08:10 AM EDT, 08/11/2025 (MT Newswires) -- Canada's labor market found itself in choppy waters in July.as the nation shed around 40,000 jobs, coming in well below consensus expectations for a modest gain and unwinding around half of June's hiring surge, noted TD after Friday's Labour Force Survey (LFS).

A similar drop in July's labor force growth kept the unemployment rate steady at 6.9%, a silver lining in an otherwise weak report, noted the bank. Markets reacted by pushing yields on the two- and 10-year bonds down around 5 bps, while the Canadian dollar (CAD or loonie) depreciated three-tenths of a cent against the US dollar (USD)

The labor market is showing clear evidence of loosening in response to U.S. tariffs and broader uncertainty, stated TD. This is even more pronounced in the performance of more trade-exposed sectors.

Of the 180,000 jobs created since Donald Trump won the U.S. presidency, highly export-exposed industries accounted for only 10% of the gain, despite accounting for around a third of total employment. Notably, trade-exposed sectors like manufacturing, natural resources, agriculture, and transportation have experienced outright job losses over the last six months.

The path forward is a little less clear, but the bank expects hiring sentiment to remain weak through Q3 as firms navigate trade-related headwinds.

Investors also received Canadian trade data for June last week. Exports managed to edge forward for a second consecutive month, but levels remain depressed compared with March. The slight advance in imports was skewed by a nearly $2-billion high-value import of equipment for an oil project in Newfoundland.

All told, Q2 GDP growth -- due out at the end of the month -- will likely see a contraction as exports tumbled, pointed out TD. Mirroring the trend in labor markets, exports of tariff-impacted sectors are showing signs of underperformance. Exports of steel, aluminum, copper and energy have suffered more than the rest of the Canadian export basket over the past six months.

Encouragingly, shipments to the U.S. as a share of total exports have dropped sharply in recent months, suggesting Canada may be slowly diversifying trade away from the U.S., added TD.

Elsewhere, the federal government stepped up its support for the ailing softwood lumber sector. In total, the lumber industry will receive $1.2 billion in financial support ($700 million in loan guarantees and $500 million in grants and contributions). The lumber industry now joins the automotive and steel/aluminum sectors in receiving direct federal government support meant to address negative impacts from U.S. trade policy.

TD thinks last week's events only marginally move the Bank of Canada in the direction of a cut at their meeting in September. Markets agree, having re-priced the probability of a 25% bps cut to north of 40% (30% probability prior to Friday's LFS).

Inflation data later this month will be more telling and could move the needle further toward a September cut should core inflation pressures show any signs of easing. Taken altogether, the bank thinks there is a strong argument for further rate easing later this year.