Canada’s labor market delivered a surprisingly strong performance in May, with employment rising sharply and the unemployment rate declining, suggesting the economy remains more resilient than many economists had anticipated despite slowing growth.

Data released on Friday showed the Canadian economy added 87,800 jobs in May, while the unemployment rate fell to 6.6%.

The result was significantly stronger than market expectations. Economists surveyed by Reuters had expected unemployment to remain unchanged at 6.9%, the highest level in six months recorded in April, while forecasting a gain of only 10,000 jobs.

May marked the first monthly increase in employment in 2026 and helped recover roughly 80% of the jobs lost since the beginning of the year, according to Statistics Canada.

The last major employment gain had been recorded in October 2025.

Resilience despite economic slowdown

For more than a year, the Canadian economy has faced pressure from US tariffs and ongoing trade uncertainty, which have weighed heavily on key sectors, contributed to job losses, and weakened hiring and investment activity across the broader economy.

Canada entered a technical recession at the end of the first quarter after recording two consecutive quarters of economic contraction on an annualized basis.

However, economists remain divided on whether the country is experiencing a true recession, given the absence of widespread job losses and continued growth in several sectors.

Statistics Canada reported that the construction sector added 26,800 jobs in May, while the information, culture, and recreation sector gained 19,300 positions.

Employment in transportation and warehousing increased by 18,700 jobs, while accommodation and food services added 17,000 positions.

In contrast, the wholesale and retail trade sector, which accounts for roughly 14% of total employment, lost approximately 35,000 jobs.

Jay Zhao-Murray, Chief Economist at Sibley Creek Economic Research, said the report provides encouraging evidence that the Canadian economy has not slipped into a deeper downturn.

“These are positive developments for the Canadian economy and should help dispel the notion that Canada has entered a recession,” Zhao-Murray said.

He added that the labor market continues to show underlying strength, potentially giving the Bank of Canada room to leave interest rates unchanged at next week’s policy meeting.

Growth concentrated in full-time employment

Economists also noted that preparations for the upcoming FIFA World Cup, which Canada will partially host, could provide additional support to employment in certain sectors during June and July.

Virtually all of May’s employment growth came from full-time jobs, which increased by 154,000 positions and nearly offset most of the losses recorded during the first four months of the year.

Meanwhile, part-time employment declined by 66,200 jobs.

Average hourly wages for permanent employees, a key measure closely monitored by the Bank of Canada as an indicator of inflation pressures, slowed to 3.2% year-over-year in May from 4.8% in April.

Youth unemployment also improved, falling by 0.9 percentage points to 13.4%, marking its first decline since January.

Market reaction

Following the release of the report, the Canadian dollar strengthened 0.12% to 1.3889 Canadian dollars per US dollar, equivalent to about $0.72 US.

Canadian two-year government bond yields rose 9.5 basis points to 2.762%.

Markets also increased expectations for future policy tightening, fully pricing in a 25-basis-point Bank of Canada rate hike by the end of the year, with December currently viewed as the most likely timing for such a move.

The US labor market delivered another strong performance in May, as job growth accelerated unexpectedly, highlighting the resilience of the economy despite elevated energy prices and persistent inflation pressures.

According to the US Bureau of Labor Statistics report released on Friday, nonfarm payrolls increased by 172,000 jobs on a seasonally adjusted basis. That followed a revised gain of 179,000 jobs in April and significantly exceeded economists’ expectations for an increase of just 80,000 jobs.

Meanwhile, the unemployment rate held steady at 4.3%, in line with market forecasts.

Gus Faucher, Chief Economist at PNC, said the labor market is currently stronger than it was a year ago and remains remarkably resilient despite higher energy costs and broader inflationary pressures.

“There are no signs that the labor market needs support,” Faucher said.

Broad-based hiring gains

May’s report showed a broader expansion in hiring across several sectors.

The leisure and hospitality sector led job creation, adding 70,000 positions, far above its average monthly gain of 14,000 over the past year.

Local governments added 55,000 jobs, while the healthcare sector—one of the primary drivers of employment growth in recent years—contributed 35,000 new positions, roughly in line with its long-term average.

The social assistance sector added another 12,000 jobs.

Average hourly earnings increased 0.3% during the month and rose 3.4% from a year earlier, matching market expectations.

A stronger labor market picture

The report comes after a period of relatively modest expectations, as companies adopted a cautious hiring strategy characterized by lower rates of both hiring and layoffs.

Although job gains remain concentrated in a limited number of sectors, layoffs have stayed relatively subdued despite growing concerns about the impact of artificial intelligence on employment.

Revisions to prior months also painted a stronger picture of the labor market. April payrolls were revised upward by 64,000 jobs, while March payrolls were increased by 29,000 to 214,000 jobs.

US President Donald Trump dismissed the Commissioner of the Bureau of Labor Statistics last summer following weak employment data and substantial downward revisions, later appointing William Jay Wiatrowski as the agency’s acting head.

Heather Long, Chief Economist at Navy Federal Credit Union, described the report as a clear sign that the hiring slowdown has ended.

“American companies are hiring again,” Long said. “This is a strong jobs report from every angle.”

Market reaction

Following the release of the data, US Treasury yields rose sharply while US stock futures generally moved lower.

The household survey, which is used to calculate the unemployment rate, also showed positive developments, with the number of employed individuals increasing by 149,000.

The labor force participation rate remained unchanged at 61.8%, while the broader unemployment measure—which includes discouraged workers and those working part-time for economic reasons—declined to 8.1%.

Implications for Federal Reserve policy

The stronger-than-expected employment data is likely to reduce expectations for near-term Federal Reserve rate cuts.

Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, said robust labor market conditions keep the Federal Reserve firmly in a wait-and-see mode, with inflation now taking center stage.

“Rate cuts remain unlikely in the near term,” Zentner said. “However, the absence of inflationary pressure in today’s report may cool some of the recent discussion about potential rate hikes.”

In recent weeks, Federal Reserve officials have become increasingly comfortable with labor market conditions and have shifted their attention toward persistent inflation concerns, which have reduced the likelihood of additional rate cuts.

The Federal Reserve lowered interest rates by 0.75 percentage points during the second half of 2025 before moving to a policy of holding rates steady this year while waiting for greater clarity on the economic outlook.

The broader US economy also remains resilient. Gross domestic product expanded at an annualized rate of 1.6% in the first quarter, while estimates from the Atlanta Fed currently point to growth of around 3% in the second quarter.

Oil prices were little changed on Friday after Oman confirmed that operations at Mina Al Fahal were proceeding normally, following reports of disruptions caused by an explosion near the port.

Petroleum Development Oman said port operations had not been affected after Reuters cited three sources saying that oil loading activities had been halted following an explosion near the shipping berths.

Oman exports between 800,000 and 900,000 barrels of crude oil per day through the port.

Brent crude futures rose 6 cents, or 0.06%, to $95.09 per barrel by 11:21 GMT, after closing 2.84% lower on Thursday.

US West Texas Intermediate crude gained 15 cents, or 0.16%, to $93.19 per barrel, following a 3.1% decline in the previous session.

Despite the recent pullback, both benchmarks remain on track for their first weekly gains in three weeks, with Brent up about 4.2% and WTI advancing roughly 6.7%.

Prices have been supported by escalating fighting in the Middle East and the continued lack of progress in peace talks between the United States and Iran, while shipping traffic through the Strait of Hormuz remains restricted. Roughly one-fifth of global oil supplies normally pass through the strategic waterway.

Analysts at Commerzbank said Brent crude and European natural gas prices rose modestly this week after hopes for a breakthrough between Washington and Tehran faded once again.

However, the bank noted that Brent’s gains remain limited due to higher-than-expected oil inventories, rerouted export flows, and weak global demand.

Meanwhile, Hezbollah Secretary-General Naim Qassem rejected a US-brokered agreement between Israel and the Lebanese government on Thursday aimed at ending hostilities. Iran has also made a ceasefire in Lebanon a condition for any peace agreement with Washington.

US President Donald Trump said he believes progress is being made between Israel and Lebanon, adding that Lebanon “deserves peace.”

Tony Sycamore, market analyst at IG, said any optimism remains clouded by a constant stream of conflicting headlines and statements.

At the same time, OPEC maintained its forecast for global oil demand growth of 1.2 million barrels per day this year despite the Middle East conflict and the closure of the Strait of Hormuz, according to Secretary General Haitham Al Ghais.

Shipping data also showed that Iranian oil exports have fallen to their lowest level in six years, primarily due to the US naval blockade, although weaker Chinese demand has also weighed on prices for Iranian crude.

The Japanese yen tested the ¥160-per-dollar level on Friday, prompting fresh warnings from Japanese officials, while the US dollar remained firm ahead of a key US jobs report. Ongoing tensions in the Middle East also continued to boost demand for safe-haven assets.

Middle East tensions support the dollar

The US dollar has been the strongest-performing major currency this week, gaining around 0.4% against a basket of peers and nearly 1.3% over the past month.

Support has come from stronger-than-expected US economic data, expectations of further Federal Reserve rate hikes, and increased safe-haven demand amid concerns that elevated energy prices could weigh heavily on import-dependent economies such as the eurozone, Japan, and China.

The US economic surprise index has climbed to its highest level in three years, following stronger-than-expected employment, consumer spending, and economic activity data, reviving the narrative of US economic exceptionalism.

Meanwhile, US 10-year Treasury yields have risen by roughly 50 basis points since the start of the Iran conflict, outpacing most major economies except the United Kingdom.

Jeremy Stretch, Head of G10 FX Trading at CIBC Capital Markets, said the US economy continues to generate positive surprises. With Treasury yields remaining above 4%, conditions are still supportive for the dollar, while higher energy prices represent a significant burden on the eurozone economy.

The euro rose 0.2% to $1.1634, although it remains down about 1% over the past month, while sterling advanced to $1.345.

Markets are now awaiting the release of the US nonfarm payrolls report later on Friday. A Reuters survey expects 85,000 jobs to have been added in May, following an increase of 115,000 in April, with the unemployment rate forecast to remain unchanged at 4.3%.

Peace talks between the United States and Iran remain stalled, while renewed hostilities this week have kept oil prices above $90 per barrel, increasing risks to global economic growth.

The yen and intervention concerns

The yen is on track for a fourth consecutive weekly loss against the dollar, as gains achieved following Japanese intervention in late April and early May have largely faded.

By Friday, the yen had once again approached the ¥160-per-dollar level, a threshold that previously triggered official intervention. This prompted another warning from Japanese Finance Minister Satsuki Katayama, who stated that Japan is prepared to act “at any time” and retains the right to take “decisive measures” against excessive currency volatility.

The yen was last trading at ¥159.93 per dollar.

Khoon Goh, Head of Asia Research at ANZ, said markets appear reluctant to aggressively test the Bank of Japan ahead of the US jobs report, particularly after authorities demonstrated renewed willingness to intervene.

Despite intervention risks, investors have built the largest speculative short positions against the yen since July 2024 in recent weeks. Analysts argue there is little incentive to unwind those positions—estimated at roughly $9 billion—unless there is a significant shift in Japan’s interest-rate outlook or economic growth trajectory.

The Bank of Japan is widely expected to raise interest rates later this month as inflationary pressures increase due to higher energy import costs. Markets are also pricing in the possibility of a second rate hike before the end of the year.