UPDATE 3-Canada's bright jobs data clouded by U.S. gloom

Fri Jul 8, 2011 9:29am EDT

* Employment rises by 28,400 vs forecast of 15,000

* Unemployment rate unchanged at 7.4 percent

* Gains in part-time, public sector jobs

* C$ briefly rallies but sinks after U.S. data

* Rate hike expectations dampened by wages, U.S. (Recasts with U.S. data. Adds market reaction, analyst comments, graphic)

By Louise Egan

OTTAWA, July 8 (Reuters) - Canada's economy created a surprisingly high number of jobs in June, but dismal U.S. data and lack of wage inflation may mean the central bank keeps its foot on the accelerator for a while longer with low rates.

Net employment gains in the month totaled 28,400, Statistics Canada said on Friday, compared with the 15,000 expected by markets. The transport and warehousing industry did the most hiring and overall gains were mostly in part-time and public sector jobs.

The unemployment rate held steady at 7.4 percent as more people entered the labor market.

The job market has been stronger than expected for three straight months now, good news for an economy that is seen to have slumped in the second quarter but may regain momentum in the second half of the year.

"It was a pretty decent number. ... It's basically suggesting the economy continues to expand at a fairly decent rate," said Sheryl King, chief economist at Bank of America Merrill Lynch Canada.

But weakness south of the border, where U.S. employers hired the fewest number of workers in nine months, quickly dampened spirits in Canadian markets. [ID:nLLA8IE7HL]

The U.S. economy actually created fewer jobs than its Canadian counterpart in June despite being many times its size.

The Canadian dollar, which had firmed to a session high against the U.S. dollar after the Statscan release, tumbled on the U.S. numbers to a session low of C$0.9665 to the U.S. dollar, or $1.0347.

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Graphic: Canada jobs, unemployment

r.reuters.com/vut52s

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The uncertain external environment, combined with the absence of wage pressures, could be more meaningful to the Bank of Canada than employment gains when it plots the path for interest rates, analysts said.

The central bank could opt to postpone rate hikes in the belief the economy can continue to expand without prices getting out of hand.

Wages for permanent employees rose 2 percent in the year to June, down from 2.2 percent in May.

"What matters the most to the Bank of Canada is not the headline jobs print, but any evidence of wage motivated cost-push inflation pressures. Simply put, there aren't any," Scotia Capital economists Derek Holt and Karen Cordes Woods said in a note to clients.

"The fact that both wage growth and hours worked are moderating offers a very different take on what is influencing household spending than any upbeat perspectives on the headline job prints," they wrote.

The Bank of Canada has held its key policy rate steady at 1 percent since last September following three successive hikes to lift it from emergency lows.

In a June 29 Reuters poll, Canada's 12 primary securities dealers unanimously forecast no rate move on July 19. Six predicted a first hike in September and the rest saw no moves until some time in the fourth quarter or even next year. [CA/POLL]

Yields on overnight index swaps, which trade based on expectations for the central bank policy rate, continued to reflect almost zero chance of a rate move on July 19.

Rate hike expectations for September, October and December briefly rose after the Canadian data but fell again after the U.S. release. BOCWATCH

The strongest hiring in June took place in the transportation and warehousing industry, which has led employment gains in the past year.

Employment was flat or little changed in manufacturing as well as in most other sectors with the exception of professional, scientific and technical services, which lost 19,200 workers.

Some other details of the report were less upbeat. Private business continued to lag behind the government in terms of hiring, despite the phasing out of government stimulus projects.

Far more part-time jobs were created than full-time ones, although the 12-month trend has favored full-time positions. Statscan said the majority of the jobs went to women in the 25-54 age group. (Additional reporting by Howaida Sorour, John Tilak, Euan Rocha and Solarina Ho; Editing by Jeffrey Hodgson)

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