The Canadian employment report shows that the job market is weakening slowly. Canada added 8,800 jobs, slightly exceeding the consensus of a 12,500 decrease, while the unemployment rate increased to 7.0% from 6.9%.

There are weaknesses in sectors like manufacturing and transportation & warehousing, but this is balanced by growth in other areas. If this trend continues, a Bank of Canada rate cut is expected in July to address the situation.

Gradual Rise In Unemployment

The data reveal that the economy is not contracting yet but isn’t reaching its long-run potential. There is a gradual rise in unemployment that is expected to carry into the second half of the year, with positive developments regarding US tariffs and further rate cuts needed to stabilise conditions.

In May, Toronto’s unemployment rate reached 9%, the highest since 2012, excluding the COVID-19 period. Meanwhile, Lululemon showed optimism regarding the Canadian consumer, despite the growing challenges in the employment landscape.

What we’re seeing in this latest employment data is a jobs market that’s slipping quietly rather than collapsing. The headline number—a small addition in new jobs when a decline was widely expected—might seem encouraging at first glance, but it doesn’t offset deeper concerns elsewhere. The jobless rate rising to 7% continues the upward drift we’ve been tracking since late last year.

Less hiring in manufacturing and logistics tells us that goods-producing segments are starting to lean back, potentially reflecting weaker demand or rising input costs. At the same time, gains in some service-oriented sectors are only just enough to prevent the total from falling.

Predictable Monetary Response

This steady but shallow deterioration makes a monetary response from policymakers more probable. Slower growth can’t be ignored when the jobless rate inches higher, especially in major cities. With Toronto now sitting at 9%—that’s not just poor performance; it’s matching levels we haven’t seen outside crises for over a decade. And yet, firms like Lululemon expecting a stable consumer suggest a divide between perception and broader economic footing.

We know from experience that weak employment data can exert pressure on central banks to ease policy, particularly if inflation risks are low. Rate decisions in the months ahead will likely incorporate these shifts. Cuts in borrowing costs are one of the few tools still left to support demand without government intervention. A July response is now increasingly predictable given the direction of these numbers.

Markets will start looking closer at how job losses may bleed into consumption. A creeping rise in unemployment over the summer would strip momentum from wage growth, weakening one of the forces keeping spending afloat. Without real relief, either from stronger hiring or interest rate support, confidence is likely to suffer among workers and small businesses alike.

As activity slows, the cost of inaction builds. It’s worth keeping in mind that stabilisation takes hold from the margins inward. In previous cycles, similar patterns preceded multi-quarter softness in payrolls, even when headline figures initially appeared stable—by the time this becomes obvious to everyone, initial moves are often already in play.

For us, it’s not just about what sectors are pulling back, but about how sentiment slowly deteriorates when jobs become harder to find. We’ve seen this happen before. Trading on rate expectations must now consider that cuts alone may not resuscitate hiring where fundamentals remain weak. Tariff relief, especially across the border, may offer some support, although that alone won’t reverse the trend if domestic hiring continues to retreat.

At this stage, we don’t have contraction—but we do have undershooting. The economy is operating under capacity, and without stronger indicators soon, policy responses are only a matter of timing.

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