Canada's rising jobless rate pushes case for July rate cut

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) -Canada's unemployment rate rose to a 29-month high of 6.4%, data showed on Friday, highlighting that people might be losing jobs as the labor market struggles to absorb a rapidly swelling population.

The jobs report, which also showed that youth unemployment reached almost a decade high barring the pandemic years, prompted money markets to increase bets of a rate cut by the Bank of Canada this month to around 56% from 40% a day earlier.

Economists pointed out that the rising unemployment rate could be indicating that Canada is flirting with recession.

"A sustained deterioration is typically only seen during recessions," Doug Porter, chief economist at BMO Capital Markets, wrote in a note, pointing to the 1.4-percentage-point rise in the jobless rate since January last year.

He said that if the jobless figure was considered independently, it was likely that the central bank would cut rates in July.

Canada lost a net 1,400 jobs in June, Statistics Canada said, against analysts' predictions of 22,500 job gains, in further indications of weakness in economic conditions.

Royce Mendes, head of macro strategy at Desjardins Group, said the sharp rise in the unemployment rate will have many questioning whether Canada has entered a recession.

"Lowering interest rates is the only way to soften the blow from upcoming mortgage renewals and keep any hope of a soft landing alive," he said, adding that the BoC would cut rates by 25 basis points this month and another two rate cuts in the three meetings thereafter.

BoC Governor Tiff Macklem said last month that the labor market had cooled reasonably in recent months, and that achieving the central bank's goal of cooling inflation did not need to involve a sharp rise in unemployment.

There was even room for economic growth and jobs creation without imperiling the bank's target of 2% inflation, the governor said.

The Canadian dollar, which was largely unchanged in early trade, weakened 0.25% to 1.3647 against the U.S. dollar, or 73.28 U.S. cents, at 1352 GMT.

Yields on the Canadian government's two-year bonds dropped by 9.1 basis points to 3.961% after the jobs report.

Despite increasing unemployment, wage growth has been a sore point in the BoC's efforts to tame inflation and it ticked up again in June.

Economists, however, said this would fast catch up with rising unemployment levels.

The average hourly wage growth of permanent employees accelerated to an annual rate of 5.6% from 5.2% in May. The pay growth rate - closely tracked by the Bank of Canada (BoC) because of its effect on inflation - was the fastest since 5.7% in December.

The central bank lowered its key policy rate for the first time in more than four years in June and said more cuts were likely if inflation continued to cool.

The bank's next rate announcement is on July 24, roughly a week after the release of the next inflation data, which is seen as a critical factor in firming up expectations for a definitive rate cut this month.

In June, jobs were shed in full-time work, while part-time positions were added in the month.

Employment in the goods sector increased by a net 12,600 jobs, mostly in agriculture, while the services sector lost a net 14,100 jobs, led by transportation and warehousing and Information, culture and recreation.

(Additional reporting by Dale Smith; Editing by Chizu Nomiyama)