07:33 AM EDT, 09/03/2024 (MT Newswires) -- There's plenty of action this week after Monday's national holiday in Canada, said Bank of Montrel (BMO).

The Bank of Canada's policy (BoC) announcement comes on Wednesday at 9:45 a.m. ET and investors will get August job figures on Friday in the Labour Force Survey (LFS).

The BoC is widely expected to cut rates 25 bps to 4.25% this week, amid a persistently soft economic backdrop and slowing inflation, noted the bank. Last week's Q2 gross domestic product (GDP) report had a decent headline, but the details were soft.

The flat June reading and flash for July GDP highlighted the lack of momentum heading into Q3. The Canadian economy is struggling, and investors will get more insight into the labor market at the end of the week, pointed out the bank.

Meantime, inflation has continued to slow, and given the widening output gap, will likely remain on a decelerating path. The recent pullback in energy prices will provide a helping hand as well if sustained. With that backdrop, there's no reason for policy rates to remain above neutral, which looks to keep the BoC on a rate-cutting path well into 2025, according to BMO.

Friday's jobs data will provide some insight into the state of the labor market. The unemployment rate has been trending higher for over a year, putting to rest concerns that a tight labor market could put renewed upward pressure on inflation. The bank is looking for the jobless rate to move a tick higher to 6.5%, and wage growth to slow (in part due to base effects).

The bank's expectations for the headline figure is for a "decent" 35,000 increase, but some of that is due to returning LCBO workers, and still isn't enough to keep up with a surging labor force. While a firmer picture likely won't change much for policymakers, a bigger increase in the jobless rate or a third straight month of job losses has the potential to prompt more aggressive easing later this year.

Tuesday's calendar is pretty light with just the August S&P manufacturing PMI @ 9:30 a.m. ET, added the bank. The rest of the week brings: July's trade balance (Wednesday), August auto sales (likely out Wednesday or Thursday), Q2 labor productivity (Thursday), August S&P services PMI (Thursday) and August Ivey PMI (Friday).

The Canadian dollar (CAD or loonie) ended the week little changed, just under C$1.350. The loonie touched its best level since March mid-week before fading in the back half. There's plenty to move the needle this week for the CAD, with the BoC and employment, noted BMO.

However, United States payrolls (NFP) could be the bigger catalyst as they could determine how aggressive the Federal Reserve will be later this month.

The Government of Canada (GoC) yields curve bear steepened, with yields 9-14 bps higher across the curve. The sell-off came despite Friday's soft GDP report, with no top-tier data earlier in the week suggesting that positioning is skewed long in Canada, according to the bank.

Even so, with a rate cut coming this week, and the risks tilted to a more dovish BoC, there's room for the front end to rally further. There's one bond auction this week: C$2.0 billion December 2055 on Thursday.