Money markets have completely priced out Bank of Canada rate cuts this year
The current overnight rate is 4.5 per cent. Prior to this morning’s 830 am ET jobs data, money markets were pricing in a reasonable chance of rate cuts by the December meeting. And prior to last Friday’s very strong U.S. employment report, a rate cut was being priced in as early as September of this year.
Instead, the labour market continues to tighten and the details support robust GDP growth such that the balance of risks facing inflation remain skewed higher than the BoC’s forecasts. ... While we have misjudged the economy’s near-term momentum, we would still push back against the idea that this means the Bank will be forced to raise interest rates further, as the rise in short-term Canadian interest rates today implies.
Note that actual, or non-seasonally adjusted, employment fell by 125,000 in January—prior to the pandemic, a “normal” January would see a job loss of 250,000-to-300,000 in unadjusted terms. So, evidently, there simply were far, far fewer layoffs than in a normal year at the start of 2023. Instead of an actual hiring boom, what we instead saw last month was a layoff freeze, given how hard it is to find workers in the current environment.
Today’s report is sure to raise eyebrows at the Bank of Canada. Their conditional pause on further rate hikes is predicated on a slowing of economic growth and an easing in the labour market. The Bank won’t adjust course after one report, but it will be closely watching to see if this trend of massive job gains continues.We should always treat the Labour Force Survey with caution.
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