Following four months of declines or little change, employment rose by 108,000 (+0.6%) in October. This increase—widespread across industries, including manufacturing, construction, and accommodation and food services—brought employment back to a level on par with the most recent peak observed in May 2022. All of the gain in October was in full-time work, another indicator of economic strength. This was the first gain among private sector employees since March when the Bank of Canada began hiking interest rates.

After declining in September, the unemployment rate remained at 5.2% in October, 0.3 percentage points above the record low of 4.9% observed in June and July. The adjusted unemployment rate—which includes people who wanted a job but did not look for one—was virtually unchanged in October at 7.1%.

In October, the labour force—or the total number of people who are either employed or unemployed—was 110,000 (+0.5%) more significant than in September. The labour force participation rate rose 0.2 percentage points to 64.9% in October but fell 0.5 percentage points short of the recent high of 65.4% in February and March 2022.

Employment rose by 24,000 (+1.4%) in manufacturing, mainly offsetting the decrease of 28,000 (-1.6%) recorded in September. Most of the increase was attributable to British Columbia (+12,000; +6.9%) and Nova Scotia (+3,700; +11.6%). On a year-over-year basis, employment in manufacturing was little changed.

The number of people working in accommodation and food services increased by 18,000 (+1.7%) in October, the first increase in the industry since May. According to the latest data from the Job Vacancy and Wage Survey, the industry had a higher job vacancy rate than all other industries in August.

Employment in professional, scientific and technical services rose by 18,000 in October (+1.0%), the third increase in six months. The number of people working in the industry has followed a long-term upward trend since June 2020, and in October was 297,000 (+19.3%) above its pre-pandemic level.

In October, the number of people working in wholesale and retail trade declined by 20,000 (-0.7%). Employment in the industry last increased in May and was little changed on a year-over-year basis in October. According to the latest data on retail trade, while retail sales increased 0.7% to $61.8 billion in August, advance estimates suggest that sales decreased 0.5% in September.

Of paramount importance to the Bank of Canada’s endeavours to wrestle inflation to a 2% pace, average hourly wages last month were 5.6% higher than one year earlier, accelerating from a rate of 5.2% in September. Despite average wages growing by more than 5% on a year-over-year basis in each of the past five months, they have not kept pace with inflation, which was 6.9% in September, contributing to concerns about affordability and the cost of living for many Canadians.

In separate news, the US employment data for October were also released today, showing stronger-than-expected hiring and wage gains, while the jobless rate ticked up a bit more than expected.

Bottom Line

Today’s labour force data in Canada throws into question the widespread assumption that the Bank of Canada can ease off the brakes very soon. I believe Governor Tiff Macklem will hike rates by another 50 bps in December and continue with 25 bp increases early next year. Today’s employment report raised the odds of the peak in the policy target of 4.5%.

Most market analysts had expected a 75 bps hike in response to the disappointing inflation data for September. Headline inflation has slowed from 8.1% to 6.9% over the past three months, primarily due to the fall in gasoline prices. However, the Bank said that “price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”

In his press conference, Governor Tiff Macklem said that the Bank chose to reduce today’s rate hike from 75 bps last month (and 100 bps in July) to today’s 50 bps because “there is evidence that the economy is slowing.” When asked if this is a pivot from very big rate increases, Macklem said that further rate increases are coming, but how large they will be is data-dependent. Global factors will also influence future Bank of Canada actions.

“The Bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023 and then return to the 2% target by the end of 2024.”

The press release concluded with the following statement: “Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.”

Reading the tea leaves here, the fact that the Bank of Canada referred to ‘increases’ in interest rates in the plural suggests it will not be just one more hike and done.

The Bank of Canada released its latest global and Canadian economies forecast in their October MPR. They have reduced their outlook across the board. Concerning the Canadian outlook, GDP growth in 2022 has been revised down by about ¼ of a percentage point to around 3¼%. It has been reduced by close to 1 percentage point in 2023 and almost ½ of a percentage point in 2024, to about 1% and 2%, respectively. These revisions leave the level of real GDP about 1½% lower by the end of 2024.

Consumer price index (CPI) inflation in 2022 and 2023 is anticipated to be lower than previously projected. The outlook for CPI inflation has been revised down by ¼ of a percentage point to just under 7% in 2022 and by ½ of a percentage point to about 4% in 2023. The outlook for inflation in 2024 is largely unchanged. The downward revisions are mainly due to lower gasoline prices and weaker demand. Easing global cost pressures, including lower-than-expected shipping costs, also contribute to reducing inflation in 2023. The weaker Canadian dollar partially offsets these cost pressures.

The Bank is expecting lower household spending growth. Consumer spending is expected to contract modestly in Q4 of this year and through the first half of next year. Higher interest rates weigh on household spending, with housing and big-ticket items most affected (Chart below). Decreasing house prices, financial wealth and consumer confidence also restrain household spending. Borrowing costs have risen sharply. The costs for those taking on a new mortgage are up markedly. Households renewing an existing mortgage are facing a larger increase than has been experienced during any tightening cycle over the past 30 years. For example, a homeowner who signed a five-year fixed-rate mortgage in October 2017 would now be faced with a mortgage rate of 1½ to 2 percentage points higher at renewal.

Higher borrowing costs are affecting spending on big-ticket items. Spending on automobiles, furniture and appliances is the most sensitive to interest rates and is already showing signs of slowing. As higher interest rates work their way through the economy, disposable income growth and the demand for services will also slow. Past experience suggests that the demand for travel, hotels, restaurant meals and communications services will be impacted the most. Household spending strengthens beginning in the second half of 2023 and extends through 2024. Population growth and rising disposable incomes support demand as the impact of the tightening in financial conditions wanes. For example, new residential construction is boosted by strong immigration in markets that are already particularly tight.

Governor Macklem and his officials raised the prospect of a technical recession. “A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth” in the first half of next year, the bank said in the MPR.

The Bank of Canada’s surprising decision today to hike interest rates by 50 bps, 25 bps less than expected, reflected the Bank’s significant downgrade to the economic outlook. Weaker growth is expected to dampen inflation pressures sufficiently to warrant today’s smaller move.

A 50 bps rate hike is still an aggressive move, and the implications are considerable for the housing market. The prime rate will now quickly rise to 5.95%, increasing the variable mortgage interest rate another 50 bps, which will likely take the qualifying rate to roughly 7.5%.

Fixed mortgage rates, tied to the 5-year government of Canada bond yield, will be less affected. The 5-year bond yield declined sharply today–down nearly 25 bps to 3.42%–with the smaller-than-expected rate hike.

Barring substantial further weakening in the economy or a big move in inflation, I expect the Bank of Canada to raise rates again in December by 25 bps and then again once or twice in 2023. The terminal overnight target rate will likely be 4.5%, and the Bank will hold firm for the rest of the year. Of course, this is data-dependent, and the level of uncertainty is elevated.