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12.02.2023 02:14 PM
Canada: Tension in the employment market persists

The Canadian labor market report dealt a blow to bullish sentiment. The huge demand for labor has not only persisted, but also increased, far exceeding traders' expectations. What does this mean for the country's monetary policy?

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January was marked by a significant improvement in manufacturing performance. In the month that followed the holidays, the real economy added 150,000 jobs. That's 135,000 above analysts' forecasts. And it's the fifth consecutive month of net job gains.

Apparently, the cuts by major corporations haven't sharply affected domestic production: the manufacturing and service sectors are growing. Apparently, corporate executives are expecting a rebound in demand among Canadian consumers as well as in exports.

Despite an increase in overall job vacancies, the unemployment rate remained unchanged at exactly 5%. This is 0.1% below analysts' preliminary estimates.

Among other things, the rise in job openings, while the unemployment rate remained unchanged and even slightly outpaced, means that Canadians and visitors have become more job-intensive. Clearly, the Bank of Canada policy is paying off and, together with inflation, is making Canadians say goodbye to the couch. Despite this, manufacturers are outpacing job seekers, adding tension to the market.

By sector, manufacturing expectedly didn't add much - only about 25,500 jobs. But the service sector is growing at a breakneck pace, adding more than 124,500 jobs.

This is not surprising: until very recently, the Trudeau government insisted on the importance of observing quarantine measures. So the service sector was in a state of semi-suffocation. Now, following the process against coronavirus vaccination, Trudeau and his team have been forced to retreat, and the service sector has recovered.

The service sector has also hidden gains in health and social services. This is an area that is hugely lacking, not only in Canada, but also in the U.S. and the EU.

It is also important that most of the growth took place in the full-time employment sector. This means that there is a real shortage of workers.

The number of workers in the country is also up by 1 million. Apparently, that wasn't enough to cover the vacancies just yet. Wage levels have also risen, responding to inflationary developments, adding just over four Canadian dollars.

The Bank of Canada is off to a low start

What do these numbers mean for traders?

Obviously, the odds are increasing that the Bank of Canada will still decide to step up the pressure to raise interest rates and become more hawkish again. Previously, labor market tensions have consistently served as one of the main reasons for the central bank to raise rates, including on Jan. 25. On that day, we saw a rate of 4.5%, the highest in 15 years.

The central bank also became the first major central bank to say it would delay further hikes to allow previous hikes to take hold. This played into the hands of those who actively traded the Canadian dollar during this period. But by itself, it primarily gave Trudeau a breather, since he did not have to face real sector discontent again over rising borrowing rates.

Now the markets are preparing for further hikes. Officials themselves also note the tentativeness of the pause in the series of rate hikes. And instead of traders' hotly anticipated start of rate cuts, officials from various agencies are more strict in their assessments and are honestly warning markets of possible further hikes.

In fact, I don't think that if there is an increase, it will be too serious. Rather, we can expect an addition of a quarter point at most.

It's all about the numbers.

Look at the job growth. Canadians are eager to fill jobs. Not only does this mean that the current wage level is more or less satisfactory to them, but it also means that they are pressed for time - more than they were a year ago. In other words, inflation itself is causing Canadian residents to look for work, which means that soon, with the service market leveling off, we will see a smooth decline in the need for new hires. Moreover, demand from the U.S. is falling, which means fewer orders and less GDP as a result.

The Canadian dollar gained 0.6% on the news, to 1.3375 to the dollar, or 74.77 US cents.

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