08:34 AM EST, 12/09/2024 (MT Newswires) -- Investors had plenty to digest with Friday's Canadian Labour Force Survey (LFS), said TD.

The unemployment rate climbed to 6.8% -- its highest level since January 2017, excluding the pandemic. This nudged the odds of a 50bps rate cut up to 80% on Friday from what was previously a near coin flip, noted the bank.

Yet focusing solely on the unemployment rate risks missing the full picture, as the increase was driven by a boost in the labor force rather than job losses, pointed out TD.

There are plenty of bright spots in the overall picture. Employment rose by 51,000 -- more than twice the consensus forecast. Full-time positions accounted for most of the gains, extending the momentum seen in recent months. Previously, employment growth trailed the expansion in the labor force, pushing the employment rate -- the share of the population that is employed -- lower. This time, however, the employment rate held steady, rather than declining.

Taken together, these figures challenge the collective wisdom of the market. TD thinks that Friday's labor market data offers little justification for aggressive monetary easing. In addition, average hourly wage growth of 4.1% year-on-year should still be too discomforting for the Bank of Canada.

Strong wage growth without accompanying productivity gains fuels inflationary pressures, strengthening the case for a measured approach to rate cuts, stated the bank.

There are other reasons to tread carefully as 2025 approaches, it added. United States President-elect Donald Trump's renewed threats of tariffs loom large, potentially making trade dynamics a critical swing factor.

In October, Canada's merchandise trade balance recorded its eighth consecutive monthly deficit. Although exports rose for the first time in four months, modest import gains outpaced the improvement.

Nonetheless, trade with the US remained a bright spot. Despite declining, the value of exports to the US exceeded the value of imports, contributing positively to Canada's overall trade balance. This trend has played a growing role in economic activity since the USMCA came into effect in mid-2020.

This trade surplus with the US is precisely what Trump opposes and demands stronger border security in exchange for Canada avoiding tariffs. As a result, any trade deal would likely entail increased spending on border security and defense. This would add to fiscal stimulus initiatives, such as tax holidays and direct payments.

Finally, recent rebounds in consumer and real estate activity argue for Canada's central bank to take incremental steps to reduce restrictive monetary policy and avoid steps that could exacerbate inflationary pressures according to the bank.

Still, policymakers may focus on the spike in the unemployment rate and the broader weakness in economic activity, opting to cut rates by another 50bps. The wait is almost over -- attention now shifts to Wednesday's BoC policy decision.