Today’s economic updates reveal a surprising rise in Canada’s unemployment rate, prompting traders to dramatically ramp up betting that the Bank of Canada (BoC) will enact a significant 50 basis point interest rate cut at next week's policy meeting. Following the release of the November jobs data, the Bank of Montreal has notably revised its predictions in line with this sentiment.

The employment report, being the last crucial economic indicator preceding the central bank’s decision on December 11, showcased a startling increase in the unemployment rate, escalating from 6.5% to 6.8%—the highest level excluding pandemic conditions in nearly eight years—even as Canada managed to add a net total of 50,500 jobs for the month. Analysts had conservatively anticipated a more modest gain of 25,000 jobs and a slight uptick in the unemployment rate to 6.6%.

Predictions captured by overnight index swaps reveal an estimated 80% likelihood that the BoC will go for the larger cut, with only 20% betting on a more standard 25 basis point reduction. Earlier this week, these probabilities were closer to a 50/50 split, underscoring how quickly market sentiments have shifted in response to the job data.

As these bets are placed, the Canadian dollar has weakened considerably, dropping to approximately 70.62 cents against the U.S. dollar. Concurrently, the yield on Canada’s two-year bonds, highly reactive to changes in the central bank’s rate, declined by 13 basis points—a notable divergence compared to the more modest drop in U.S. yields.

Adding to this complex narrative, the participation rate surged, with Statistics Canada revealing that the labor force expanded by 137,800—exceeding the growth in job creation and thus exacerbating the unemployment situation. Moreover, wage growth appears to be slowing, dipping to 3.9% from 4.9% in October, marking the weakest growth in monthly earnings since June 2023.

Economists are expressing mixed perspectives on the implications of this data. Douglas Porter, Chief Economist at BMO Capital Markets, asserts that the rise in joblessness signals a strong reason for the BoC to lower rates significantly. He acknowledges the counterarguments for a more cautious cut but emphasizes that the high unemployment rate could compel the Bank to act swiftly.

Andrew Grantham, a senior economist at CIBC, notes that while employment growth seems robust, the spike in participation has overshadowed it, resulting in a less favorable outlook overall. Other experts, such as Matthieu Arseneau from National Bank Financial, point out concerning trends, particularly among youth and the prime working-age population, where unemployment figures have worsened.

Despite some commentary suggesting that today’s report shows underlying economic strength, a broader consensus is forming around the notion that the BoC may have no choice but to opt for a 50 basis point cut, especially in the context of a struggling labor market and slower wage growth. As Canada’s total employment dynamics continue to fluctuate, a more flexible monetary policy may soon be on the table, with potential interest rate cuts helping to stimulate growth in early 2025.

Traders and economists alike are eagerly awaiting the final decision from the Bank of Canada, which will set the tone for the financial landscape moving forward in these uncertain economic times. As we approach next week, all eyes will remain on the BoC, as the implications of their decision could resonate throughout the economy for months to come. Will they heed the call for a more aggressive reduction, or will they choose a more cautious path? Only time will tell.