New economic data puts BoC and Fed policy expectations on divergent paths
New data from Canada and the U.S. are telling a tale of two job markets, setting divergent monetary policy expectations for the country’s respective central banks.
In a show of surprising strength, the Canadian economy added 34,700 jobs in March while the unemployment rate held steady at 5%, near a record low, Statistics Canada reported Thursday in Ottawa. Driven by private-sector hiring, the figures beat forecasts for a small increase of 7,500 positions and a jobless rate of 5.1%, according to the median estimates in a Bloomberg survey.
With its unexpectedly strong start to the year, the hot labor market is showing few signs of responding to aggressive interest-rate increases. The numbers add to evidence that first-quarter growth will far exceed expectations, raising questions about whether the Bank of Canada has boosted borrowing costs high enough to cool demand.
Thursday’s increase follows gains of 150,000 and 21,800 in January and February, respectively, and marks the seventh consecutive month of job creation. Employment gains since September now total 383,000.
Total hours worked, a key input to gross domestic product, rose 0.4% on the month and were up 1.6% compared to a year earlier.
Last month, BoC Governor Tiff Macklem and his officials kept borrowing costs unchanged for the first time in a year. They are closely watching labour-market developments, including wages, to assess whether their 425 basis points of hikes since last March are enough to bring inflation to heel. If sustained, the relentless job gains, strong output growth and sticky inflation could put the central bank back on a tightening path.
“Bad news for the Bank of Canada was good news for Canadian workers in March,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a report to investors. “They’ll keep the door open to more hikes, but the recent banking sector turmoil raises the bar to unleash any more rate increases.”
Meanwhile, weekly jobless claims in the U.S. surged past expectations, reaching 228,000, with the prior week’s claims also revised up to 246,000.
The job market has been consistently strong, but new seasonally adjusted data suggests that it may not be as tight as previously thought. Over the past few months, weekly jobless claims figures remained below 200,000, indicating a remarkably tight labor market. However, the latest data shows that the situation may not be as exceptional as previously believed. This highlights the challenges of interpreting economic data in the wake of the unprecedented economic disruption caused by the pandemic.
Weekly claims serve as a crucial early warning system for potential problems in the labour market. Typically, the number of people filing for jobless benefits hovers around 200,000 per week in a healthy labour market, and 400,000 or more during a recession. Despite the potential volatility of these figures, they provide valuable insights into the state of the labour market.
The newest print and upward revision could be an indication that recent layoffs are impacting the overall employment situation and potentially slowing down the labour market, as the Federal Reserve had anticipated. The disappointing data is likely to increase speculation that the Fed will pause rate hikes sooner than expected, with futures traders now pricing in a 60% chance of a pause at the May meeting.
What is important to note, however, is that the Department of Labor has just revised how it calculates seasonally adjusted numbers. Starting from the latest Unemployment Insurance (UI) Weekly Claims News Release dated Thursday, April 6, 2023, it has changed the methodology used to seasonally adjust the national initial and continued claims.
- with files from Bloomberg.
