Market-implied odds of a quarter-point rate cut by the Bank of Canada this month surged to about 90% in the wake of weaker-than-expected jobs reports this morning in both Canada and the U.S.
The economy shed 65,500 jobs in August, largely in part-time work, Statistics Canada said Friday, and added that this was fueled not only by lower hiring but also some layoffs.
The number of job losses in August was the worst level since January 2022. Analysts polled by Reuters had forecast net job gains of 10,000 and the unemployment rate to edge up to 7% in August from 6.9% in the previous month.
Meanwhile, in the U.S., nonfarm payrolls rose by only 22,000 jobs last month after rising by an upwardly revised 79,000 in July, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls rising by 75,000 positions after a previously reported 73,000 gain in July.
Implied interest rate probabilities in overnight swaps markets now show about a 90% probability of a 25 basis point BoC cut on Sept. 17, up from about 75% prior to the data and about 65% on Thursday. Those market bets for a rate cut have been trending higher throughout this week, and were only at about 40% last week before a sluggish GDP reading was released for the second quarter.
Market-based odds of a Federal Reserve rate cut on Sept. 17, which is also when the U.S. central bank will make its monetary policy decision, also rose following the release of the U.S. data. Three Fed rate cuts are now priced into the market by the end of this year.
The Canadian dollar was volatile in the moments after the jobs reports, as traders weighed how to react to weak data on both sides of the border.
Here, in detail, is how implied probabilities of future interest rate moves stood in swaps markets moments after the jobs report Friday. The current overnight rate is 2.75 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.
And here’s what they looked liked prior to the data:
More to come