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The robust employment surge in September exceeded consensus expectations, but underlying weaknesses temper its significance for the Bank of Canada's upcoming rate decision. Our anticipation remains unchanged: no interest rate adjustment is expected, given dwindling job opportunities and an economic slowdown in response to prior rate hikes.
- In September, employment saw an impressive increase of 64K, significantly surpassing the consensus projection of +20K. This growth closely aligned with the pace of labour force expansion, resulting in a stable unemployment rate of 5.5%. However, this job upswing was not evenly distributed; instead, it was predominantly driven by a 66K surge in the education sector, which can be volatile at this time of year. This surge partially offset declines in sectors like finance, real estate, and leasing, alongside modest gains in transportation and warehousing.
- The employment composition exhibited signs of fragility. September's employment leaned more towards part-time roles (+48K) than full-time positions (+16K). Private sector employment showed minimal growth, with an increase of only 1K, following two consecutive months of decline. The public sector experienced more significant job additions, while self-employment saw a second consecutive monthly increase, although it still lags pre-pandemic levels.
- Hours worked in September were relatively weak, dropping by 0.2%, in contrast to the 0.3% rise in headline employment. The information, culture, and recreation sector saw a substantial decline in hours worked, mirroring the decrease in job numbers.
- Wage growth continued to exceed policymakers' preferences, with a slight uptick for permanent employees at 5.3% year-on-year compared to the consensus forecast of 5.1%. However, this increase reflects some of the labour market's prior tightness and wage adjustments following last year's inflation surge. With the unemployment rate no longer at its lows from last year and anticipated to rise further as job vacancies decline, wage inflation might see some easing soon.
Regarding Economic Forecast:
While the unexpected surge in headline employment figures may have grabbed attention, the underlying weaknesses and the decline in hours worked suggest that the economy remains sluggish as we approach the end of Q3. With GDP essentially stalled in both Q2 and Q3, and no clear signs of acceleration as we enter the final quarter, we anticipate the Bank of Canada will maintain its current stance, despite recent stronger-than-anticipated inflation readings.
Regarding Markets:
Following the release of the better-than-expected headline employment figures, Canadian bond yields experienced a notable uptick. However, this move partially reversed as investors scrutinized the less robust underlying details. Interestingly, even though the US payroll figures also exceeded consensus expectations, the Canadian dollar managed to strengthen against the US dollar.
Much like a steadfast ship navigating through challenging headwinds, the September US jobs report underscores the remarkable resilience of the US economy, surpassing many expectations. Job gains surged to 336K, a notable increase from the 227K recorded the previous month. Furthermore, there were significant net positive revisions, totalling +455K, rendering the consensus expectation of 170K job gains obsolete. However, the report also contained some mixed elements:
- The unemployment rate remained steady at 3.8%, slightly above consensus projections.
- Nominal wage growth remained subdued at 0.2% month-on-month, falling short of the expected 0.3% increase.
- The participation rate held firm at 62.8%, suggesting that the substantial rise in the labour supply observed last month is likely to persist.
Nonetheless, the surge in job gains is likely to put pressure on the Federal Reserve (the Fed), and the data increases the likelihood of a rate hike in November. If the Consumer Price Index (CPI) remains soft, driven by ongoing supply-side improvements, the Federal Open Market Committee (FOMC) may opt to stay on the sidelines. However, if inflation exceeds a pace consistent with 2% annualized inflation, we anticipate the Fed will raise interest rates in November.
Job gains were primarily driven by the private services sector, accounting for nearly 70% of new hires in the month and responsible for most of the increase compared to the previous month. Government hiring also saw an uptick, contributing to about 20% of the job gains. Within the service sector, notable employment growth was observed in leisure and hospitality, health care, social assistance, business services, and the retail sector. Health care has been a key driver of employment growth, likely due to prior job gains enabling access to employer-linked health care plans, increasing the demand for health care services. However, the latest data indicated a somewhat slower pace of growth in the health care sector, warranting attention in the future. The upward revisions to previous months' data, showcasing larger and more widespread job gains, help explain the surge in consumer spending witnessed during the quarter.
In contrast, the payroll survey revealed that wage growth remained soft, marking the second consecutive reading of 0.2%, and average weekly hours worked remained unchanged. Weak wage growth was concentrated in the service sector, with six sectors experiencing weaker wage growth momentum, including those with substantial job gains, such as leisure and hospitality and the health care sector. Average weekly hours worked have remained around their pre-pandemic levels since April 2023.
On the other hand, the household survey painted a less optimistic picture of the Labor market. Hiring increased by only 86K, a significant slowdown from the previous three months' average pace of over 250K. Modest hiring and ongoing increases in the labour force kept the unemployment rate and participation rate unchanged. The previous month saw a substantial increase of 736K in the Labor force, primarily due to foreign-born new entrants, with a further modest increase observed this month. Prime-age participation remained stable at 83.5%, reflecting offsetting changes in male and female participation. Male prime-age participation has now reached 89.6%, matching its pre-pandemic high in March 2019. While job gains signal increased demand, the rise in participation exerts a partly offsetting disinflationary force, especially if it proves to be more permanent. The Fed will certainly scrutinize these dynamics as it interprets the various signals from the latest data.
Regarding Economic Forecast:
The September labour market data, featuring both a robust monthly increase and substantial revisions to prior months, indicates stronger economic resilience than previously anticipated. This development challenges our earlier prediction of the Federal Reserve (the Fed) maintaining its current stance in November. Our new assessment is that if the upcoming Consumer Price Index (CPI) reading aligns with a 2% annualized pace, the Fed is likely to maintain its position. However, should inflation exceed this threshold, we anticipate a rate hike by the Fed in November.
Regarding Markets:
In response to the surge in job gains, both bond yields and the broader dollar experienced an increase and sustained these gains.
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