Money market traders trimmed their bets that the Bank of Canada will cut interest rates again at its next policy meeting this month following a stronger-than-expected jobs report this morning.
Canada’s economy posted a surprise 60,400 net job gains in September, almost entirely reversing the losses of the previous month, but was not enough to bring down its multi-year high unemployment rate. The jobless rate was at 7.1%, the same as the prior month when the rate hit a nine-year high outside of the pandemic years.
Analysts polled by Reuters had forecast job gains of 5,000 and the unemployment rate to edge up to 7.2%. The Canadian dollar and bond markets rose modestly on the data.
Implied interest rate probabilities in overnight swaps markets now imply about 56% odds of a quarter point cut on Oct. 29, down from about 70% odds prior to today’s report, according to LSEG data. A quarter point cut is still almost completely priced into markets by the start of 2026.
Up to today, those odds of a Oct. 29 cut had been been trending higher this month. They have now returned close to where they stood as September drew to a close – basically down to a coin flip. September inflation data, to be released on Oct. 21, will now likely be key for what will happen at the bank’s next policy decision.
Here, in detail, is how implied probabilities of future interest rate moves stood in swaps markets after the jobs report. The current overnight rate is 2.50 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Here’s what they looked liked just prior to today’s data:
Economists are also showing little conviction on whether this month will bring another rate cut.
Here’s how they are reacting in written commentaries today:
Bradley Saunders, North America Economist, Capital Economics
“The broad-based jump in employment in September reversed much of the weakness in prior months and will help reassure policymakers that they can afford to focus on the upside risks to inflation for now, even with the unemployment rate at a four-year high. …
Encouragingly, the breakdown showed the largest rise was in manufacturing (+28,000), suggesting US tariffs have not completely toppled the factory sector. President Trump’s refusal to offer relief on sector-specific tariffs or commit to the future of CUSMA during his meeting with Prime Minister Mark Carney this week does not bode well, though. Otherwise, bar a 21,000 fall in wholesale and retail trade employment, the report showed broad-based strength across most industries. There was also no boost from a seasonal quirk in youth employment as we had anticipated, reaffirming that September’s report reflected genuine strength.
Despite the strong employment growth figure, a 72,000 rise in the labour force meant the unemployment rate was unchanged at 7.1% last month – its highest since August 2021. Nevertheless, with today’s release suggesting the labour market is not in as dire a position as it had looked in prior months, and given the emphasis on upside inflation risks in the Summary of Deliberations from the Bank’s September meeting, we are starting to think policymakers will wait until December before they decide to cut interest rates again.”
Royce Mendes, managing director and head of macro strategy, Desjardins Securities
The employment by industry numbers, along with the sharp increase in full-time paid positions reverses earlier weakness. But such volatility may simply represent statistical noise inherent in the Labour Force Survey.
The unemployment rate remains the best arbiter of supply and demand conditions in the labour market. Despite the sharp rise in employment reported, the unemployment rate didn’t budge, staying elevated at 7.1%. Using the American methodology for the unemployment rate, which doesn’t include discouraged workers, the jobless rate was stuck at 6.0%, much higher than the US rate of 4.3%.
Given the persistently-elevated unemployment rate, we still believe the Bank of Canada needs to lower rates to get the economy back on track. Our latest tracking suggests that GDP is on track for growth somewhere between 0.0% and 1.0% in Q3. Fiscal stimulus is on the horizon, but won’t hit the economy until well into 2026. Should Canadian central bankers move back onto the sidelines, there would be no policy support for the economy in the months to come. As a result, we maintain our view that the Bank of Canada will cut rates down to 2.00%.
Andrew Grantham, senior economist, CIBC Economics
“Overall, today’s data still suggests that a large degree of slack remains within the labour market, which we think justifies a further interest rate cut from the Bank of Canada, although today’s strength in employment could delay the timing of that move, particularly if the upcoming CPI print is also stronger than expected.”
Douglas Porter, chief economist, BMO Capital Markerts
“The wild swings in headline job tallies in the past four months serve as a loud reminder to not be heavily swayed by one or two reports, since the wind direction can change very quickly. Even with the nice advance last month, the big picture is that over the past eight months—i.e., since the trade uncertainty ratcheted higher in late January—employment is up a tiny 0.1%.
That aside, the bounce in September is certainly welcome, and most aspects of the report were positive; full-time jobs rose 106,100, the private sector was solid at +21,900, and the gains were somehow led by manufacturing at +27,800 (perhaps the most surprising/suspicious aspect of the report). …
Today’s strong report is certainly welcome after the big declines in the prior two months. Canada’s economy continues to hang in there, treading water as it awaits more certainty on trade. For the Bank of Canada, the soft labour market over the summer was one of the key drivers of the September rate cut. That factor is no longer front and centre, so unless CPI (on Oct 21) slows materially, the solid jobs figures leans toward a pause at the October meeting.”
Andrew Hencic, drector and senior economist, TD Economics
“The Bank of Canada’s next decision is due at the end of the month and this surprise from the labour market could change the calculus on the decision. However, underlying inflation continues to hover within the target range and the unemployment rate suggest that the labour market still has excess slack. The next inflation report is due on the 21st and the bar will be even higher for inflation to underperform and bring the BoC onside for another rate cut. Markets seems to agree as the pricing for a rate cut materially deteriorated this morning.”
Michael Davenport, senior economist at Oxford Economics
“September’s jobs rebound is more likely a feature of monthly volatility in the Labour Force Survey than a signal that the job market has turned a corner. The underlying trend in the labour market is still weak and a large degree of slack persists. Total employment is down about 45,000 from June, and the unemployment rate has risen 0.5ppts since the start of the year. Canada may avoid a technical recession this year, but we expect the economy will struggle to grow in the near term, and recession risks remain high. September’s job rebound is unlikely to be repeated in October, and we think more layoffs to come in Q4 will lift the unemployment rate to the mid-7% range by year end. The labour market and economy are weak enough for the Bank of Canada to justify another 25bp cut on October 29. However, that’s likely as low as the overnight rate will go this cycle.”
Matthieu Arseneau and Alexandra Ducharme, economists at National Bank
“This report alone is not enough to convince us that the Bank of Canada will not cut rates in October. We should never overreact to a single piece of data, particularly when it originates from this survey. Ultimately, everything will depend on the information available before 29 October. If inflation remains high and the business outlook survey indicates an improvement in the Canadian business situation, we could see a pause later in the month. However, we doubt this will happen. There are not only sectors that are directly affected by tariffs, but a bulk remains worried by high levels of uncertainty surrounding tariffs with regular protectionist announcements from the US. This continues to paralyse many companies in terms of hiring and investment. Regarding inflation, we have very few concerns as the Canadian economy is firmly in a state of excess supply, the Canadian dollar has shown resilience against the US dollar, and retaliatory tariffs have largely been abandoned.”
Derek Holt, head of Capital Markets Economics, Scotiabank
“We still need to see CPI on October 21st and the BoC’s quarterly surveys the day before, but at this point the odds of skipping the meeting have gone up. The economy is still weak and building spare capacity, which could motivate the BoC to opt in favour of additional insurance. The BoC looks at job market trends that are still weak with employment down 46k in Q3 and there is a strong reason to be careful interpreting this round of jobs numbers.”
David Rosenberg, founder of Rosenberg Research
“The Canadian dollar has snapped back smartly on the data (below C$1.40) but, to us, this data point looks to be a blip on what is still a weakening labor market trajectory. The big picture shows an ongoing decay in the trend — employment growth, on a year-over-year basis, has softened to just over +1.0% from +1.5% a year ago, +3.4% two years ago, and +2.8% three years ago. Practically every recession over the past five decades either commenced with a weak jobs trend like this or had already arrived. The Bank of Canada is not very likely to be fooled or swayed by the lipstick at the headline level.”
Gisela Young and Veronica Clark, economists at Citi
“The upside surprise in September employment does not rule out an October BoC rate cut, in our view, with the unemployment rate still at the recent highs suggesting a wider output gap. The CPI reading later this month will be important. Employment increased by 60.4k in September, stronger than the 5k increase consensus had expected and our expectation for a 15k decline. The strength in September was driven mainly by more trade-sensitive goods categories, particularly manufacturing, which have been generally weaker this year.”
With a file from Reuters