Canada's labour market delivered a surprise in September, and the country's main stock index moved higher as investors quickly adjusted their expectations for interest rates. The economy lost 68,300 jobs during the month, a sharp reversal from the 9,200 gain economists had forecast. The unemployment rate also ticked up, and the data prompted traders to slash the odds of a Bank of Canada rate hike at the next meeting to 27% from 40%.
The S&P/TSX Composite rose as the repricing rippled through markets. When the prospect of higher rates fades, bond yields tend to ease, and that can lift stock valuations across the board. The move was broad, with gold miners and consumer names like Aritzia among the gainers.
Why a jobs miss matters for rates
The Bank of Canada has been wrestling with inflation that, while cooling, remains above its 2% target. For much of the past year, the central bank's key policy rate has sat at 5%, and officials have repeatedly said they need to see sustained evidence that price pressures are under control before cutting. But the September jobs report flipped the narrative from “rates might stay higher for longer” to “the BoC can probably wait.”
Swap markets, which let investors bet on future policy moves, now see a much smaller chance of a hike at the next meeting. That shift matters because it changes the discount rate used to value stocks. Lower expected policy rates usually mean lower Canadian bond yields, which mechanically raises the present value of future corporate earnings. That can broaden a rally beyond the most defensive sectors, as investors become more willing to pay up for growth.
The repricing also tends to show up in gold-related materials names. Lower real yields and a softer US dollar make the metal relatively more attractive to hold, and gold rose more than 1% on the day. That helped materials lead the TSX higher.
Company news adds fuel
Individual stock moves also contributed. Aritzia, the Canadian apparel retailer, jumped after reporting quarterly revenue and profit that topped expectations. The company has been a favourite among growth-oriented investors, and its strong results provided a reminder that consumer spending, while uneven, is not collapsing.
But the bigger backdrop is that markets are still juggling slower growth with the drag from high yields. Over the week, yields had been climbing as investors worried about sticky inflation and the possibility that central banks might need to keep policy tight for longer. Friday's jobs report offered some relief on that front, but it also carried a warning: a jobs miss big enough to move rate expectations is also a sign that the economy is cooling.
What it means for investors
For everyday investors, the takeaway is that this wasn't only about one data point. It was about how quickly pricing for the next few Bank of Canada meetings can shift. When markets believe the policy path will be a bit lower, it can lift the TSX through the discount-rate channel, as we saw on Friday.
That dynamic can be good for stocks in the short term, but it comes with a caveat. A weak jobs report is not unambiguously positive. It signals that the economy is losing momentum, which could eventually weigh on corporate earnings and consumer spending. So while the market's “good news” on rates can feel like a win, it often arrives with a growth warning attached.
For those with diversified portfolios, the key is to watch how the data evolves. If job losses continue, the Bank of Canada may eventually pivot to cutting rates, which could support bonds and rate-sensitive sectors like financials and real estate. But if inflation proves stubborn, the central bank could stay on hold for longer, keeping yields elevated and pressuring stock valuations.
As always, no single report tells the whole story. Investors should keep an eye on upcoming inflation data and the Bank of Canada's next policy decision for clearer signals about the path ahead.
