The surprisingly strong Canadian jobs report for December has some economists paring back their expectations for interest rate cuts.

“Canada’s slowdown is obvious everywhere except on the hiring front, which just continues to defy gravity. Employment rose by an astonishing 61,600 in December, and the details were also robust, as full-time positions rose 36,900 and the jobless rate fell two ticks to match its three-decade low of 6.1%,” notes BMO Nesbitt Burns.

“Canada’s job engine simply refuses to quit, even in the face of a clear cooling in underlying GDP growth,” it adds. “Suffice it to say that productivity growth remains dismal, as the 2.1% rise in jobs in the past year actually exceeds the 1.6% rise in GDP. But this strong job performance will help backstop confidence and spending. It’s also just the tonic the ailing loonie was looking for, and also should dampen talk of an early move by the Bank of Canada to trim rates.”

RBC says that, “the Bank of Canada will be comforted somewhat that these figures support consumption in the new year (thanks in part to broader public-sector employment and spending). They will also be heartened by the tentative bottoming in manufacturing.”

“In all, the report may take out some of the notion of an early ease in 2007 (we think the Bank of Canada will await the second half of the year), but there are no grounds on the basis of this to be considering rate hikes,” it says.

Bank of Montreal says that the divergent nature of the recent data complicates the job of the Bank of Canada. “The low unemployment rate does raise concerns that the economy is operating close to, if not beyond, capacity limits with negative implications for the inflation outlook. However, indications of very modest growth in recent quarters argue for interest rates to be lowered.” It expects that the central bank will continue to hold the overnight rate unchanged at 4.25% through this year and likely even beyond.

Yet, National Bank Financial suggests that the surprisingly robust report should be interpreted with caution “as it was mostly driven by an outsized jump in self-employment.” It adds that private sector payrolls rose only 4,700 in December, the weakest showing in four months; which brought the largest drop in total hours worked in a couple of years.

“The bottom-line is that the Canadian economy is creating jobs, but at nowhere near the pace suggested by this morning’s headline number,” NBF says. “We do not view this morning’s employment report as an obstacle for the Bank of Canada to downgrade its growth outlook in its upcoming MPR report on January 18.”

TD Economics adds that 2006 was the best year for Canada’s labour market since 2002 with the creation of 345,000 net new positions. But, it cautions, “Looking out over 2007, with economic growth decelerating over the first half of the year, it is unlikely that the labour market will be able to match 2006.”

“However, the combination of a pick-up in economic activity over the second half of 2007 and the continuation of high commodity prices will deliver a respectable 190,000 new jobs this year. Although the unemployment rate is forecast to edge a touch higher, the labour market will remain tight over the year, supporting the consumer and limiting the severity and duration of the export-led slowing in overall economic growth,” it concludes.