Highlights:

  • Employment soared a much stronger-than-expected 54k building further onto the 32k gain in June. All of the unexpected strength could be attributed to the education component rising 37k in the month.
  • The solid increase in employment contributed to the unemployment rate dropping back down to 5.8%.
  • Wage growth moderated to 3.0% after overstated gains the previous two months averaging 3.7%.

Our Take:

Today’s July labour market report indicated that volatility in employment growth continues with hiring in July soaring 54k that built further onto the 32k gain in June. These gains more than offset minimal employment declines the previous two months. The July increase was much stronger than the 17k expected going into the report. However explaining all of the upward surprise was a 37k jump in the education component that had essentially remained unchanged over the first half of the year. This component in recent years has seen increased volatility over the July through September period reflecting difficulties seasonally adjusting shifting hiring practices by educational institutions over the summer holiday period. Our expectation is that the July spike will likely be reversed over the subsequent two months. Smoothing out the volatility, employment has grown on average 5k per month to date this year which does represent a marked slowing from the 36k average gain achieved in 2017. However, the resulting unemployment rate on average this year of 5.8% is already moderately below the 6.0% to 6.5% full employment level. A more robust pace of hiring would raise the risk of both pushing the Canadian economy further into excess demand and contributing to greater upward inflationary pressures. To keep employment growth moderate going forward, our expectation is that the Bank of Canada will continue to withdraw still relatively stimulative monetary conditions. Today’s report raises the probability of a 25-basis point hike in the overnight rate to 1.75% possibly occurring as early as the next policy meeting in September. However, with inflation currently still close to the Bank of Canada’s 2.0% target, our expectation is that a gradual pace of tightening will be maintained with the next hike occurring at the subsequent policy meeting in October.

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