Canada Unemployment Rises But Wages Spur Caution on July Cut

(Bloomberg) -- Canada’s unemployment rate rose for the third time in four months, but rising wages and a strong US labor report prompted some economists to express caution on the pace of Bank of Canada rate cuts. 

The country added 26,700 positions in May and the jobless rate rose 0.1 percentage points to 6.2%, Statistics Canada reported, roughly in line with expectations in a Bloomberg survey of economists. The unemployment rate has risen 1.1 percentage points since April last year.

Governor Tiff Macklem became the first in the Group of Seven this week to pivot to less restrictive policy. He said it was reasonable to expect more cuts if inflation progress continued, and insisted Canada was “not close” to the limit of divergence from the Federal Reserve.

His surprisingly dovish comments boosted hopes of another cut next month, but the jobs reports spurred money markets to reprice the odds to about 58%, down from roughly 65%. The loonie was down 0.6% on the day to C$1.375 per US dollar, though it was the second-best performer in the Group of 10. Canadian two-year government bond yields rose about five basis points to 3.99% as of 11:15 a.m. in Ottawa.

“There is plenty in May’s jobs data that supports the case for lower interest rates. However, the economy has cooled, but it has not fallen off a cliff,” Leslie Preston, senior economist with Toronto-Dominion Bank, said in a report to investors.

“We expect that will lead to a gradual pace of interest rate reductions this year, with the Bank of Canada likely to cut at every other meeting.”

The report supports the central bank’s view that the economy is still operating in excess supply, which has helped relieve price pressures. A rapidly expanding labor pool from high levels of immigration has continuously outpaced job creation over the past year.

The Bank of Canada lowered the benchmark overnight rate by 25 basis points to 4.75% on Wednesday, widening the spread to 75 basis points below the upper end of the Fed funds rate. The growing gap between the two countries’ rates puts downward pressure on the loonie relative to the greenback.

The rise in Canadian government bond yields is mostly in sympathy with the move in US treasuries, while the loonie’s losses are due to the strong American data, Royce Mendes, managing director at Desjardins Securities, said in a report to investors.

“The rising unemployment rate is enough to keep the Bank of Canada on track to reduce rates again in July. That said, there is a significant number of data releases between now and then,” Mendes said.

Still, several economists flagged rising wage growth in Canada as a concern. Hourly wages for permanent employees accelerated by 5.2%, faster than expectations of 4.7% and up from 4.8% a month earlier. That’s the strongest pace since January, but Macklem has said he expects wage pressures to moderate gradually.

“The further rise in the unemployment rate in May shows that the labor market continues to loosen, but the surprising pick-up in wage growth still provides reason to be cautious about the idea that the Bank of Canada will cut interest rates again at the next meeting in July,” Stephen Brown of Capital Economics said in a report to investors.

Wage growth will likely attract the central bank’s attention, but overall, the report will have little impact on officials, said Charles St-Arnaud, chief economist at Alberta Central.

“The language from the Bank of Canada earlier this week suggests that, as long as inflation continues to moderate and remains consistent with the inflation target, especially the momentum in measure of core, further easing in monetary policy is likely.”

This is the first of two labor market reports before the bank’s next meeting July 24, when policymakers will also update their economic forecasts.

The job gain in May was driven by part-time jobs, which increased by 62,400 positions, while full-time jobs fell by 35,600. More than four in five part-time workers do so by choice, but involuntary part-time work rose to 18.4% in May from 13.8% last September.

Job gains were led by increases in health care and social assistance, which saw the third straight monthly increase, as well as finance and real estate and business and other support services. Construction, transportation and warehousing and educational services shed the most jobs.

The private sector gained 17,600 jobs, while the public sector lost 7,500 jobs and self-employment rose by 16,600.

Total hours worked were unchanged in May and were up 1.6% from a year ago.

The employment rate — the proportion of the working-age population that’s employed — fell one-tenth of a percentage point to 61.3%. That’s the seventh decrease in the past eight months, highlighting a trend of immigration-driven population growth outpacing employment.

The participation rate held steady at 65.4%.

Regionally, employment rose in three provinces, led by Ontario, while Alberta saw the biggest decline.

--With assistance from Jay Zhao-Murray.

(Adds more economist reaction, updates market reaction.)

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