Disappointing employment numbers from both Canada and the U.S. have significantly increased the chances of interest rate cuts from central banks this month, with a U.S. Federal Reserve cut now seen as virtually certain, says Earl Davis, head of fixed income and money markets at BMO Global Asset Management.
Canada’s unemployment rate climbed to 7.1% in August, up from 6.9% in July, reaching its highest level since 2016 (excluding the pandemic period). The Canadian economy shed 66,000 jobs last month, according to Statistics Canada.
Meanwhile, the U.S. added just 22,000 jobs in August, far below economists’ expectations of around 80,000. The U.S. unemployment rate also rose, hitting 4.3% — the highest since 2017, outside the pandemic.
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“This jobs data cements a cut from the Fed,” Davis told BNN Bloomberg on Friday. He pointed out that despite upcoming inflation data, the market has already fully priced in a rate cut for the Fed’s next meeting on September 17.
“At Jackson Hole, [Fed Chair Jerome] Powell already shifted the focus more toward growth and employment, rather than solely inflation. That confirms the cut — markets are treating it as 100% certain,” Davis said.
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He predicts the Fed will cut rates by 25 basis points (bps) in September, followed by two more similar cuts before year-end, totaling 75 bps in reductions.
As for the Bank of Canada (BoC), Davis expects a similar move, though the market remains slightly less confident — pricing in an 80% chance of a cut this month. The hesitation, he explains, stems from the BoC’s single mandate: controlling inflation.
“The Fed has a dual mandate: inflation and growth. We don’t — inflation is our only focus,” Davis said. “Core inflation in Canada remains sticky at 3%, which is at the upper end of the Bank’s target range, so the next CPI reading will be key to solidifying expectations.”
Still, Davis argues the weakening labour market and broader economic slowdown are enough to justify easing. He also noted the ongoing trade tensions with the U.S. and the impact of President Donald Trump’s tariffs, which economists warn could be inflationary.
“In our view, the conditions are there,” he said. “The jump in unemployment to 7.1%, the net job losses — these are significant signals. We believe the Bank of Canada will follow the Fed, cutting rates by 25 bps in September and delivering a total of 75 bps in cuts by year-end, bringing the overnight rate down to 2%.”
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