Heading into next week’s Bank of Canada policy meeting, officials would have wanted to see evidence that rate hikes from the past year have caused a material slowdown in the Canadian economy. Such evidence would support a view that inflation will not only continue to moderate, but get close to the Bank’s 2% target in the not too distant future. The decision to pause on rate hikes last quarter was a bet that this is how things would unfold.  Unfortunately, the March jobs report had something else to say about it.

 

This morning, Statcan reported that there were 34.7K net new jobs created in  the  month, following a 21.K rise in February. This is roughly five times the increase that market economists had predicted and essentially rules out any chance that the first quarter saw a recession in Canada. Some have pointed to the fact that there was a large number of part-time positions created as a suggestion that the report was not as strong as the headline data suggested. Well, full-time jobs rose by 18.8K (versus 15.9K in part-time) and this was after more than a 31K gain in February.

 

What we did see in March was a further divergence between the goods side of the economy (where inflation has definitely been on a downward path) and services.  Total goods-producing payrolls fell by 40.9K, whereas services employment soared by 75.5K.  This sector is where we are also seeing the most persistence in wage inflation and this is evident in the fact that overall hourly wages were still up 5.2% on a year-over-year basis in March – just a little slower than the 5.4% pace in February.

 

Had there been an acceleration in wage growth, then the odds of a return to rate hikes at next meeting would have gone up.  There may still be enough hawkish ingredients in this report to sway some officials to moving in favour of a quarter point increase in the overnight target rate from 4.5%. We expect the Bank will ultimately maintain the pause, however, there is a good chance the accompanying statement comes out sounding more hawkish than the last meeting. This would push back against pricing in the market for rate cuts by the end of the year and could push short-term yields higher.  For now, the data has provided additional protection for the Loonie.

 

On behalf of the Pyle Group, have a happy Easter and Passover   

Andrew Pyle

 

 

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These are the personal opinions of Andrew Pyle and the Pyle Group and may not necessarily reflect those of CIBC World Markets Inc.