OTTAWA (Reuters) — Canada's economy created far more jobs than expected in December, defying expectations amid sluggish growth and fears about the United States "fiscal cliff" and increasing the likelihood of a central bank rate hike this year.
The economy added 39,800 jobs in December from November, Statistics Canada said on Friday, well above market expectations for 5,000 jobs and surpassing even the most bullish prediction in a Reuters poll.
The unemployment rate dipped to 7.1 per cent from 7.2 per cent in November while market players had expected it to rise a notch.
Most economists had expected employers to shy away from hiring in December, before U.S. lawmakers and the White House reached a last-minute deal to avert the so-called fiscal cliff, a set of tax hikes and spending cuts that could have thrown the economy into recession.
Weaker-than-expected economic growth in Canada in the fourth quarter also weighed on expectations.
"My initial response is not only are they defying expectations, they are defying gravity," said Doug Porter, deputy chief economist at BMO Capital Markets.
The third month of surprisingly strong jobs growth in the past four months increases the prospect the Bank of Canada will follow through on hints that it will hike interest rates from the current one per cent, analysts said.
Most primary securities dealers surveyed by Reuters expect a move in the fourth quarter of this year.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders increased bets on a rate hike in late 2013 after the employment reports.
"Already the market was pricing in about a 25 per cent chance that the Bank of Canada would hike rates in 2013 and I think it keeps that type of expectation ingrained," said Camilla Sutton, chief currency strategist at Scotiabank.
"So it's likely that we do see higher rates in Canada at the very end of 2013 to early 2014," she said.
The Canadian dollar strengthened to a session high after the data to C$0.9876 to the U.S. dollar, or $1.0126, compared with C$0.9880, or $1.0121, at Thursday's North American close. It was at C$0.9910 just before the jobs data was released.
Most of the details looked positive too. All the gains were in full-time jobs and most were in the private sector.
Employment gains were spread across goods-producing and services sectors, with the strongest hiring in transportation and warehousing, construction and health care and social assistance.
"It is very tough to reconcile this with a lot of the other indicators we are seeing on the economy, but we have to accept the numbers as presented. Almost every aspect of this report was strong," said Porter.
In 2012 as a whole, employment grew by roughly the same amount as in 2010, by 1.8 per cent, or 312,000 jobs. That was up from the 1.1 per cent growth in 2011 but weaker than the pre-recession years of 2006 and 2007.