National Post (National Edition)
‘Ridiculously strong’ jobs report boosts hike odds
Analysts say interest rate may rise in January
“Unbelievable,” “spectacular” and “ridiculously strong” were just some of the ways economists described a Canadian jobs report for December that will make it more difficult for the country’s central bank to put off raising interest rates this month.
The December gains — 78,600 new positions were added — mark the thirteenth-consecutive month of job growth, and cut the unemployment rate by 0.2 percentage points to a record low of 5.7 per cent.
“There doesn’t seem to be anything that can derail Canada’s labour market,” said Arlene Kish, director of Canadian economics at IHS Markit.
The employment numbers, which compared to a consensus forecast for an increase of just 2,000, sent the Canadian dollar soaring as much as a penny to US80.91 cents, and forced economists to push forward their ratehike forecasts.
While noting that Canadian job numbers are notoriously volatile, Greg Taylor, portfolio manager at Redwood Asset Management, pointed out that the trend — with 150,000 jobs added in the last two months of 2017— is clearly rising.
“The Bank of Canada can’t sit on the sidelines when the economy is doing this well, and I think that is what is getting the dollar going,” he said.
The BoC would probably have preferred a lower loonie before going ahead with another rate hike. The currency is up almost 11 per cent from its 2017 low of roughly US72.75 cents in May, and has risen nearly four per cent since mid-December.
Owing to other factors such as an oil price above US$60 per barrel, economists have grown more confident about the likelihood of additional monetary policy tightening early in the new year.
Yet some believe the loonie’s sharp move higher warrants some caution.
“Markets may be getting ahead of themselves by starting to price two moves in Q1,” said Nick Exarhos, an economist at CIBC World Markets.
Prior to the job figures, the market was pricing in roughly a one-third chance of a hike on Jan. 17, when the bank is next scheduled to make an interest-rate announcement. Now, the odds are above two-thirds, and prices even imply a small chance of another move higher in March. Overall, the market is pricing in at least three rate hikes in 2018.
Of course, a rate hike isn’t guaranteed due to uncertainties surrounding trade and the impact of new mortgage lending rules. However, Derek Holt, head of capital markets economics at Scotiabank, who previously anticipated a hike in April, now forecasts the BoC will raise rates by 25 basis points to 1.25 per cent in January.
“The job market is absolutely booming north of the border,” Holt said. “(Stephen) Poloz has a chance to sneak in another hike before NAFTA risks may escalate into spring, but he downplayed NAFTA worries before the holidays anyway.”
Canadian businesses have noted increasing labour shortages, so that topic will be a focal point in the upcoming Business Outlook Survey due on Monday.
If the report flags tightening capacity and broadening labour shortages, BMO Capital Markets senior economist Robert Kavcic thinks the BoC may not wait until March to raise rates.
“Most were expecting a subdued Canadian employment tally after a blowout report last month — we saw just the opposite,” he said, noting that the domestic economy created 422,000 new jobs in 2017, and achieved the strongest calendar year percentage gain (2.3 per cent) in 14 years.
“The Bank of Canada was surely watching the jobs report closely, and it was quite simply one of the strongest of the cycle,” Kavcic said.
Job gains in December were split between private sector (28,000), public sector (22,000) and self-employed (28,000), while full-time employment was up 24,000 and part-time employment rose 55,000. However, the monthly gain in hours worked (1.3 per cent) — the fastest pace since September 2003 — may be what most convinces the BoC to look through economic softness in the fourth quarter.
Holt noted that solid income fundamentals behind consumer spending should be seen as a driver of broader growth into the new year.
“Strong income gains are also a risk mitigant to higher rates that have lagging and staggered effects upon mortgage payments over future quarters and years,” he said.