release. We suspect core trends will show little further progress in September, holding above 2%.
4) If the equity market could speak, it may well ask “what’s the rush?”. The TSX has quietly rolled 25% higher in the past year to a record high, and up a cool 10% just since the BoC began cutting rates in early June.
5) Finally, there is the small matter that the U.S. economy remains sturdy, and that lessens the urgency of outsized BoC cuts.
Having said all that, we readily recognize that inflation is back at target, the economy is operating below capacity, confidence is sour, and the Bank seems to have a dovish bent. If the market is handing the BoC an opportunity to cut by 50 bps on a silver platter, it’s tough to see them saying “No thanks”.
Stephen Brown, deputy chief North America economist, Capital Economics
The key activity and labour market indicators in the Bank of Canada’s surveys did not deteriorate last quarter, but they remain consistent with weak GDP growth, rather than the pick-up the Bank is looking for. The weak results mean that, despite the earlier strong September Labour Force Survey release, market pricing has shifted back to implying that a 50bp cut is marginally more likely than another 25bp move later this month, although the CPI data next week could still swing things either way.
David Doyle, head of economics at Macquarie
Employment data in Canada was mixed for September and the Business Outlook Survey suggested an ongoing subdued outlook.... Elsewhere, the Business Outlook Survey also seemed subdued in its description of the economy placing an emphasis on “muted inflationary pressures”, “weak demand”, and “excess capacity”. There was also a further encouraging decline in consumer inflation expectations. However, there was also no sign of significant deterioration. Hiring and investment intentions remained stable relative to 2Q. For the BoC ahead, we expect cuts of 25 bps per meeting to continue with the Overnight rate falling to 2.5% in Jul-25. Risks to this remain tilted towards a more substantial (and front loaded) easing path with a 50 bps cut this month a possibility.
Claire Fan, economist, Royal Bank of Canada
Details from the third quarter Bank of Canada Business Outlook Survey are suggesting that demand is still weak and businesses continue to expect inflation pressures will further unwind. That combination should be enough of a catalyst for a larger 50 bps rate cut from the next BoC meeting in two weeks.
Maria Solovieva, economist, TD Economics
Despite ongoing concerns about future economic prospects, today’s surveys provide a glimmer of hope as sentiment showed marginal improvement. Businesses are anticipating some relief in wage and price pressures, while consumers are adjusting their near-term inflation and wage expectations downward.
While the possibility of a jumbo 50 basis point cut remains on the table, today’s survey results and stronger-than-expected employment report suggest that a 25 basis point cut is more likely. The only data point that could shift the decision toward a larger cut would be a significant downside surprise in next Tuesday’s CPI report. Stay tuned!
Royce Mendes, managing director and head of macro strategy at Desjardins Securities
Firms reported that excess capacity is translating into restrained hiring and investment. Weakness in sales combined with the growing supply of available workers saw most businesses report adequate staffing to meet anticipated demand and, therefore, fewer plans to hire more. The cooling labour market has translated into both firms and households expecting wage growth to weaken in the next twelve months.
The good news is that interest rate reductions appear to be having some effect. The share of households feeling financially stressed declined in the third quarter. Moreover, fewer expect that their financial situation will deteriorate over the coming twelve months, with rate cuts and lower inflation both helping. That said, a host of measures of financial stress remain elevated.
As a result, a lot hinges on the Bank of Canada’s ability to cut rates at a fast enough pace to stave off a recession. Rate cuts have helped to reduce some of the downside risks to the economy, but to get growth back on track we still believe that central bankers will reduce rates 50 basis points later this month.
David Rosenberg, founder of Rosenberg Research
There was a thin layer of gold on the surface of this [jobs] report, but it was more dust than a slab, sheet, or bar. Indeed, the Canadian job scene gave an allure of improvement in September, for reasons unknown outside of the prospect that the previous weakness in the data may have been overdone. ... The unemployment rate, instead of inching up to 6.7% from 6.6% in August as was widely expected, dipped to 6.5%. Still, that compares to 5.6% a year ago and 5.1% in September 2022.
But one of the various pieces of non-validation came from the fact that the participation rate dropped to 64.9% from 65.1% in September (consensus was flat at 65.1%) — that is the lowest since May 2021. Absent that move, the unemployment rate, even with the headline boom, would have actually risen to a consensus-like three-year high of 6.7%. Not only that, but the employment-to-population ratio (the so-called “employment rate”) edged lower for the fourth time in as many months — from 60.8% in August to 60.7% in September, which is the lowest since July 2021 when the policy rate was pressing against the zero bound.
All this means there actually is less “tightness” to the labor market than what was represented by the move down in the unemployment rate. In other words, the +46.7k headline should be viewed in the context of Canada’s ongoing immigration boom, which resulted in a massive +83.4k population bulge in September. ...
That said, the odds of a 50-basis point rate cut by the BoC are lower on this report — as well as the markdown in Fed expectations — at the coming policy meeting on October 23rd, and a 25-basis point trimming (which would be the fourth in a row) is more likely. ... Even if the Bank of Canada opts for a 25 basis point cut, the road is long and winding all the way down to where it should be under the circumstances of a prolonged disinflationary output gap — as in, a path to 2% from the current 4.25%.
Tu Nguyen, economist with assurance, tax & consultancy firm RSM Canada
September job numbers shows some resilience as unemployment rate fell and the economy added 47,000 jobs. This gives confidence that Canada can maintain a soft landing until rate cuts are sufficient for the economy to awaken. While we think the Bank of Canada should consider speeding up the pace of rate cuts, they might stay the gradual and steady course with a 25 basis point cut at each of the two remaining meetings. Despite September’s positive job report, the overall trend is that rates are too restrictive, and employers are holding off hiring until rates fall further.