By Douglas Porter

February 6, 2026

Who needs an employment report to tell you that the job market is softening? The brief partial shutdown of the U.S. government delayed this week’s marquee economic release until next Wednesday, but the heavy weight of evidence elsewhere made it quite clear that hiring conditions are icing over.

A steep drop in job openings late last year, modest hiring in January (+22,000 from ADP) and a big rise in layoffs to start 2026 all suggest employment is chilly. And Canada chimed right in with its January jobs data revealing a 24,800 drop in employment, the first such setback in five months.

The increasingly clear signals that job growth has all but stalled comes amid some sudden churning in financial markets. Even as the bond market and currencies made no big noises—yields were moderately lower, the U.S. dollar modestly stronger—stocks saw heavy-duty rotation, commodities whipsawed again, and crypto bounced massively after a crash.

If there was a common theme to the past week, it was that some of the previously highest fliers came down with a thud, but investors shifted to lower volatility stocks, and not traditional safe havens. Given the volatility in precious metals and the weakness in the U.S. dollar over the past year, some may wonder what precisely constitutes a safe haven these days?

The chilly jobs backdrop also does not entirely jibe with other economic indicators. Of course, the split between sluggish employment and solid U.S. GDP growth has been well documented over the past year; a notable pick-up in productivity, perhaps partly thanks to heavy AI spending, helps circle that square. And that split looks to be continuing in early 2026.

Both ISM reports for January landed on the strong side of expectations, especially the surprising jump for factories. Some downplayed the bounce in the manufacturing ISM to 52.6 as seasonal, but the result was the best in over three years and the new orders index reported its biggest monthly rise in 25 years (aside from 2020).

Curiously, factories in Japan and Europe also reported a mild pick-up to start 2026, and even Germany saw a big rebound in factory orders late last year, all hints that the world is moving beyond the U.S.-led trade war.

Unfortunately for Canada, moving beyond the trade uncertainty is not yet a realistic option. Along with Mexico, it’s one of the few major economies that remains in tariff limbo—awaiting the USMCA review—albeit with a lower average tariff rate than others. And, even with a significant diversification push, its merchandise exports to the U.S. still accounted for 17% of Canadian GDP in 2025.

The trade uncertainty is grinding on the manufacturing sector; while S&P’s PMI for the sector actually bounced above 50 last month, almost every other factory indicator is pointing to stress, with steel and autos especially under strain. Manufacturing output is down 5% y/y and payrolls in the sector have dropped almost 3% in the past year.

Thus, after a burst of surprising strength last fall, it was back to reality for Canadian jobs in January.

Manufacturing employment fell a hefty 27,500 in the month, vying for one of the biggest monthly declines on record, with all of the losses in auto-led Ontario. Even so, the unemployment rate fell, as participation dropped sharply. The jobless rate of 6.5% is now down since the trade war first erupted early last year—not an outcome many would have guessed.

The big offsetting factor to cooling demand for labour is an even bigger slowdown in the supply. The labour force took a big step back last month and the rapid slowdown in population growth points to further such softness ahead. As a result, Canada could easily be looking at very little economic and job growth over the course of 2026, and yet further declines in the jobless rate.

What is a central banker to do in this environment? For the Bank of Canada, Governor Macklem made it abundantly clear in remarks this week that the bar for additional rate cuts is very high indeed. He warned not to misinterpret the weakness in the economy; if it’s structural in nature, he suggested the Bank cannot fight that.

And, January’s big drop in factory jobs would suggest to the BoC that this is due to the trade war, it’s a structural shift, it’s a loss of capacity, and lower rates won’t help. While we wouldn’t quite see it that way—lower rates could help speed the transition by supporting other sectors—we’re in the business of projecting what policymakers will do, not what they should do. And it’s apparent that the Bank will do nothing soon.

Another argument in favour of the Bank still leaning on the dovish side is the ongoing funk in Canada’s housing market. It’s true that one shouldn’t read too much into January activity, especially when many large cities were buried in snow for much of the month.

(As an aside, we’ll just note that Vancouver is headed for an entirely snow-free winter for the first time in 43 years—don’t hate them, they can’t help it—and yet home sales are equally weak there too, so it’s more than the weather at work.)

But the common theme from almost across the country was that buyers were sitting on their hands, and prices continue to drift lower. Given that affordability is still quite challenged, it’s likely that prices will continue to drift until incomes gradually rise and repair buying power. From a policy perspective, if the most interest-rate-sensitive sector of the economy is struggling mightily, it seems readily apparent that the current setting for rates is far from overly stimulative.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.