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The latest evidence of weakening job markets in both Canada and the U.S. underpins growing expectations for rate cuts, analysts say.

In the first week of July, jobless rates for both North American markets came in higher than forecast. In fact, the U.S. unemployment rate is above the U.S. Federal Reserve Board’s year-end projection, National Bank Financial Inc. (NBF) noted in a new report.

The gloomy news is providing support to the notion that monetary policy should ease.

The jobless rate for Canada has risen the most in the G7 over the past couple of years, NBF said, adding that the rate is on track to top 7% this year “if recent (worsening) labour market dynamics persist.”

Despite the worse-than-expected jobs report, markets remain cautious about the prospect of a rate cut later this month, NBF said, given the latest inflation data and concerns about upcoming consumer price data.

“While the latest [inflation] data wasn’t ideal, we don’t think it’s wise to miss the forest for the trees,” NBF said. “Inflation today is much better behaved, while the labour market is gasping for air.”

Given the inevitable monetary policy lag, NBF argues that the Bank of Canada should be prepared to act sooner rather than later to help curb labour market weakness.

“To us, a July cut should be considered a higher probability outcome, as only a disastrous June [inflation] report should leave the [Bank of Canada] sidelined,” it said.

Similar dynamics are in play in the U.S., with the jobless rate rising there too.

“The June jobs report is the latest confirmation of a slow but steadily cooling U.S. job market, in which job creation, wage growth and turnover are mostly back at pre-pandemic norms and are broadly consistent with the Fed’s 2% inflation target,” said Moody’s Investors Service in a new report.

“The data suggest that the disinflationary process, after pausing in the first quarter, is continuing and that the risks of an overly tight monetary policy are rising, strengthening the case for the Fed to begin cutting rates,” it said.

Moody’s said it expects the U.S. unemployment rate to rise modestly this year “as firms right-size their operations to better match softer consumer demand in an economy gradually returning to potential.”

Additionally, while layoff activity remains low, the volume of job vacancies is declining, and there’s not enough capacity to absorb the new entrants to the labour market, the rating agency said.

Weaker labour demand and reduced churn in the job market, “with quits, hires and layoffs all below their pre-pandemic averages,” are also combining to slow wage growth, Moody’s noted.

“We expect labour market turnover to remain low as labour demand continues to cool, which will keep wage growth contained within an acceptable range for the Fed,” it said.

NBF said the latest U.S. data bolstered its forecast of two cuts by the Fed this year.