The May Labour Force Survey (LFS) -- the major data event of last week -- delivered a significant upside surprise, said TD.
Employment increased by 88,000, handily beating expectations for a 10,000 gain, and pushing the three-month average back into positive territory at 28,000, noted the bank.
The details were equally strong, stated TD. Job gains were broad-based across industries and concentrated in full-time positions, reversing much of the weakness seen earlier this year. The unemployment rate fell 0.3 percentage point to 6.6%, while the youth unemployment rate declined nearly a full percentage point to 13.4%.
The LFS also helped temper the recession talk, pointed out the bank. "Technical recession" chatter picked up following a contraction in real gross domestic product in Q1, which was reported the week before.
The economy is clearly operating below capacity, even judging by Friday's LFS numbers -- Canada is essentially back where it was in January. In Canada, recession determinations are made by the C.D. Howe Institute's Business Cycle Council, which last week reiterated that it assesses recessions through the lenses of duration, amplitude and scope.
This means that a modest quarterly decline in GDP must be corroborated by weakness in adjacent quarters and accompanied by a broad-based decline in economic activity. On the latter point, the simple unweighted diffusion index of GDP by industry has yet to breach recessionary thresholds, despite pressure on trade-exposed industries.
In that regard, this week will bring another important data point with the release of April's international trade figures, according to TD. Trade developments remain a major focus as attention shifts towards the next phase of CUSMA trade deal discussions.
Early positioning from both sides suggests negotiations are unlikely to be straightforward, with several longstanding regulatory and market-access disputes already resurfacing. There were several tariff announcements last week, but the direct impact on Canada is likely limited.
This week will also bring the Bank of Canada's next policy decision, where rates are widely expected to remain unchanged, added TD. The bank's assessment remains that the Canadian economy is treading water -- not strong enough to justify rate hikes, but not weak enough to signal a deep downturn.
As a consequence, TD sees little reason for the BoC to move on Wednesday. Markets, meanwhile, are now pricing in a full rate hike by year-end -- a reflection of how quickly Friday's LFS shifted the narrative.
Separating the wheat of the economic data from the chaff of the politicized narrative around it remains an important task, and the bank will continue watching the data closely to determine whether this delicate balance can hold in the weeks ahead.