Canada sheds tens of thousands of jobs as tariffs dent hiring plans

Canada's economy shed 40,800 jobs in July, reversing June's gains and pushing the employment rate to an eight-month low of 60.7%, while the unemployment rate held steady at a near multi-year high of 6.9%. This weaker-than-expected labor data, which saw significant losses in sectors like information, culture, recreation, and manufacturing (partly due to tariffs), has notably increased market expectations for a Bank of Canada rate cut, with money market bets for the September 17 meeting rising to 38%. Despite the overall job losses, average hourly wage growth for permanent employees accelerated to 3.5%, a metric closely watched by the BoC for inflationary trends.

Analysis

The Canadian labor market demonstrated significant and unexpected weakness in July, shedding 40,800 jobs, which starkly contrasts with the 83,000 jobs added in June and defied analyst forecasts of a 13,500 gain. This contraction pushed the employment rate down to an eight-month low of 60.7%, while the unemployment rate remained at a near multi-year high of 6.9%. The manufacturing sector appears to be a primary driver of the weakness, shrinking by nearly 10,000 jobs on a yearly basis, a direct consequence of U.S. tariffs on steel and aluminum. This negative outlook is reinforced by forecasts from Oxford Economics, which projects an additional 140,000 job losses and a rise in unemployment into the mid-7% range. Consequently, market expectations for a Bank of Canada (BoC) rate cut have intensified, with money market odds for a September reduction rising to 38%. However, the BoC faces a conflicting signal as average hourly wage growth for permanent employees, a key inflation metric, accelerated to 3.5% in July. This juxtaposition of a deteriorating employment landscape against persistent wage pressure creates significant policy uncertainty, though the data has prompted a bearish reaction in the Canadian dollar.

Key Decisions for Investors

• The decidedly weak labor report strengthens the bearish case for the Canadian dollar (FXC), as it significantly increases the probability of a Bank of Canada rate cut; investors should monitor upcoming Canadian CPI data, as a soft print would likely solidify this outlook and could prompt further currency depreciation against the USD (UUP).
• Given the conflicting signals of rising wage inflation (3.5%) and falling employment, the Bank of Canada's September policy decision is not a certainty, and investors should be cautious of positioning too aggressively for a rate cut, as a surprise hold could trigger a sharp reversal in the currency.
• The report highlights acute stress in tariff-exposed sectors like manufacturing, as well as cyclical areas such as construction and recreation, suggesting investors should review their exposure to Canadian equities in these industries due to headwinds from slowing domestic activity and trade policy.