TD Securities strategists Robert Both and Emma Lawrence highlight that the Canadian jobs report for April showed a downside surprise, with 18,000 jobs lost compared to market expectations of a 10,000 gain and TD's own forecast of a 5,000 increase. The unemployment rate rose by 0.2 percentage points to 6.9%. The report was broadly dovish, led by a pullback in full-time employment, a mild reduction in hours worked, and softer wage growth. Despite this weaker employment data, TD Securities does not believe it brings the Bank of Canada (BoC) closer to rate cuts, but it does temper market expectations for BoC hikes in late 2026. The downside surprise in Canadian employment sparked a strong rally across the curve, with front-end rates down 8 basis points and CAN-US 10s below -90 for the first time since November. Strategists advise caution due to the volatility of the Labour Force Survey (LFS) series and recommend maintaining long positions in 2-year bonds and duration as the extension approaches. The combination of softer data, lower inflation, and higher oil prices is expected to keep the BoC on hold for 2026, but several strong downside prints would be needed for market pricing to fully align with this view [1].
Meanwhile, TD Securities strategists anticipate that April US Consumer Price Index (CPI) data will show firmer inflation, with core CPI projected at 0.38% month-over-month and 2.8% year-over-year, and headline CPI at 0.56% month-over-month and 3.7% year-over-year. The rebound in shelter prices and higher airfares linked to oil are cited as key drivers. Headline inflation is expected to reach a three-year high, with risks skewed to the upside if the pass-through from jet fuel prices to airfares is larger than assumed. Core inflation is forecasted to peak near 2.9% in Q2 before gradually easing, with gradual disinflation seen as a possible scenario toward the end of the year. The energy component, particularly a ~5% increase in gasoline prices, continues to act as a catalyst for higher headline CPI. Food inflation likely rebounded after being flat in March. TD's CPI NSA forecast at 332.714 is slightly below the market's current fixing at 332.780 [2].
The Canadian jobs data and US inflation outlook together suggest diverging monetary policy paths, with Canada likely to remain on hold due to weaker employment and softer inflation, while US inflation pressures persist, driven by services and energy costs. Market reactions in Canada included a rally in the rates curve, reflecting reduced hike speculation, while US inflation risks remain tilted to the upside, especially if oil-related price increases continue.
CONCLUSION
Weaker Canadian employment data has tempered expectations for Bank of Canada rate hikes in late 2026, prompting a rally in Canadian rates markets. In contrast, US inflation pressures remain elevated, driven by shelter and energy costs, with headline CPI expected to reach a three-year high. The market takeaway is a divergence in monetary policy outlooks, with Canada likely to stay on hold and the US facing continued inflation risks.