07:44 AM EDT, 08/06/2024 (MT Newswires) -- July's employment report (LFS), out Friday, is the highlight in Canada on this holiday-shortened week, said Bank of Montreal (BMO).

The uncomfortable upward trend in the unemployment rate likely continued, as ongoing modest job gains are consistently dwarfed by booming labor force growth, stated the bank. The latter accompanies strong population growth, which hasn't shown signs of ebbing yet.

BMO's call for a 20,000 increase in employment is modestly below the average gain over the past year as the Ontario LCBO strike sidelined about 10,000 workers. That will reverse in the August figures.

The anticipated sub-par increase would push the jobless rate up a tick to 6.5%, the highest since 2017 -- excluding the pandemic). With the advance estimate on Q2 gross domestic product (GDP) coming in better than expected, the bank will be watching July's hours worked to get a pulse on how the current quarter began.

Ahead of jobs, investors will get June's merchandise trade balance at 8:30 a.m. ET on Tuesday. BMO notes June marks the first full month of shipments from the expanded Trans Mountain pipeline, which should (along with higher natural gas prices) boost energy exports, driving the trade deficit narrower to C$1.0 billion. However, a negative manufacturing flash is expected to weigh on non-energy exports and imports.

Looking ahead, a relatively stable balance suggests that trade will add little to economic growth in the second half of the year, it added.

At 9:30 a.m. ET Tuesday, the July S&P services PMI will be released. June was in contraction territory at 47.1. The bank will be watching out if it stays under 50.

This week's only other data point is the July Ivey PMI on Wednesday.

The Bank of Canada (BoC) will release the Summary of Deliberations for the July 24 decision on Wednesday. The meeting saw a second consecutive 25 bps rate cut, and the minutes will be parsed to assess whether the BoC's extremely dovish tone was fully intentional, according to BMO. The policy statement, along with Governor Tiff Macklem's opening remarks and press conference, signaled that risks to the outlook are more balanced and that the incoming data will have to keep the BoC from cutting, rather than prompt them to cut.

The bank will be looking for confirmation of the change in posture and any hints on how far the BoC intends to ease policy. While the economy is sporting a sizeable output gap, inflation remains well above 2% and isn't expected to return to target until well into next year. Lastly, markets will be watching closely for any thoughts on the Canadian dollar (CAD or loonie) and potential deviation from the United States Federal Reserve.

The Canadian dollar lost a bit of ground last week, finishing around C$1.376. It was an up-and-down week, as the firmer Canadian GDP data gave the currency temporary support before the risk-off tone in the back half of the week weighed heavily. Friday's soft US payroll (NFP) report helped limit C$ losses, though it underperformed on most crosses, noted the bank. The loonie will likely take its cues from the risk environment, while the BoC's minutes and July's employment report will be drivers as well. Despite Monday's big risk-off move, the C$ gained ground as markets continue to ramp up Fed easing odds, though that's unwinding a bit early Tuesday.

The Government of Canada (GoC) yields curve bull steepened, with Friday's weak US NFP report driving a huge rally on both sides of the border. Not surprisingly, Canadas couldn't keep pace with USTs, underperforming 5-7 bps across the curve. There are now 75 bps in cuts priced by year-end in Canada and another 75 bps by mid-2025, added the bank.

The Fed is priced even more aggressively with over 100 bps of cuts priced by year-end and another 80 bps by mid-2025. The path for the Fed is particularly aggressive as it implies more than one 50 bps cut this year -- as only three meetings remain. BMO is now calling for the BoC to cut 25 bps at each of the last three meetings this year, leaving policy rates at 3.75% by the end of 2024. BMO then anticipates the BoC will trim rates further to 3% by mid-2025.