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. Most economists are also now expressing confidence a rate cut is coming, with both Scotiabank and Bank of Montreal revising their forecasts to now call for 25 basis points of easing at the bank’s next policy meeting.

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.

The unemployment rate rose 0.2 percentage points to 7.1 per cent, a level last seen in May, 2016, if the COVID-19 years of 2020 and 2021 were excluded. Analysts were expecting 7%.

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, according to LSEG data. 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 on Friday. A series of dovish remarks from Federal Reserve officials and weak U.S. economic readings earlier this week had already been persuading traders to raise their bets for a rate cut in both the U.S. and Canada.

Market-based odds of a Federal Reserve rate cut on Sept. 17 (both central banks will make their policy decisions that day) also further rose following the release of the U.S. jobs data. Three Fed rate cuts are now priced into the market by the end of this year, and there is even speculation the Fed could cut by 50 basis points later this month.

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.

Meanwhile, U.S. and Canadian bond yields moved sharply lower across the curve. The U.S. 10-year bond yield was down about 10 basis points to 4.079% after the jobs reports, and the 2-year was also down by about 10 basis points.

Canada’s five-year yield, which is particularly closely watched because of its influence on fixed mortgage rates, was down about 9 basis points at 2.805% – its lowest level since the start of June.

U.S. and Canadian stock markets opened higher. The U.S. jobs report hints of a weak U.S. economy but also makes it highly likely a Fed rate cut is coming this month, and lower interest rates are generally supportive for equity markets.

Here, in detail, is how implied probabilities of future interest rate moves stood in swaps markets moments for Canada 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. As shown, markets are nearly fully pricing in 50 basis points of monetary easing by next spring.

Here’s what they looked liked just prior to today’s data:

Here’s how economists are reacting to the Canadian jobs report, based on excerpts taken from their written commentaries:

Doug Porter, chief economist, BMO Capital Markets

“We are now looking for the Bank of Canada to also cut rates in September, and we are sticking to our dovish lean that it will ultimately slice by 75 bps, taking the rate to 2.0% by early next year. While we and the market have been debating the timing and depth of potential cuts, an exceptionally weak Canadian jobs report barged into the discussion and left few doubts. … While many were pointing to the somewhat hawkish language in the July meeting and minutes, that event pre-dated the loss of more than 100,000 jobs and the removal of most of Canada’s reciprocal tariffs. Landing on top of last week’s sour Q2 GDP result (-1.6% a.r.) and the softening U.S. job backdrop (which could ping back on Canada), the market is now heavily leaning to a September trim by the Bank. Adding some fuel, this week’s batch of early home sales results suggest that activity receded somewhat again in August after some signs of life earlier in the summer. Unlike the Fed, it’s not a lock that the BoC will cut, as Canadian rates aren’t in restrictive terrain at 2.75%, and core inflation has proven sticky. But, the strong counter arguments are that the weaker job market will ultimately sap underlying price pressures, and rates are clearly not low enough yet to spur the housing market. It’s true that monetary policy can’t fix the trade war, but it can provide important support to the other parts of the economy amid the deep and ongoing uncertainty.”

Derek Holt, vice-president and head of capital markets economics, Scotiabank

“Ouch. Canada’s job market was hit hard in August. The odds that the BoC will resume easing at the September meeting just went up. With materially fresh evidence, our revised call is a 25bps cut on the 17th followed by another in October and then hold. If they’re going to ease, then it’s totally pointless to do it just once. …

The additional reasoning for the BoC to be easing is based on the following:

The BoC previously showed inflation falling back to 2.1% y/y in 2026Q4 and 1.9% in 2027Q4. They would likely be more concerned about downside than upside risks to this in light of fresh domestic and US developments. Insurance easing against the risk of undershooting 2% inflation in future may dominate in the nearer term, final domestic demand be damned.Second, developments in the US are material. Up to now, our argument had been that the tariff shock to Canada was small in weighted terms after taking into account high USMCA/CUSMA compliance. Therefore as long as the US economy held it together, Canadian exports could be buoyed as the income pull effect on exports offsets the price effect. That’s less clear now as the US job market stumbles and growth risks mount with the Fed in easing mode. Canada is highly trade dependent especially on the US.Tariff retaliation is (mostly) gone which lessens risk of import price pass through into Canadian inflation.It’s also unclear where the balance may lie in the October federal budget. We’re told it will apply austerity—likely on operating spending—while ramping up investment spending. Where the net lies, when, and by how much is highly uncertain as it has taken too long to present fiscal plans at a point of high uncertainty. That probably means the BoC can’t afford to wait given lags in policy effects.

The combination of factors probably merits additional easing by the BoC but it’s not without risks to how the BoC may look at things. One cut wouldn’t be worth Macklem getting out of bed to deliver as the effects would be scant and markets would pressure him to keep going. 50bps back to back and then we’ll see. All of which would be a pivot away from inflation risk, for now.”

David Doyle, head of economics at Macquarie Group

“Canada’s labour market is likely to continue to struggle in the near-term and we suspect a modest further rise in unemployment through year-end. We pull forward the timing for our first expected BoC rate cut to September and our second cut to October (prev. Dec). While this is our base case, uncertainty remains on the timing with the August CPI reading (due on 16-Sept) being an important consideration for the BoC.”

David Rosenberg and Mehmet Beceren, economists with Rosenberg Research

“Wages showed mixed signals — the average wage rate increased by +3.2% YoY — but this should really be of little concern to the Bank of Canada because the widening labor market slack will ensure that cost pressures will remain contained.

Governor Tiff Macklem and the BoC have hesitated to move this year, citing tariff uncertainty. Yet uncertainty itself has become a significant headwind for growth without meaningfully affecting inflation expectations and is showing through in a sharp reduction in hiring activity. Today’s employment report should dispel any lingering doubts as to what the BoC should be doing at the coming policy meeting on September 17th. …

Three final items to note: (i) over the past year, the level of unemployment has risen nearly +8.0%, but the comparable pace of job creation is but a fraction of that at +1.0%; (ii) just 65% of the folks who entered the labor market over the past twelve months have managed to land a job; (iii) the unemployment rate has now risen +230 basis points above the cycle-low of 4.8% posted back in July 2022. Never before in the annals of recorded Canadian economic history has the economy managed to escape an official recession with such a dramatic move off the cycle low.

Tiff, you know what to do.”

Royce Mendes, managing director and head of macro strategy, Desjardins

“Despite easing trade tensions, Canada’s labour market showed further signs of deterioration in August. … Weakness which was previously isolated in highly trade-dependent sectors now appears to be spreading across the economy, a risk we had flagged when the Bank of Canada moved to the sidelines earlier this year. Employment decreased across several sectors, with both highly trade exposed and non-exposed industries seeing declines. Importantly, the prime-age unemployment rate, which captures households with the largest mortgage balances, rose three ticks to 6.1%, also the highest since 2016 aside from the pandemic.

The softening labour market further dimmed the prospects for wage growth. Average hourly wages for all employees slowed to a 12-month pace of 3.2% from 3.3% in July. The Labour Force Survey echoes other recent data releases which suggested that wage increases are cooling off and are unlikely to be a source of inflation.

The ugly employment numbers released today should be enough to push those who had been in the “no cut” camp to reassess their outlooks. We continue to see the Bank of Canada reducing its policy rate 25 basis points later this month and ultimately down to a terminal rate of 2.00% to stem the bleeding in the economy. Markets are coming around to the view that the Bank of Canada will need to move more clearly into stimulative territory, but remain underpriced for the coming easing in our view.”

Leslie Preston, managing director and senior economist, TD Economics

“July and August’s job losses have now more than reversed June’s outsized gain, and the Canadian economy has lost 39k jobs since January. The unemployment rate has risen half a percentage point over the same time period. It could be worse though, a slowdown in labour force growth is keeping the unemployment rate from rising too high, despite weak labour demand.

August’s report is consistent with the Bank of Canada’s characterization of “an excess supply of labour” in July’s Monetary Policy Report. However, it hasn’t yet prompted them to lower rates beyond the pre-emptive cuts made early in the year. Markets are now putting odds on the next cut coming in September. We have long expected two more cuts this year, with the inflation report on September 16th likely to help cement the timing of the next cut.”

Andrew Grantham, senior economist, CIBC

“A further slump in employment, resulting in a larger-than-expected increase in the unemployment rate, adds to evidence that the Bank of Canada needs to restart interest rate cuts later this month. The 66K decline in jobs was even worse than the 41K reduction seen in the prior month and contrasted to consensus expectations for a slight increase. While the majority of the reduction came in part-time work (-60K) there was also a modest decline in full-time positions. By sector, trade exposed areas such as transportation & warehousing and manufacturing saw big drops, but they weren’t solely responsible for the overall reduction with business & technical services also seeing a marked reduction in positions. Unlike prior months, youth employment/unemployment was fairly stable in August, with the overall weakness driven by prime aged (25-54) workers. The slump in employment saw the unemployment rate increase to 7.1%, from 6.9%, despite a further slight downtick in participation. Hourly wage growth for permanent employees surprisingly accelerated (to 3.6% from 3.5%), but that could be due to compositional factors as clearly there is slack building up in the labour market. Overall, today’s data demonstrates the need for further interest rate cuts, and we continue to forecast a 25bp move in September with another to follow in Q4.”

Tony Stillo, director of Canada economics, and Michael Davenport, senior Canada economist, at Oxford Economics

“The impact of the trade war looks to be broadening to less directly trade-exposed sectors. … The recent removal of most Canadian counter tariffs and rising USMCA compliance will cushion the economic impact of the trade war on Canada’s economy, but it is still likely to teeter on the verge of recession in H2. There will likely more job losses to come that could lift the unemployment rate even higher. Lower Canadian counter tariffs also reduce the upside risks to inflation and lessen uncertainty from the trade war, which we believe will convince the Bank of Canada that it can now lower rates, albeit cautiously. Today’s weak job report will likely reinforce that view. We expect the BoC to cut rates 25bps in September and October, bringing the overnight rate down to the low end of its neutral range.”

Thomas Ryan, North America economist, Capital Economics

“As well as the broadening out of job losses, the other troubling detail of the report was a 0.2%-point rise in the unemployment rate to 7.1%, the highest since August 2021. That was despite a 31,200 drop in the labour force, even as the population continued to rise. As far as the Bank of Canada is concerned, this cements that there is growing slack in the labour market, which we expect will prompt 25bp cuts in both September and December. Markets are now nearly fully aligned with our September call … and are gradually moving toward our December view as well.”

Veronica Clark, economist with Citi

“An undeniably soft August employment report in our view solidifies a resumption of rate cuts by the BoC this month. … With weakness largely concentrated in services sectors, details of employment data the last two months suggest weakness in trade-exposed parts of the economy could be spreading more broadly. We do not think a further weakening in demand is a backdrop that will require simply fine-tuning policy rates around neutral. We continue to expect 100 basis points more of rate cuts to 1.75% by early next.”

Matthieu Arseneau and Kyle Dahms, economists with National Bank

“While LFS employment data showed a certain resilience in the country’s job market a few months ago, due to methodological issues that we repeatedly highlighted in the first half of the year (link), recent data now contradicts that earlier narrative, particularly this morning’s release. The labor market has deteriorated much more than economists had expected in August, with employment falling significantly and the unemployment rate rising more than anticipated to 7.1%. The increase could have been even greater had it not been for the decline in the participation rate, which limited the damage for now. …

August data further reinforces our view for the need for the Bank of Canada to lower interest rates later this month. The economic contraction was significant in the second quarter, and the weakness continues into the third quarter, according to the survey published this morning. Hiring and investment intentions were sluggish in the Bank of Canada’s latest survey, and tariff uncertainty continues to paralyze businesses. The job market has deteriorated significantly since last February (the unemployment rate has risen from 6.6% to 7.1%) and is now showing a material slack, which is consistent with rapidly declining wage pressures in the private sector. These developments should reassure the BoC that inflation risks are now minimal, especially since the government has drastically reduced retaliatory tariffs.”

Claire Fan, senior economist, Royal Bank of Canada

“The negative job market report today increases the odds that the BoC could see fit to cut interest rates further. The the next CPI print in Canada set to release on September 16, the day before the next Bank of Canada meeting, will bear an unusual amount of weight as a deciding factor. Another softer inflation print could raise odds for additional easing relative to our current base case that assumes the BoC has already reached the end of the cycle. Going forward, condition in trade exposed sectors will likely continue to worsen but we don’t expect that will spread and cause a sharp, broad-based contraction. For that, we point to 1) relatively low average tariff rate on Canada among major U.S. trade partners thanks to CUSMA exemptions and 2) healthy domestic consumer spending trends as reasons why we expect resilience in other sectors will help keep a floor under broader economic conditions.”