UBS Sees Bank of Canada on Hold This Week Despite Strong Labor Report

09:03 AM EDT, 06/08/2026 (MT Newswires) -- Canada's labor market finally saw some signs of life in May, with employment up 88,000, after declining 18,000 in April, said UBS after Friday's Labour Force Survey (LFS).

This left the level of employment back where it was in January after a run of declines in recent months. The gain was concentrated in full-time work, which rose by 154,000 in May, while part-time employment decreased by 66,000. This left the four-month moving average change in employment flat in May, relative to a 28,000 drop in April.

Despite the gain in employment on Friday, UBS imagines the Bank of Canada considers this in the broader trend of a "soggy" labor market. A flat four-month moving average in

employment growth, even with Friday's strong gain in May, suggests the BoC would need to see a sustained improvement rather than just this one-month gain before this would tip the balance, stated UBS.

This also has to be framed alongside disappointing growth in Q1, writes the bank in a note to clients. While this was partly driven by "noisy" swings in the net exports and inventories, business fixed investment and government spending also dragged on the headline. The only bright spot was the consumer, who now faces higher energy prices, and potentially slow spending in Q2 in real terms.

Additionally, while headline inflation has been boosted by energy prices, core inflation, including the BoC's preferred measures, continues to come in weaker than expected. It is also the case that UBS isn't seeing significant spillovers into other areas of the inflation basket like food or even airfares -- something that the BoC had noted as a potential concern.

The bank predicts that the message from the BoC at Wednesday's policy meeting is similar to that in April, with two large risks: trade relations with the United States and the conflict in the Middle East.

Despite firmer headline inflation, UBS thinks the BoC will look through the energy-driven rise, given the risk of worsening an already fragile growth backdrop. The bank also views the risks to rates in 2026 as tilted to the downside.

If the USMCA renegotiation proves more prolonged than expected, the BoC may yet need to ease rather than tighten policy if domestic demand weakens further. Further ahead, if the USMCA review is resolved, or if there is at least greater clarity on the likely path, whether that means a deal or a shift to annual reviews, stronger growth should support firmer core inflation and increase the likelihood of hikes.

UBS sees that as a second-half 2027 story.

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