Weak October Canadian Jobs Report Raises Odds of Jumbo Rate Cut

The data shows the unemployment rate held at 6.5%, the same as in September and a tick below the FactSet projection of 6.6%. Economists responded to the lackluster data by asserting that the cooling labor market and Canadian economic weakness bolster the possibility of another 50-basis-point interest rate cut when Bank of Canada policymakers meet on Dec. 11.

How Much Will the Bank of Canada Cut Rates?

“The October jobs report is very much consistent with an economy that is still grinding out modest growth,” says Douglas Porter, chief economist at BMO, in a note to investors. “This so-so result doesn’t really turn the dial on the Bank of Canada’s cut-o-meter, with the market still leaning slightly to a follow-up 50-basis-point reduction in December.”

While the latest data supports an argument for a larger cut, it’s not a done deal. There is a full month’s worth of economic data (including another jobs report and the GDP report) for the central bank to parse before making a decision.

“The mixed nature of today’s data didn’t help, but we continue to lean toward another 50-basis-point move,” says Andrew Grantham, senior economist at CIBC. However, he adds that with one more employment report before the Bank’s decision, “today’s release was never going to close the book on the basis point debate.”

National Bank economist Matthieu Arseneau believes a weak appetite while the worker pool grows at a staggering rate does not bode well for labor market stabilization. “We remain concerned about further deterioration in the months ahead as monetary policy remains restrictive,” he says.

Arseneau argues that while the latest jobs data may not strengthen the case for a bigger rate cut, “we still think a 50-basis-point cut is appropriate.”

This makes TD Bank senior economist James Orlando a rare voice insisting the labor market won’t force the Bank of Canada’s hand. “Today’s report should encourage the Bank to revert to a 25-basis-point cut in December, even if it means eating some crow on its one-off 50-basis-point move,” he asserts. Still, he concedes that “a 50-basis-point move would be the choice” if policymakers are “dead set on getting the policy rate back into a neutral range [2.25%-3.25%] by year-end.”

Labor Market Slowdown Unabated

A cooling labor market remains a big concern. Analysts argue the increase in October employment numbers is insufficient to stabilize the ongoing deterioration. “The 15,000 jobs created fell well short of the 51,000 needed to stabilize the employment rate, which has seen a sixth consecutive fall and is now down 1.8 percentage points from its peak in 2023,” says Arseneau. Although the decline was expected, given an aging population, he says the speed of the recent reduction signals clear weakness.

The unemployment rate was particularly high in Alberta (7.3%) and Ontario (6.8%), exceeding the national average of 6.5%, driven by the rapid population growth in both provinces. Arseneau cautions against celebrating the stability of the national unemployment rate too quickly, “as it has been sustained in part by a further drop in the participation rate, possibly reflecting discouragement among job seekers.”

There is still plenty of slack in the Canadian labor market, according to Desjardins macro strategist Tiago Figueiredo, who cites a sharp spike in unemployment rates for the core age group (25-54 years old). “These cohorts tend to spend more and have larger liabilities, so any signs of growing slack among this segment would be concerning for central bankers,” he explains.

The employment rate (the proportion of the working-age population that is employed) fell 0.1 percentage points to 60.6% in October—the sixth consecutive monthly decline. On a year-over-year basis, it fell 1.3 percentage points, continuing a downward trend from a recent peak of 62.4% in February 2023.

The Dollar Feels the Drag

Orlando says a 25-basis-point cut “would the Canadian dollar, which has been weak on widening rate differentials with the [US] Fed.” However, if the Bank of Canada again opted for a supersized rate cut, it would likely make the Canadian dollar fall further. The loonie reached a recent high of C$1.21 against the US dollar in May 2021, but it has been tumbling since, hitting a low of C$1.39 against the US dollar on Nov. 1, where it has hovered.

The value of the Canadian dollar is also influenced by the Bank of Canada and the US Federal Reserve’s differing monetary policies. If the Canadian central bank lowers its interest rates faster (and in larger chunks) than the Fed, the loonie will devalue further. However, that gap recently narrowed from 100 basis points to 75 when the Fed enacted a 25-basis-point rate cut.

“Interest rate differentials are not the only driver of the currency. Risk sentiment also plays an important role in explaining movements in the Canadian dollar,” says Figueiredo.

Donald Trump’s decisive victory in the US presidential election clouds things even further. The Fed must calibrate monetary policy amidst a more uncertain environment, with proposed fiscal stimulus and tariffs muddying the waters. It remains to be seen which proposals ultimately get implemented, “but these policies could be catalysts for more pronounced divergence in monetary policy across jurisdictions,” Figueiredo says.

Prolonged Economic Pain?

Macroeconomic data like the October jobs report point to continued economic malaise plaguing Canada. However, some economists see light at the end of the tunnel. They find hope in how the economy has added 270,000 jobs this year, including the 15,000 new jobs in October, and believe it may be close to turning a corner.

“Against this backdrop, we are seeing the unemployment topping out around current levels, as the federal government’s plan to aggressively slow population growth should limit the buildup of further labor market slack,” says Thomas Feltmate, senior economist at TD Bank.

Figueiredo says there’s some scope for further weakness in the Canadian labor market, but he doesn’t expect a material deterioration scenario. “The rate-cutting cycle in Canada is well underway, and there are some signs that economic growth is beginning to pick up, with fourth-quarter GDP tracking looking healthy,” he says.

Canadians are responding to rate cuts by increasing spending, which could revive the housing market—a key component of domestic economic growth. “We have economic growth rebounding in the fourth quarter of 2024 and the first half of 2025,” says Orlando. “Unless a geopolitical shock happens, such as big US tariffs, 2025 should be a rebound for Canada, not a slowdown.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.