Canada unexpectedly lost jobs in September and housing starts fell, adding to evidence the economic recovery is flagging and cutting already slim chances the Bank of Canada will raise rates again this month. A separate survey on Friday by the central bank showed businesses were positive about their prospects over the next year, but also think growth will be curbed by US weakness.
Canada's economy shed 6,600 jobs last month. Analysts had predicted a gain of 10,000. The unemployment rate edged down to 8.0 percent from 8.1 percent in August as fewer people participated in the labour force. The numbers mirrored the trend in the United States, where non-farm payrolls fell an unexpectedly large 95,000 last month. Canada sends 75 percent of its exports to the United States and remains vulnerable to weakness in its giant neighbour.
"There's no doubt the job market has slowed and has slowed notably from its very strong pace earlier in the year," said Doug Porter, deputy chief economist at BMO Capital Markets. "The market had basically priced the Bank of Canada out (of further rate hikes). This won't do anything to change that."
The Bank of Canada raised rates in June, July and last month, but made clear it would carefully consider the patchy recovery before hike rates a fourth time. Swap markets were pricing in an 89.26 percent chance rates will remain on hold at the October 19 rate decision, according to a Reuters calculation, compared with 88.97 percent just before the data.
A report last month showed the economy shrank in July. This was the first decline since August, 2009 and a far cry from the annualised 5.8 percent growth rate in the first quarter. Growth in the second quarter was a more modest 2 percent. Canadian Finance Minister Jim Flaherty said in Washington he was not surprised by Friday's employment data and was encouraged by the growth in full-time jobs.
Still, the Canadian dollar touched a session low of C$1.0238 to the US dollar, or 97.68 US cents on the data before recovery to trade stronger on the day. Adding to the negative news, housing starts fell 1.5 percent because of a drop in new construction of single-family homes, which could weigh on economic growth.
"We continue to expect that residential investment will ease through the remainder of 2010 as housing supply works to adjust to cooling demand," David Onyett-Jeffries, an economist with Royal Bank of Canada, said in a commentary. The news was not all bad. Two Bank of Canada surveys showed businesses were positive about future sales, investment and hiring. But they also expect economic growth to be modest, due in part to the flagging US economy.
The balance of business opinion on future sales - the difference between the percentage predicting higher sales minus those expecting a drop - rose to 29 percent from 24 percent in the second quarter. That was still well below the 44 percent recorded in the first quarter. Eric Lascelles, chief Canada macro strategist at TD Securities, said the market could now assume that interest rates would be on hold for a while."
But Lascelles noted that the jobs report wasn't quite as soft as it seemed on the surface, given the healthy gain in full-time jobs, the drop in the unemployment rate and wage growth. Some economists also saw a positive element in news that employment among 15- to 24-year-olds fell by 42,000.
"The story is mostly young Canadians going back to school. These Canadians aged 15-24 were working part-time so that's why you have part-time employment down that's the simple link," said Sebastien Lavoie, assistant chief economist, Laurentian Bank Securities. "This report is not disastrous. Certainly it supports the growing market participants' view out there that the Bank of Canada will take a pause on October 19."