Core Inflation in Focus for Rate-Cut Cue After Canada’s Job Beat

A hotter-than-expected jobs report means core inflation needs to be convincingly cooler for the Bank of Canada to go ahead with a June rate cut.

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Bloomberg News

Randy Thanthong-Knight

Published May 10, 20243 minute read

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(Bloomberg) — A hotter-than-expected jobs report means core inflation needs to be convincingly cooler for the Bank of Canada to go ahead with a June rate cut. 

April’s job gains blew past expectations by nearly five times, with the most positions added in 15 months. That resulted in traders paring odds of a June cut back to just over a third, from two-thirds before the release on Friday. 

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Whether the Bank of Canada can start its easing cycle next month will now hinge on April’s consumer price index report due in less than two weeks.

A further deceleration would mark the fourth straight monthly easing of underlying price pressures, boosting odds for a June rate cut, currently seen by a majority of economists in a Bloomberg survey. A lapse in progress would likely slam the door shut for a move next month.

“Today’s showy headline jobs increase will give the Bank of Canada some pause, since it reinforces the point that the economy is clearly not rolling over,” Doug Porter, chief economist at Bank of Montreal, said in a report to investors. A rate trim in June “will require a seriously cool core CPI result.”

To pivot to easier policy, Governor Tiff Macklem and his officials set a condition that they need to see “further and sustained easing in core inflation.” They said they’re already satisfied with the “further” element and are now looking to see the progress “sustained.”

For the first three months of 2024, core inflation has been gradually cooling, with the averages of the Bank of Canada’s two core measures reaching a 2.95% yearly pace in March. Economists in a Bloomberg survey see the rate slowing to 2.8% in April.

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“Our own base case assumption is that the BoC will be in a position to cut the overnight rate in June,” Nathan Janzen of Royal Bank of Canada. “But with labor market data for April surprising on the upside, that is also contingent on the next round of inflation numbers continuing to flag easing in price pressures.”

Read More: Bank of Canada Can Lower Rates Far Below Fed, National Says

Economists who are sticking with their call are looking past the headline jobs number and focusing instead on the details that suggest continuing softness in the labor market.

“This strength appears to largely reflect a further surge in the base population as the labor force count catches up with the quarterly population tally,” said Andrew Grantham, an economist at Canadian Imperial Bank of Commerce.

Against the backdrop of rapid immigration-fueled population growth, Canada’s creation of 90,000 jobs in April still failed to keep pace with 112,000 new working-age entrants — a persistent trend over the past year. Wage growth is also rising at the weakest pace in 10 months.

“With the unemployment rate remaining higher than it was at the start of the year and wage pressures easing slightly, the data is still consistent with a gradual loosening of labor market conditions,” Grantham said. “After today’s data that call relies even more heavily on core measures of inflation remaining subdued within the next CPI print.”

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Still, other economists who already expect a cut later than June pointed to a risk that April’s job report suggests stronger-than-expected growth momentum in the second quarter.

“Today’s report could introduce some doubt at the BoC that inflation progress will be sustained, and while we still look for the first BoC cut in July we see the April CPI report and Q1 GDP as more impactful for the near-term policy outlook,” said strategists Robert Both, Andrew Kelvin and Chris Whelan at Toronto-Dominion Bank.

“Sure, at the margin June is less probable now, but a June hold is not a done deal especially ahead of CPI.”

—With assistance from Jay Zhao-Murray.

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