(Bloomberg) -- Canada’s unemployment rate unexpectedly fell as job gains beat expectations, bolstering the Bank of Canada’s case for gradual rate cuts and raising hopes of a soft landing.

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The jobless rate dropped 0.1 percentage points to 6.5% in September as the country added 46,700 jobs, Statistics Canada reported Friday. Economists in a Bloomberg survey had expected unemployment to tick up to 6.7% with modest job gains of 27,000. It’s the first time the unemployment rate has fallen since January.

The growth was led by full-time positions, which surged by 112,000 on the month, while part-time roles fell by 65,300. The private sector was also a strong driver, adding 61,200 jobs while the public sector shed 23,600. The country’s labor force grew by just 15,900 people, one of the smaller increases in recent months as Canada’s population has surged since the pandemic.

The data point to surprisingly strong labor demand in an economy that may be feeling some wind in its sails from the central bank’s rate cuts. The report will add to the Bank of Canada’s case to keep cutting rates gradually and firm up hopes that it will be able to tame inflation without a deep downturn in employment.

Canadian bonds underperformed after the release as yields rose, pushing the two-year Canada benchmark yield to 3.15%. The loonie rose to a session high of C$1.3725, on course to break seven days of losses versus the greenback as of 8:39 a.m. in Ottawa.

Before the report, traders in overnight swaps put the odds of a 50 basis-point cut at the central bank’s next meeting on Oct. 23 at about a coin flip. Former Bank of Canada Deputy Governor Paul Beaudry said earlier this week that he would not be surprised by a 50 basis-point cut at the meeting, while RBC Dominion Securities has called for back-to-back cuts of that size this month and at the December meeting.

Policymakers led by Governor Tiff Macklem reduced the policy rate by 25 basis points for a third straight time in September, bringing it to 4.25% and saying it was reasonable to expect further cuts. Macklem has said the trend in the labor market has been that employers are not hiring enough to keep pace with labor force growth, and that a “big change in layoffs” would spark concern.



This report is likely to ease those concerns. It’s the last jobs release before the next rate decision and inflation figures are due on Tuesday. Most economists in a Bloomberg survey expect a 25 basis-point cut at the meeting later this month.

Wage growth also slowed, to 4.5% annually from 4.9% previously.

The information, retail and culture sector as well as wholesale and retail trade led the job gains, while education, health care and agriculture lost the most jobs.

The youth unemployment rate fell to 13.5% in September from 14.5% the previous month. Young people and newcomers have struggled the most to find jobs in Canada this year.

--With assistance from Jay Zhao-Murray and Carter Johnson.

(Adds market reaction, more details from report starting in paragraph five.)

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