OK, so, colour me surprised

I think I would like to take a mulligan on the final paragraph of my most recent blog entry.  Commenting on Wednesday's Bank of Canada rate rise, what I said in effect was that the Bank wouldn't have crossed up the market that way unless it had advance knowledge that the May jobs and wages data would be strong. 

Well, this morning Statistics Canada released said data and they were....not strong. Employment actually fell by 17,000 in May, as against a consensus expectation for an increase of about 20,000. This can be compared to average monthly gains of 33,000 jobs in the previous three months and close to 80,000 around the turn of the year. The unemployment rate, which had been eerily stable at 5.0 percent for the last five months, ticked up to 5.2 percent, the first increase since August 2022. As for wages, growth in average hourly earnings edged down to 5.1 percent year-on-year, 0.7 percentage points above the latest annual increase in CPI.  

All in all the data seem to suggest that the Bank of Canada's rate actions are starting to bite in the labour market, sufficiently at least to allow it to delay another month before ending its "conditional" pause. So why did it hike rates this week?  One or two technical elements in today's release may indicate that the data are overstating any weakness in employment. Most notably, a sharp fall in youth unemployment more than fully accounted for the jobs lost in the month, but StatsCan's data release carefully explains that this was the result of a large seasonal adjustment factor for the month: without that adjustment, youth employment actually rose in the month.

Then there is the historic volatility of Canadian employment data. Some commentators have already pointed to that as a reason to be skeptical about today's figures, although it may be noted that the same people had few qualms about taking the numbers at face value when they were growing strongly. 

Perhaps we need to look no further than the Bank's own statements. On June 6, just a day before the rate hike, it posted this on Twitter: "When we set interest rates, it's based on where we expect inflation will be in the future, not where it is today".  I thought then that this curiously-timed message might be intended to set the market up for a rate hike, but evidently didn't take it seriously enough to share my concerns.

Year-on-year CPI is likely to ease well below 4 percent in the next month or two, thanks to the base effect. Year-on-year wage gains are already above CPI, and any fall in CPI in the near term would soon widen that differential to more than one percentage point.  Does the Bank see that possibility as evidence that the dreaded wage-price spiral is taking shape? When it comes to explaining this week's rate hike, that seems as good a rationale as any. 

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