May 11, 2012 / 12:37 PM / 6 years ago

Canada's huge job gains stir rate hike talk

OTTAWA (Reuters) - Defying forecasts of a hiring slowdown, Canada added far more jobs than expected in April and marked the biggest two-month employment gain in more than 30 years, raising expectations that the Bank of Canada will raise interest rates in the coming year.

April registered 58,200 new jobs, mostly full time, after a whopping gain of 82,300 in March, Statistics Canada said on Friday. The back-to-back jump of 140,500 jobs was the biggest since a 143,300 rise in January and February of 1981.

With a Canadian population one-ninth the size of that of the United States, it would be as if the U.S. economy had added about 1.3 million jobs in two months. U.S. non-farm payrolls rose by a total of 269,000 in March and April.

“It’s a solid report, showing very surprising strength for the second straight month in Canadian jobs,” said Sal Guatieri, senior economist at BMO Capital Markets. “It certainly raises the possibility of the Bank of Canada moving on interest rates sooner rather than later.”

But Guatieri, who expects a rate hike in January 2013, said the economy probably is not growing as fast as the robust jobs figures suggest.

Despite all the new jobs, the unemployment rate actually rose to 7.3 percent from 7.2 percent in March because more people were looking for work.

Economists surveyed by Reuters had, on average, forecast the job market would create just 7,000 new jobs after March’s jump. However, the median forecast for the unemployment rate proved correct at 7.3 percent.

The details of the job picture also showed strength. All the new posts were in the private sector and 43,900 of them were full time. The number of employees rose by 66,600, while those in the often-softer category of self-employed fell.

The Canadian economy has recovered all the output and jobs, including full-time positions, that it lost in the 2008-09 recession. Statscan said the unemployment rate would be 6.4 percent if reported in the way the United States calculates its rate. The U.S. rate for April was 8.1 percent.

Construction jobs rose by 24,600 in April as Canada’s housing boom continued. Employment in manufacturing rose 23,800 and was almost unchanged from a year earlier despite the challenges the sector faces due to the strong Canadian dollar. Jobs in natural resources industries rose by 11,000, with employment now 12.5 percent higher in a year.

Overall employment has risen 214,000 in the past year. Over the past six months, it has gone up by an average 23,000 a month.

The Canadian dollar rallied after the figures were released, and the yield on the two-year Canadian government bond, which is especially sensitive to expectations of Bank of Canada interest rate moves, jumped to 1.309 percent from 1.226 percent.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that traders sharply raised their bets on a rate hike this year following release of the jobs figures.

The market is betting on a greater than 50-50 chance that rates will rise by September and it has almost fully priced in a 25-basis-point rise by December. The Bank of Canada’s key rate is now at a very low 1 percent.

“While we had forecast no hikes by the BoC (Bank of Canada) this year, today’s data clearly lean against that call, and we will have to be on guard for further signs of a sharp growth pick-up in data for March/April,” Avery Shenfeld at CIBC World Markets wrote to clients.

He said the numbers suggest second-quarter economic growth might well make up for softness in the first quarter.

The Bank of Canada, which sees the economy’s spare capacity diminishing, has said it may have to increase rates modestly. The bank, however, is also eyeing the unsettled European debt crisis for a potential backlash on North American economies.

Its next rate decision is on June 5, but few people expect it to move on rates that soon.

The bank targets consumer price inflation of 2 percent, and one figure it watches carefully is wage inflation. The April data showed the average hourly wage of permanent employees up 2.4 percent from a year earlier. This was down slightly from March’s 2.5 percent but up from 2.1 percent in February.

One caveat in the numbers is that they are based on a survey of a fraction of the population. Statistics Canada said that 19 times out of 20 the overall employment numbers should be accurate to within 57,200. That means it is possible the real gains in April were as small as 1,000 or as large as 115,400.

Additional reporting by Claire Sibonney, Andrea Hopkins and Euan Rocha in Toronto; Editing by Jeffrey Hodgson; and Peter Galloway

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