Employment up by 64,000 and wages above inflation could lead to rate rise
The Bank of Canada has a tricky decision to make this month. Does it focus on flat GDP growth despite rising inflation and pause rates, or the latest labour market data and hike again?
Friday’s jobs data from Statistics Canada shows that 64,000 jobs were created in September following a 40K increase in August, while the unemployment rate stated at 5.5% for the third month in a row.
But it’s the inflation-busting rise in wages that has concerned Scotiabank head of capital markets economics, Derek Holt, who determined in his analysis that “wages scream hike to the Bank of Canada.”
“While I think the 64k rise in total employment during September had generally soft details under the hood, the broad trend in employment gains this year remains explosive and it’s the wage figures that were the most eye popping and relevant consideration,” he wrote.
With an 8.3% month-over-month (seasonally adjusted annual rate) rise in average hourly wages following a 10.5% increase in August and 12.1% in July, Holt points to the 10.3% three-month moving trend rate.
Digging down into the wage growth stats, he notes some quality issues, including a rise in self-reported self-employment, volatility in the educational sector data, and the high prevalence of new part-time roles (48K).
On hours worked, Holt believes that they signify economic rebound.
“Since GDP is an identity defined as hours worked times labour productivity with the latter defined as output per hour worked, the rise in hours is a supportive factor for broad GDP growth,” he wrote.
With a conclusion that the BoC appears to be falling further behind second round effects of inflation, there could be cause for a rate hike on October 25.
Other economists
At CIBC Economics, Andrew Grantham believes that the weakness in underlying data should keep the BoC on pause.
“We continue to expect no change in interest rates, with falling job vacancies and a stall in economic activity evidence that the economy is now responding to prior rate increases,” he wrote in his commentary.
He concurs with Holt that wage growth is stronger than policymakers would want to see.
“However, that still reflects some of the previous tightness in the labour market as well as wage adjustments following last year's surge in inflation. With the unemployment rate off last year's lows and expected to rise further as job vacancies continue to fall, wage inflation could ease fairly quickly next year,” he concluded.
Meanwhile, at TD Economics, senior economist James Orlando says that the labour market data muddies the outlook for rates.
“There will be a lot more data coming out between now and the next BoC rate decision (CPI, housing, retail sales) and the Bank will likely need to see significant weakness in these reports to prevent it from pulling the trigger on another hike,” he wrote.
