June 4, 2010 / 3:04 PM / in 7 years

Canada jobs gain boosts talk of rate hike pressure

OTTAWA (Reuters) - Canada added almost double the number of jobs expected in May, prompting analysts to predict the Bank of Canada will come under more pressure to raise interest rates again next month despite rocky global markets.

Statistics Canada said on Friday that employment rose by 24,700 positions in May compared with the expected gain of 12,500. A record 108,700 new jobs were created in April.

“This should up the ante on further Bank of Canada hikes. This is simply an astounding jobs report,” said Derek Holt of Scotia Capital.

Canada became the first member of the Group of Seven industrialized nations to raise rates when the Bank of Canada lifted its key rate by 25 basis points this week to 0.50 percent.

The central bank, whose next rate announcement will be on July 20, said it would weigh domestic and global developments carefully before acting again.

“The (bank) was saying they are going to pay a lot of attention to incoming data and this would further suggest we could likely see another 25 basis point hike in July,” said Matthew Strauss, currency strategist at RBC Capital Markets.

The unemployment rate remained at 8.1 percent in May, matching market forecasts.

Shortly after the jobs data, yields on overnight index swaps -- which trade based on expectations for the Bank of Canada’s key policy rate -- mostly edged higher, showing the market saw tightening as slightly more likely.

But within an hour of the report, overnight index swaps had moved lower, suggesting tightening was less likely.

Canada’s job numbers were strong compared with those in the United States, where May nonfarm payrolls increased by a less-than-expected 431,000 and the jobless rate fell to 9.7 percent from 9.9 percent.

“POSITIVE MOMENTUM”

Statscan also reported the value of Canadian building permits in April had risen by 5.4 percent from March, compared with analysts’ predictions of a 2.0 percent drop.

In another sign of recovery on Friday, the Ivey Purchasing Managers Index rose to 62.7 in May from 58.7 in April.

While the string of healthy data shows the Canadian economy is out of recession, the outlook for Europe is gloomier.

“While external global risks abound, the employment data underscore the need to continue to gradually reduce the monetary policy stimulus provided by the Bank of Canada,” said Pascal Gauthier, senior economist at TD Economics.

“In the near term, this provides incremental support for continued Bank of Canada overnight rate renormalization (+1/4 point to 0.75 percent) on July 20.”

The jobs numbers did little to help the Canadian dollar, which sank on new concerns about Europe and global growth.

The currency firmed to a session high of C$1.0352 to the U.S. dollar, or 96.60 U.S. cents, from C$1.0379 just before the data, but then weakened and hit a session low of C$1.0507 to the greenback.

Statscan said full-time employment rose by 67,300 jobs in May, offsetting a loss of 42,500 part-time jobs. The private sector added 43,400 positions while the public sector had a more modest gain of 9,400.

Since Canada’s labor market began recovering last July, 310,000 workers have been added to payrolls -- still short of the 417,000 jobs lost between October 2008 and July 2009.

“The exceptionally strong employment growth over the past few months highlights the positive momentum in the Canadian economy and reinforces the Bank of Canada’s rationale to hike rates earlier this week, despite the turmoil in Europe,” said Benjamin Reitzes BMO Capital Markets Economics.

The average hourly wage of permanent employees, watched by the central bank for inflation pressures, rose 2.7 percent in May from a year earlier, up from the 2.3 percent year-on-year rise in April.

Additional reporting by Jennifer Kwan, Euan Rocha and John McCrank; Editing by John O'Callaghan and Rob Wilson

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