Today’s unexpected jump in the country’s unemployment rate has traders aggressively adding to bets that the Bank of Canada will announce another large 50 basis point rate cut at its policy meeting next week. And at least one major Canadian bank – Bank of Montreal – has changed its forecast to now expect an outsized rate cut next week.
The jobs report is the last major economic release before next week’s central bank decision.
Implied probabilities in overnight index swaps trading, which capture market bets of where monetary policy is heading, now suggest about an 80% chance of a 50 basis point cut on Dec. 11, and about 20% odds that it will be a more typical 25 basis point cut.
Swaps markets earlier this week were pricing in roughly 50/50 odds on whether it will be a 25 basis point or 50 basis point rate cut next week. And in late November, when Prime Minister Justin Trudeau announced a suite of new stimulative fiscal spending measures – including plans for $250 cheques in the mail for early next year – the odds of a 50 basis point cut had shriveled to only about 10%.
Reflecting greater odds of a 50 basis point cut by the Bank of Canada next week, the Canadian dollar has been weakening in the aftermath of the jobs report, and is now down more than half a cent, to 70.62 cents U.S. And Canada’s two-year bond yield, which is particularly sensitive to changes in the Bank of Canada’s overnight rate, is down 13 basis points. That’s a large move on a daily basis and about double the decline being seen in the U.S. two-year yield this morning (more typically, they move nearly in lockstep.)
Canada’s unemployment rate rose more than expected to 6.8% in November, a near-eight-year high excluding the pandemic years, even as the economy added a net 50,500 jobs. Analysts had forecasted a net gain of 25,000 jobs in November and the unemployment rate would rise to 6.6% from 6.5% in October.
Canada’s labor force grew by 137,800, more than double the gain in jobs, Statistics Canada said. Adding to signs of labour market weakness, the average hourly wage growth for permanent employees slowed to an annual rate of 3.9% from 4.9% in October. This was the slowest since June 2023.
Here’s how implied probabilities of future interest rate moves stood in swaps markets at 10 am ET Friday morning, according to LSEG data. The overnight rate currently resides at 3.75 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
The second table to the bottom is a breakdown of probabilities for the size of a cut on Dec. 11.
And here where the probabilities stood just prior to the jobs report:
Here’s how economists are reacting in written commentaries this morning:
Douglas Porter, chief economist, BMO Capital Markets
As a result of the big step up in the unemployment rate, we are switching our call on the rate decision by the Bank of Canada next week to a 50 bp cut. When the facts change, we change, and the sharp rise in the jobless rate is a big change, especially after two months of calm. To be clear, this is what we believe the Bank will do, not necessarily what we believe that they should do. There is certainly still a solid counter-argument for a more moderate 25 bp cut—domestic demand is clearly reviving, core inflation picked up last report, the Fed is proceeding more cautiously, and the currency is pushing 20-year lows. But the Bank seems biased to ease quickly, and the high jobless rate provides them with a ready invitation. The downside to such aggressive action is that the Canadian dollar is poised to weaken further—especially amid deep trade uncertainty—and housing is poised to reignite.
Andrew Grantham, senior economist with CIBC
While employment growth was stronger than expected in November, a jump in participation left the unemployment rate higher than anticipated as well. The 50K increase in employment was double the consensus forecast (25K) , and was led by gains in wholesale & retail, construction and education. However, the detail was generally less positive. Even though full-time positions drove the headline increase, most of the gains were in public sector paid employment, with private sector hiring up by only a modest 6K. Moreover, a three-tick increase in labour force participation (which simply offset the reductions seen in the prior two months) meant that employment growth fell well short of the pace of labour force growth, and as a result the unemployment rate jumped to 6.8% (from 6.5% and relative to a consensus forecast of 6.6%). That included a further increase in joblessness for prime aged (25-54) workers. Hours worked fell slightly, while hourly earnings for permanent employees eased more than expected to 3.9% year-over-year (from 4.9%). Today’s data was the final piece of the puzzle before next week’s Bank of Canada decision, and even though the piece didn’t fit perfectly, we still see the picture of a struggling economy that needs the help of another 50bp reduction in rates.
Royce Mendes, managing director and head of macro strategy of Desjardins Securities
The jump in the unemployment rate overstates the weakness in today’s report. A strong increase in employment outweighs the volatility in labour force participation and the decline in hours worked due to labour disputes. As a result, we’re retaining our call that the Bank of Canada cuts rates by just 25 basis points next week. The market and other economists no longer see it this way, so we are heading into the decision with an out of consensus view.
Matthieu Arseneau, deputy chief economist of National Bank Financial
The unemployment rate is now the highest in 38 months and the highest since January 2017 excluding the pandemic. In the GTA, the metropolitan area in the country, the unemployment rate stands at a staggering 9.2%, the highest level since May 2012 excluding the pandemic. The reversal in the unemployment rate in November is particularly marked among young people, whose cumulative rise is now 4.6 percentage points since its low in 2022. Meanwhile, the unemployment rate for the main cohort of workers (aged 25 to 54) has risen for the fourth consecutive month. This morning’s report confirms our view that the labour market has continued to slacken rapidly in recent months and that restrictive rates are preventing its deterioration from stopping. The labour force survey also suggests that wages has calmed down a bit during the month which is another sign that the balance of power between employers and employees is changing. The private sector stalled in November and the next few months do not bode well. Job vacancy data does not point to a wave of hiring in the coming months. Furthermore, the last Bank of Canada’s Business Outlook Survey shows no sign of stabilization in the short term. Indeed, hiring intentions were virtually unchanged in Q3 and remained below the historical average. Such a weak appetite in a context where the pool of workers is growing at a staggering rate does not bode well for a stabilization of the labour market. All in all, we remain concerned about further deterioration in the months pushing the unemployment rate between 7.0% and 7.5%. The door seems wide open for the Bank of Canada to lower its policy rate by 50 basis points next week to the upper end of its estimated neutral range (2.25% to 3.25%).
James Orlando, director and senior economist, TD Economics
Today’s jobs report had a lot of moving parts. Yes, the unemployment rate rose significantly, but this was due to a massive increase in the labour force rather than outright job losses. Remember that Statcan has cautioned people on using its jobs report population figures, which don’t match recent demographic data (also means caution of labour force figures). So, we should be taking this with a heavy hand of salt. Rather, we focus on the trend, where employment growth has held up well, with cyclically sensitive sectors driving gains over the last few months.
The Bank of Canada will make an interest rate announcement next Wednesday and markets are still on the fence as to whether the bank will cut by 50 or 25 bps. Recall that the BoC accelerated its rate cutting cycle with a 50 beeper in October as weak growth and an inflation undershoot raised fears that it was behind the curve. But since then, economic data have shown more resilience, with consumer spending, the real estate market, and price pressures rebounding. Even with the messiness of today’s employment report, the economy continues to add jobs, reinforcing our view that the labour market is on solid foundations. We think this should be enough to convince the central bank to revert to a 25 bp cut next week, but it will remain a close call for the central bank.
Thomas Ryan, North America economist, Capital Economics
The strong pick-up in employment growth in November is not quite as good as it looks, but we judge that it tips the scales a little bit toward the Bank of Canada favouring a smaller 25bp interest rate cut next week, despite the accompanying jump in the unemployment rate to 6.8%. While that rise may worry some on the Governing Council, they can take some comfort from the recent improvement in forward-looking labour market survey indicators, which imply that employment growth should remain stronger than has been the case in prior months.
Nathan Janzen, assistant chief economist, Royal Bank of Canada
Details underlying the November labour market data were mixed but the rise in the unemployment rate (alongside a slowing in wage growth) should reinforce that interest rates are higher than they need to be to keep inflation at the BoC’s inflation target. Our base-case expectation remains that the BoC will cut the overnight rate by another 50 basis points next week.
David Doyle, head of economics at Macquarie
The gap between the trend in employment growth and the breakeven level (required to keep the employment rate constant) remains substantial, suggestive of a widening output gap. … We continue to expect another 50 bps cut in December, followed by four successive cuts of 25 bps per meeting, with the overnight rate reaching 2.25% in June 2025. …
Canada’s economy is likely to remain under pressure in 2025 as headwinds mount from i) the u-turn in federal immigration policy that may lead to a contraction in the overall population, ii) the continued drag from mortgage rate resets that will weigh on housing and consumption, iii) trade policy uncertainty that could weigh on fixed business investment. Overall in 2025, we anticipate real GDP growth (4Q on 4Q basis) of just +0.6% and see downside risks to this estimate. This is well below the consensus estimate of +2.0%.
David Rosenberg, president and founder of Rosenberg Research
Canadian employment surprised to the upside in November, with +50.5k net new jobs created (double the consensus estimate). But despite the largest employment jump in seven months, the unemployment rate rose +0.3 percentage points to 6.8%. That doesn’t even begin to tell the story of a Labour Force Survey riddled with indications that supply-side slack is opening rapidly in the Canadian labour market, which is giving the Bank of Canada the green light to continue its easing cycle at full steam ahead. …
In all, a very clear message from this Labour Force Survey: supply-side factors are significantly outweighing any demand-side positives in the Canadian labor market, and there is nothing in this key sector of the economy to give the Bank of Canada any pause for thought as it maps its way back to a neutral policy setting.
Derek Holt, vice-president, Scotiabank Economics
The Bank of Canada is likely to cut 50bps next week. This is not a high conviction call from the standpoint of what we think they should do. In fact, there are really only two main reasons for doing so, neither one of which having much of anything to do with the jobs report we just got. …
One reason for the call is that the BoC may take a risk management approach that attaches less concern to the risk of reigniting inflation with aggressive easing than it does to its concern about not wishing to risk inflation dropping materially below 2% by not doing enough to ease. That’s their schtick. Time will tell if it’s the right approach, but it’s their bias. I think they should be more careful, but Macklem is a dove who reacts to inflation far too late and is quick to ease.
The second reason is that the BoC may find it more difficult to explain why it is doing less than markets are pricing than to simply bow before traders and wish them all happy holidays. That’s because Governor Macklem has been sounding so dovish with guidance that the BoC is nowhere close to the limit of undershooting the Fed while he is signalling ambivalence toward the effects on the currency. Markets are pricing almost all of a half point cut in the wake of this morning’s numbers. So give it to them and blow a party favour. Put on the Santa Clause costume for the presser as a nice added touch.
But ease because the job market is cratering? Give me a bloody break. This is a very strong job market. Where it is not is not something for rates to fix; if they try, they’ll break something else.
Tu Nguyen, economist with assurance, tax & consultancy firm RSM Canada
Even though Canada added 50,000 jobs in November, double the expected number, the unemployment rate also rose 0.3 percentage points to 6.8% as more people looked for work. More importantly, wage growth dropped sharply to 3.9% after hovering around 5% for over a year. The slow job market was finally hitting wages. The size of the rate cut from the Bank of Canada next week remains a toss-up, but a 50-basis point cut seems more likely now given low inflation and a weak job market.
Of course, the Bank has to balance the domestic economy with a weak Loonie and the widening differential with the Fed, whose interest rate currently stands at 4.75%, a whole percentage point higher than the Bank’s. Employers are still hesitant to hire as the current real interest rate remains restrictive. Most of the jobs gained came from the public sector (45,000). At the same time, nearly half (46.3%) of unemployed people in November were new entrants or had not worked in the past year, again, an indicator of laggard hiring by firms rather than mass layoffs. As more rate cuts are expected to come and lower the cost of borrowing, the job market will warm up by early 2025.
Bryan Yu, chief economist, Central 1 credit union
This was a soft but not terrible jobs report highlighted by the sharp increase in the jobless rate, lack of private- sector growth and effects of strong population but weak hiring trends. While there are good reasons for the Bank of Canada to maintain a steady path of cuts into 2025 (and a 25 bps cut next week), including the weak Canadian dollar and import inflation risks, some momentum in consumer spending, and pick up in the housing market, the Bank has shown a desire to return to neutral quickly with trade risks likely adding urgency. The sharp increase in unemployment rate likely provides sufficient rationale to cut 50 basis points on December 11.
Charles St-Arnaud, chief economist, Alberta Central
Overall, the report points to an increase in the amount of slack in the labour market: higher unemployment rate, rise in participation rate, and sharp deceleration in wages. Going into next week’s BoC meeting, we continue to believe that the central bank should cut by 50bp to bring the policy rate to neutral faster, especially given the downside risk to growth from slower population and US tariffs next year. Looking at the increased slack in the labour market, continued sluggish growth outlook, and inflation within the target, we think the BoC will choose to cut 50bp. However, our level of conviction is low. As stated in their summary of deliberations, some members of the MPC are concerned that a big cut could be interpreted as “panic” and may support a 25bp increase instead.
