Canada’s jobs blowout in January signals a possible need for another rate hike

By Steve Scherer and Ismail Shakil

OTTAWA (Reuters) – Canada’s economy beat expectations, adding 150,000 net jobs in January, data showed on Friday, and putting pressure on the Bank of Canada to take a “conditional pause” in rate hikes announced just last month to reconsider.

The unemployment rate remained steady at 5%, which is just one decimal place above the record low, Statistics Canada (Statscan) said. Analysts polled by Reuters had forecast January net gains of 15,000 and a rise in the unemployment rate to 5.1%.

Statscan revised net earnings for December down to 69,200 jobs from a previous 104k.

Tight labor markets were one of the main reasons why the central bank hiked interest rates to 4.5% on Jan. 25, the highest level in 15 years, according to the minutes outlining the decision released this week.

It then became the first major central bank to announce that it would hold back further hikes in order to let previous hikes sag.

“The Bank of Canada’s conditional pause on interest rates was likely done in part so policymakers didn’t feel the need to react to a single strong data push, no matter how strong,” said Andrew Grantham, senior economist at CIBC Capital Markets.

“However, that will not stop markets from reacting to today’s strong data by pricing in a greater likelihood of further rate hikes and pricing out rate cuts,” he said.

Ahead of the jobs numbers, markets had been betting that the Bank of Canada’s next move would be a rate cut. After the figures were released, money markets instead priced in a higher probability of a rate hike.

In announcing a rate pause, Gov. Tiff Macklem said it was “conditional” and didn’t rule out further hikes.

“I don’t necessarily think it’s going to be an ironclad extended hiatus. It’s a conditional pause and we just have to watch the data,” said Derek Holt, vice president of capital markets economics at Scotiabank, who now says an April rate hike is more likely.

The Canadian dollar rose 0.7% to 1.3355 per greenback, or 74.88 US cents, after the data.

The job gain in January, the fifth straight monthly increase, was primarily driven by the core 25-54 age group and was spread across multiple industries, according to Statscan.

“For the Bank of Canada, the strong report must make them at least a little nervous given their freshly minted pause,” said Royce Mendes, head of macro strategy at Desjardins Group, adding “the jobs data could prove to be just a loud noise, assuming inflation continues to ease.”

Annual inflation slowed to 6.3% in December from a peak of more than 8%. The central bank is targeting annual inflation of 2%.

The average hourly wage for permanent employees rose more slowly in January, rising 4.5% annually versus a 4.7% increase in December.

Employment in the goods sector increased by 25,400 net jobs, led by construction. The number of jobs in the service sector increased by a net 124,700, mainly in wholesale and retail trade and in the health care and social assistance sub-sectors.

(Reporting by Steve Scherer and Ismail Shakil; Additional reporting by Fergal Smith in Toronto and Dale Smith in Ottawa; Editing by Jason Neely, Kirsten Donovan, Arun Koyyur and Jonathan Oatis)


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