The return of volatility in global markets is undeniably the event of the week. Still, investors will take a close look at the Labour Force Survey report to be released on Friday morning. We expect total employment to remain unchanged in January relative to December (consensus: +10K month-over-month). We also forecast an unpainful 0.1pp increase in the unemployment rate to 5.9% (consensus: 5.8%).
The 10K consensus hides a significant discrepancy in individual estimates, varying from a 12K decline in total employment to a massive 50K net gain. This discrepancy is likely reflecting several positive and negative details contained in the December report. On the positive side, fewer temporary workers lost their jobs last December, likely because the solution to growing labour shortage is retaining more employees. Thus, the current level of employment appears more sustainable. Also, the combined 146K surge in LFS employment observed in November-December 2017 reflects a catch-up of better Survey of Employment, Payrolls and Hours (SEPH) data released earlier in 2017. Thus, the risk of a sudden month-over-month decline in LFS employment appears low.
This being said, a few factors prevent us from forecasting another massive job gain. First, the pace of hiring in the Canadian manufacturing sector appears overly strong (+88K or +5.3% year-over-year) in comparison to the global economic momentum. Second, the new stress test for the uninsured mortgage market, combined with higher interest, could soon weigh down labour market conditions. Yesterday, the Toronto Real Estate Board reported a 22% year-over-year decline in residential MLS transactions for January 2018. In other words, the housing sector oversized contribution to Canada’s job creation has likely ended.
Our call of a small 0.1pp uptick in Canada’s unemployment rate is in part based on the expectation of an unpainful increase in Quebec’s unemployment rate. The latter declined from 6.0% in October to 5.0% in December (see chart below). While the robust economic expansion in Quebec is undeniable, a 1.0pp cumulative decline in the unemployment rate usually occurs over 12-18 months when an economy performs very well. Furthermore, the recent decline in Alberta’s unemployment rate to 7.0% appears slightly stretched relative to Western Canada Select, the benchmark price obtained for several producers for oil.
Bottom Line: Even if our call of below consensus numbers turns out to be right, it would not automatically imply that market participants will remove some of the BoC policy hikes currently expected this year. With more companies citing labour shortages as a constraint on future production, the chances of seeing a steady and fast pace of growth in wage inflation have increased. The average hourly earnings (AHE) of employees reported in the LFS rose by a brisk 2.7% year-over-year in December already; and markets should pay attention to the January AHE number. Also, the overlooked SEPH data shows a brisk 3.5% year-over-year increase in the AHE of salaried employees for the month of November (see chart below), another positive wage inflation measure that could eventually facilitate further removal of monetary stimulus by the Bank of Canada in 2018.
