by Ismail Shakil and Steve Scherer

PARIS (Reuters) – Canada’s unemployment rate rose for the first time in nine months, data showed on Friday, an early sign of job weakness that surprised after Canada’s central bank raised rates on Thursday, in partly because of a tight labor market.

The unemployment rate rose to 5.2% and the number of jobs fell by 17,300 positions, Statistics Canada said.

Analysts polled by Reuters had forecast a net gain of 23,200 jobs and an unemployment rate rising to 5.1% in May, after remaining at 5.0% since December.

Money markets nonetheless continue to forecast a further rise in Canadian interest rates, potentially as early as July, a forecast shared by many analysts, as the Bank of Canada struggles to bring inflation back to its 2% target.

“The Canadian labor market cracked in May, but those cracks may not yet be big enough to convince the Bank of Canada that inflation is about to slow significantly,” says Andrew Grantham, senior economist at CIBC Capital Markets.

“The poor jobs data will need to be corroborated by many other indicators for us to change our forecast of another rate hike in July,” said Royce Mendes, head of macroeconomic strategy at Desjardins Group.

European yields weakened on the release of the data, as markets read the rare sign of weak employment as a possible indication of an easing in monetary policies.

The ten-year German Bund yield lost 3.3 basis points (bps), to 2.39%, while the yield on Italian government bonds fell 9.6 bps, to 4.12%.

Conversely, short-term yields in the Eurozone remained at their elevated levels as investors braced for further tightening of monetary conditions following the ECB meeting next week.

The two-year Bund yield, sensitive to monetary policy expectations, rose 0.7 bps to 2.97%.

(Reporting Ismail Shakil and Steve Scherer in Ottawa, with contributions from Fergal Smith in Toronto and Dale Smith in Ottawa; Correntin Chapron, editing by Kate Entringer)

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