WRAPUP 4-Canada rate hikes seen after stunning job gain

* Job gain is six times forecast, C$ rallies

* Unemployment rate drops to 7.9 pct from 8.1 pct

* Services gain while goods sector sheds workers

* June housing starts lower than expected

* Poll shows July 20 rate hike expectations intact
(Adds details, comment from manufacturing sector)

By Louise Egan

OTTAWA, July 9 (BestGrowthStock) – Canada’s economy created six
times more jobs than forecast in June, a near-record gain that
pressures the central bank to raise interest rates again this
month even as cracks in the U.S. recovery threaten to cool the
country’s scorching growth.

The staggering employment gain contradicts a recent string
of weaker data, including another report on Friday showing
housing starts fell in June.

Statistics Canada said on Friday that employment surged by
93,200 in June, flying past market expectations for 15,000
jobs.

In the past year, services sector job growth has more than
doubled that of the goods-producing sector. The trend continued
in June.

Businesses are generally more confident about the domestic
economy than export markets, particularly the United States,
where demand for Canadian goods is faltering. That partly
explains why services like retail stores and wholesalers
created the most jobs in June, while factory owners dismissed
workers.

The overall gains were the second largest on record after
the 108,700 reported in April. The labor market has now nearly
recovered the 417,000 jobs lost during the recession.

Still, the unemployment rate is well above pre-recession
levels at 7.9 percent, though down from 8.1 percent in May.

Even taking into account signs of slowing domestic growth,
the labor market strength reflects an expanding economy where
emergency low interest rates no longer make sense, analysts
said. The report increased expectations of a second consecutive
central bank rate hike on July 20.

“There is a lot of strength from top to bottom and so
clearly this is bond-bearish, it is Canadian dollar-positive,
and it argues for hikes not just in July but arguably beyond,”
said Eric Lascelles, chief Canada macro strategist at TD
Securities.

The Canadian dollar surged to its strongest value since
late June after the data, hitting C$1.0296, or 97.13 U.S.
cents. Bond and money market yields also rose.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic http://link.reuters.com/myd76m

Instant view [ID:nN09262182]

Canada interest rate poll [CA/POLL]

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

The Bank of Canada raised rates on June 1 to 0.5 percent
from a record low of 0.25 percent, becoming the first among the
Group of Seven industrialized nations to start tightening
monetary policy after the financial crisis. [ID:nN01103957]

In a Reuters poll conducted after the data, all 12 of
Canada’s primary securities dealers predicted the bank would
raise rates this month and again in September. [ID:nTOR007659]

Yields on overnight index swaps, which trade based on
expectations for the Bank of Canada’s key policy rate, are
pricing in an 84 percent likelihood of a July 20 rate hike.
(BOCWATCH: )

‘GAME OF SUDOKU’

It was tough to find any negative details in the employment
report, which showed strong private sector hiring and gains
split evenly between full-time and part-time positions.

But market excitement about imminent rate hikes was
tempered by some skepticism about the sustainability of jobs
growth and a history of volatile Canadian employment data.

Signs of fatigue in the U.S. recovery, European debt woes,
monetary tightening in China could all inflict collateral
damage on export-reliant Canada, where growth stalled in April
after seven straight months of expansion. [ID:nN07168558]

Easing wage inflation pressures may also give the Bank of
Canada leeway to raise borrowing costs at a more leisurely
pace.

Statscan said the average hourly wage of permanent
employees, watched by the Bank of Canada for inflation
pressure, rose 2 percent in June from a year earlier, down from
the 2.7 percent in May.

“Right now it’s almost like a game of Sudoku in that the
(central) bank is weighing what’s going on domestically …
that global backdrop is what the Bank of Canada is concerned
about for Canada looking forward,” said Tom Nakamura,
fixed-income portfolio manager at AGF Investments.

“My thoughts are that they will continue to embark on a
rate hike path … the pace and timing will be uncertain,” he
said.

Friday’s jobs report showed service industries did all the
hiring in June. Layoffs in manufacturing exerted a drag on the
goods-producing sector as factories shed 14,000 workers and
employment in that sector remained 11.9 percent below
pre-recession levels.

Analysts said fears the U.S. may slip back into recession
were partly to blame for the factory layoffs. Jayson Myers,
president of Canadian Manufacturers and Exporters, said
uncertain market conditions “led manufacturers to put new hires
on hold.”

Separately, a less buoyant report showed housing starts
fell in June to a seasonally adjusted annualized rate of
189,300 units from a revised 195,300 in May. This was below
analyst expectations, though May’s numbers were revised up.

The decline in starts is further evidence that the housing
market, which helped drive the recovery but was also feared to
be overheating, will slow in the second half.
(Additional reporting by Claire Sibonney and John McCrank in
Toronto; Editing by Frank McGurty, Jeffrey Hodgson and Rob
Wilson)

WRAPUP 4-Canada rate hikes seen after stunning job gain