Douglas Porter 

December 3, 2021

On the day of the dual employment reports two months ago, we penned a piece entitled “A Tale of Two Diverging Job Tallies”, which looked at the impressive surge in Canada versus a lacklustre headline U.S. payroll gain. Well, it’s déjà vu all over again (and, full disclosure, the temptation to simply update that piece runs very high). Canada’s employment report blew the doors down again in November, with a massive 153,700 advance and a deep 7-tick carve in the unemployment rate to just 6.0%. The top-line job rise again came close to matching the U.S. increase of 210,000, which was less than half of expectations. Even wage gains came in a bit shy of consensus stateside, rising a moderate 0.3% m/m, holding the annual increase steady at 4.8%. However, while some of the most closely-watched figures were a bit light, we believe that the U.S. results overall are still consistent with a very tight job market, and do little to dull our upbeat view on the outlook.

The mixed jobs data punctuated a truly topsy-turvy week for financial markets, which dealt with on-again, off-again concerns around the Omicron variant. At this point, we are still awaiting more complete evidence before significantly adjusting any forecasts. Some renewed international travel restrictions and rules, and the uncertainty surrounding such, are at the least chipping away at the near-term outlook and are a big reason WTI is still down roughly $10 from its pre-Omicron levels (i.e., all of 8 days ago). Equities took a big round-trip to almost nowhere in a volatile week, with the S&P 500 down moderately but the TSX off roughly 2% despite solid Q4 bank earnings. Similarly, long-term bond yields did not rebound from the deep dive last Friday; in fact, they dipped a bit further in the U.S. and Canada—30-year yields in the latter are now down more than 30 bps in the past 10 days alone.

Perhaps the big story of the week for markets was at the shorter end of the curve. Even with concerns and uncertainty around the new variant, a so-so U.S. jobs report, and some respite from commodity price inflation, the 2-year Treasury yield renewed its upward march. At one stage post-payrolls, it stood at 0.65%, the highest level since early March 2020. There’s little mystery behind the move, as Fed Chair Powell came out swinging in his Senate testimony on Tuesday. Besides burying the transitory description of inflation, he also flatly stated that the FOMC will be considering a faster pace of tapering forthwith, Omicron or not. Other Fed speakers chipped in with the view that the economy has dealt well with prior new waves, and they remained confident it will continue to do so.

Moreover, the ostensibly disappointing U.S. employment report showed some steel beneath the surface. Exhibit A: the blow-out rise in the household survey, which showed a 1.14 million pop in employment. True, this is a much more volatile measure, but it marks the biggest gain in a year and helped chop the unemployment rate 4 ticks to 4.2%. Recall that the Fed views 4% joblessness as the long-run full employment trend, so we’re basically there. And, the participation rate nudged up 2 ticks (to 61.8%), to its best level of the pandemic, and an encouraging sign that the high demand for labour is coaxing people back into the workforce. How to square this rollicking result with the sluggish payroll print? Briefly, the longer-term trends between the two surveys match much better, and the bounce in the household survey may reflect greater strength in informal work as benefits waned.

Perhaps the big story of the week for markets was at the shorter end of the curve. Even with concerns and uncertainty around the new variant, a so-so U.S. jobs report, and some respite from commodity price inflation, the 2-year Treasury yield renewed its upward march.

There was no such ambiguity in Canada’s jobs data, as it was wall-to-wall strength. First, a quick note on employment growth topping expectations by a factor of four last month: In any month, the consensus call is subject to huge error, but the uncertainty around this particular month was turned up to 11. The end of various government programs in late October, a more complete reopening of Ontario, and even some uncertainty around the impact of B.C. floods (which were a non-factor for this survey, due to timing) cast a bigger cloud than usual. In other words, a big surprise in jobs really wasn’t a big surprise. Now that we have dispensed with the obligatory ‘sorry, not sorry’ on the call, let’s dig into the strength. Four factors really stood out:

The deep dive in the unemployment rate to 6.0%. Yes, it is still a bit above the pre-pandemic low of 5.7%, but this is close to the lowest ebb of the past four decades. For example, in the 40 years to 2017, there was precisely one quarter when the jobless rate was lower than 6% (5.9% in 2007 Q3, and the BoC hiked the overnight rate to 4.5% that quarter, which was a highwater mark for the past 20 years).

Two provinces saw record-low jobless rates—Quebec and Newfoundland. These two were a little less affected by some of the biggest growth drags this year (the chip shortage, the third wave, the drought). But they are also two of the provinces with an older demographic profile and could be pointing the way to eventual new lows on the national jobless rate in the years ahead.

Total hours worked popped 0.7% last month and it, too, has now fully recovered all the ground lost in the pandemic. Arguably, that’s an even more important milestone than the recovery in employment, first noted two months ago. Moreover, hours worked are on track for an annualized sprint of about 9% for Q4, suggesting that GDP could challenge the 5.4% clip in the prior quarter.

Wages are quietly gaining momentum. The intense labour shortages have been a bit slower to develop in Canada than stateside, but last week’s shocking one million job vacancies news has upped the pace. The average hourly wage metric in the Labour Force Survey has not been a reliable guide during the past two years, due to profound shifts between sectors. However, its latest pick-up to 2.7% y/y just happens to precisely align with the two-year trend in industry-weighted wage increases (provided by StatCan). While still 2 full points below headline inflation, the trend is back in line with the pre-pandemic pace. And, simply put, all signs point due north from here for wages.

What does this all imply for Bank of Canada policy, with the central bank meeting next week and its inflation target renewal due imminently? Were it not for the latest COVID curveball, it would seem like an open field for the Bank to start laying the groundwork for rate hikes out of the gate in 2022. Between 4.7% inflation, a tight jobs market, torrid housing, and a cool currency, there is little standing in their way. And the market continues to hand it to them on a platter, now fully priced for a hike by March, and more than 125 bps of total rate hikes for next year. With the Fed now sharpening its tightening talons, and the rapid and more complete recovery in domestic employment, that market pricing suddenly looks much more reasonable.

In a very busy week for news and events, somehow Canada’s hot housing market still weighed in heavily. The early reports from the big cities in November were, quite simply, strong and reinforced the point that the market has broadly reheated after the briefest of lulls in the summer. Perhaps the most direct message was from the Home Price Index for the Toronto region: It rose 28.3% y/y, matched for sheer power perhaps only by the local hockey team. (Vancouver reported a 16% rise on a similar price measure… no comment on their team. Montreal’s results aren’t in yet… nor is the team.) The only other time this century that prices were hotter in Toronto was in early 2017, which prompted a suite of measures by the Ontario government at the time to calm the market. And, the sustained strength in housing may also have played a big role in the BoC’s decision to hike at back-to-back meetings later that year.

Doug Porter is chief economist and managing director, BMO Financial Group. His weekly Talking Points memo is published by Policy Online with permission from BMO.