Canada's unemployment rate unexpectedly rose in November, increasing expectations for another significant interest rate cut by the central bank

According to the Zhitong Finance APP, the unexpected rise in Canada's unemployment rate in November led to a significant drop in the Canadian dollar on Friday, and increased market and some major banks' expectations for the Bank of Canada to cut interest rates significantly for the second consecutive time.

Data from Statistics Canada shows that employers added approximately 51,000 jobs in November, but the unemployment rate rose to 6.8%, an increase of 0.3 percentage points from October, marking the highest level since January 2017 (excluding pandemic years).

The statistics agency pointed out that the job growth in November was mainly concentrated in full-time positions and the public sector. However, the simultaneous rise in the unemployment rate and job growth has left many economists puzzled. TD Bank's Chief Economist James Orlando stated, "The phenomenon of job growth occurring alongside a rising unemployment rate is indeed perplexing. Even we economists are pondering what this data is really conveying."

Orlando explained that despite the significant month-over-month increase in the unemployment rate, the underlying reasons are worth noting. The data indicates that approximately 87,000 people became newly unemployed in November, including those looking for work or temporarily laid off. The rise in participation rate (including those employed and actively seeking work) is a significant driver of the unemployment rate increase, with November's growth offsetting declines in September and October.

After six consecutive months of decline, the employment rate remained stable in November, but is still 1.2 percentage points lower than the same period last year, indicating that employers have failed to keep pace with Canada's rapidly growing labor force. Orlando emphasized that labor force surveys are typically "volatile," and one should not overinterpret single-month data. He believes that the current rise in Canada's unemployment rate is primarily due to population growth rather than a significant slowdown in hiring or layoffs.

Following the release of the employment data for November, the exchange rate of the Canadian dollar against the US dollar fell to 70.6 cents, close to a five-year low. The recent poor performance of the Canadian dollar is partly due to investors flocking to safe-haven assets like the US dollar, spurred by President Trump's re-election.

The employment data for November is the last major economic report before the Bank of Canada's interest rate decision on December 11. Currently, the central bank has cut rates by a total of 1.25 percentage points since June, including a significant cut of 50 basis points in October. Market expectations for a further 50 basis point cut this week rose from 55% before the report was released to 80%.

BMO's Chief Economist Doug Porter stated in a client report on Friday that due to the sharp rise in the unemployment rate, the bank now expects the central bank to cut rates by 50 basis points next week. However, he noted that a 25 basis point cut remains reasonable, and a larger cut is a possible action the central bank could take, rather than a necessary measure.

Porter pointed out that although consumer demand has rebounded, aggressive rate cuts could further weaken the Canadian dollar, especially amid increasing global trade uncertainties. Additionally, the housing market could heat up again due to rate cuts, bringing new risks.

Meanwhile, banks like CIBC and RBC, which have predicted a 50 basis point cut, maintained their expectations. Orlando believes the central bank should take a more conventional 25 basis point cut. He noted that the November unemployment rate does not reflect the actual situation of slowing population growth in 2024 and warned against overreacting to the volatility of single-month data Orlando stated that due to rising consumer confidence and the recovery of housing market activity after a 50 basis point interest rate cut in October, the Canadian economy is currently not facing an urgent risk that requires significant interest rate cuts. He concluded, "An increase in the unemployment rate does not mean we are entering a recession. In fact, the fundamentals of the Canadian economy remain strong."