The first week of September brought important signals for both the Canadian and U.S. economies. Recent labour-market reports point to a slowdown in hiring momentum, and investors are now turning their attention to what this might mean for central-bank policy in the months ahead.
Canadian and U.S. Job Data Disappoint
In Canada, August’s employment report showed a surprise decline of 65,500 jobs, far below expectations of a 5,000 gain. As a result, the unemployment rate climbed to 7.1%, marking its highest point so far this year.
South of the border, the U.S. nonfarm payrolls report also disappointed. The economy added only 22,000 jobs in August, compared with forecasts of 75,000 and down sharply from July’s revised 79,000. The unemployment rate edged higher to 4.3%, also the year’s peak.
Adding to the cautious tone, job openings in the U.S. have now fallen below the number of unemployed workers for the first time since 2021, signaling softer demand for labour.
Why Investors Care
Weaker job growth often signals that central banks may soon shift policy to support the economy. Both the Bank of Canada (BoC) and the Federal Reserve (Fed) are now expected to cut rates in the near term.
Markets are fully pricing in a September rate cut by the Fed, with some probability of a larger 0.50% cut rather than the usual 0.25%. In Canada, expectations are for one or two additional rate cuts in the coming year, building on the seven already delivered since 2024.
Lower interest rates typically push bond yields down, which reduces borrowing costs for households and businesses. Over time, this can help stimulate growth and investment.
Inflation Still in Focus
While labour data is softening, central banks must balance it against inflation trends. U.S. CPI data is due this week and is expected to show headline inflation rising to 2.9%, while Canadian CPI is forecast to move above 2%. Tariffs have added some pressure, but easing demand in services like housing and rent could offset upward price momentum.
Market Implications
Equity markets remain near yearly highs despite some end-of-week volatility. Historically, when interest rates are falling but the economy is not in recession, stock markets tend to perform well. This creates a cautiously optimistic outlook: investors may face volatility in the short term, but conditions remain supportive for growth into 2026.
Positioning Ahead
With interest rates likely heading lower and fiscal policy providing some support, the backdrop for risk assets is constructive. Investors may want to:
- Monitor U.S. large-cap and AI-driven technology stocks, which remain market leaders.
- Watch mid-cap companies that could benefit as credit conditions ease.
- Look at sectors like financials, healthcare, and consumer discretionary, which often gain momentum during periods of stronger growth.
Final Thoughts
The Canadian and U.S. labour markets are showing cracks, but that does not necessarily mean a recession is around the corner. Instead, it could mark the beginning of a more supportive central-bank stance. For markets, this mix of softer labour data and potential rate cuts may create opportunities for investors who stay patient and focused on long-term growth.
