The Canadian employment report came in stronger than expected for September, but not strong enough to divert the Bank of Canada from further aggressive cuts to interest rates.

Against all expectations, the Canadian economy created almost 20,000 net new jobs in September, holding the unemployment rate steady at 7.2%. The growth snapped a three-month string of losses. The details were stronger than the headline would suggest, as full-time jobs rose by 51,300,the largest gain this year and the second big increase in a row.

BMO Nesbitt Burns notes that despite the cheery headline, the data doesn’t fully account for the effect of the terrorist attacks, and the increase may partly reflect seasonal factors.”Even with the caveats, there is no doubt that this report is a pleasant surprise. Gains were especially strong in construction, retail trade, education, and finance/real estate. Manufacturing had a small gain, and factory payrolls are still up 0.6%.”

CIBC World Markets is more skeptical, inviting market watchers to, “Take a good look at what is likely to be the best employment performance Canada will see for some time. While September’s results were unambiguously positive, dark clouds continue to hang over the employment outlook. Indeed, the growing likelihood of massive layoffs in the months to come should see the Bank of Canada look right past today’s rosy results and continue on an aggressive course of rate cutting.”

CIBC says that today’s surprise rise in employment and hours worked may alter the pattern of quarterly GDP growth, but it does little to change its view of a second half recession. “While third quarter growth could experience somewhat less of a drop than our earlier 1.3% estimate, today’s employment gain has merely delayed the inevitable. With more job losses being pushed into the final quarter of the year (and beyond), Q4 growth is clearly headed for rough water.”

RBC DS Capital Markets Research says, “If not for the U.S. terrorist attacks on September 11, this employment report would have been seized upon as encouraging news for the Canadian economy. But in reality, Canada needs a rebound in U.S. activity to underpin its own growth performance and the fallout from the terrorist attacks will deepen and extend the slowdown on both sides of the border.” It says that the Bank of Canada still has ample reason to cut rates by 50 basis points on October 23.

BMO agrees that the cut is likely, but declines to guess how big it will be. CIBC says, “With further aggressive Fed easing in the cards, it would be imprudent for the Bank to do anything less than match Greenspan’s latest 50 bps rate cut on October 23.”