Will bad job report hold Bank of Canada from rising rates?

In May, Canada’s job market showed weak results for a second month in a row, affected by massive restrictions to fight the third wave of COVID-19.

According to Statistics Canada, the national economy lost 68,000 jobs last month, following the loss of 207,100 positions seen in April. As a result, the unemployment rate was up from 8.1% to 8.2%. Meanwhile, economists surveyed by Bloomberg have expected a loss of 25,000 jobs, and an 8.2% jobless rate.

In spite of two weak months, analysts believe a fast recovery is coming this month as containment measures are lifted. Ontario and Quebec (Canada’s two largest provinces) are already gradually reopening, the pace of vaccinations is growing, and cases are going down.

“The third wave has brought slightly larger job losses than the second one”, – Eric Lascelles, chief economist of RBC Global Asset Management, noted. “And it makes sense, as this time we’ve seen quite a significant lockdown.”

Economists expect a healthy rebound in the second half of 2021, as businesses are reopening and consumers are more comfortable now to attend in-person activities. However, there are some worries about possible disruptions which may restrain the recovery.

The Canadian jobs report coincided with the U.S. release, showing an increase by 559,000 positions in May, which is less than expected 675,000. Canadian government bonds were up, the 10-year yield traded about 0.06% below Thursday’s levels at 1.46% in Toronto. The five-year yield was below 0.9% (we are watching this one very closely since it has direct influence over 5 years fixed mortgage rate).

The largest decline was reported in the sector of part-time workers – it lost 54,200 positions, while a full-time employment saw a drop by 13,800. Hours worked were almost unchanged last month.

“Although we keep expecting a strong rebound in employment this summer and into the fall, the slow job market recovery in the U.S. seems to be a warning,” – says Doug Porter, chief economist at Bank of Montreal.

The possible sharp and faster-than-expected full recovery has already made the central bank reduce its stimulus and warn about a rate hike. A slower-than-expected jobs recovery will definitely affect the general overview.

According to the Governor Tiff Macklem, a full-recovery should lead employment to about 200,000 above the pre-pandemic levels, when the jobless rate was less than 6%. After April and May’s losses, the national economy is almost 770,000 jobs behind.