Canadian employment dipped 13,000 in May, the second consecutive monthly decline, Statistics Canada reported Friday.

A jump in the number of people entering the labour market in search of work pushed the unemployment rate up 0.3 percentage points to 7.8%.

Economists say that interest rates are surely on hold, if not heading lower, as a result.

“Canada’s job market took it on the chin again in May, but it was not the SARS outbreak throwing the punches this time around,” says TD Bank. It says that the jobless rate is better than it looked, with the participation rate jumping, too. But, “it really does appear as if Canada’s labour market is starting to buckle.”

BMO Nesbitt Burns says, “If anything, the details were even weaker than the headline result. Full-time positions accounted for all of the losses, and the survey was taken prior to the second outbreak of SARS and the discovery of Alberta’s mad cow. Thus, this was a relatively clean report, and the underlying story is not positive.”

There was weakness in factory jobs, and across numerous other sectors. “Faced with anemic global industrial demand and burdened with a soaring loonie, manufacturers were once again chopping headcount,” notes CIBC World Markets.

“Although modest, May’s 3,000 factory jobs decline is the fifth such setback in the past half year, pushing year-over-year growth in this key industry back into negative territory. The transportation sector remained at the vanguard of the factory sector retreat, reflecting a general softening in the North American auto market. Elsewhere, the majority of service sectors recorded monthly declines. A 19,000 drop in finance/insurance/real estate undid some earlier growth built on a red-hot housing market. Meanwhile, a 14,000 decline in retail and wholesale trade likely captured cooler winds in the consumer sector.”

“There is no ambiguity in this report, with widespread signs of softness clearly evident. This will stoke talk that the Bank of Canada’s tightening cycle is over, and will take some steam out of the loonie,” Nesbitt says.

TD agrees, saying, “In sum, today’s data confirm without a shadow of doubt that the bright glow of last year’s red-hot labour market has turned into little more than a feeble flicker. And, that can only add to the long list of reasons for the Bank of Canada to keep its policy settings on hold for the remainder of the year.”

CIBC says that, even before this report, markets were pricing in some chance of Bank of Canada rate cut. “And the surprisingly soft tone to today’s report pushed them even further in that direction, with the futures market putting better than 50% odds of a quarter-point cut by fall. The prospect of a more dovish Bank also weighed on the Canadian dollar early this morning.”