When All Else Fails, Pray for Rain

Last week we received the Canadian and U.S. employment reports for June, and they stood in stark contrast to each other – Canadian employment fell last month while U.S. employment surged higher.

In today’s post we’ll look at the lowights and highlights from both reports and I’ll explain how ongoing exchange-rate adjustments should help to narrow the employment-momentum gap between our two countries over time (albeit much more slowly than most expected).

Canadian Employment Lowlights for June

• The Canadian economy lost an estimated total of 31,200 jobs in July. The consensus had expected about 10,000 new jobs after our June report showed a loss of 700 jobs but this did not materialize.
• What’s worse, we lost 71,000 full time jobs in July, on top of the 39,000 full-time jobs that were lost in June. We added another 40,000 part-time jobs to help cushion some of this blow but that isn’t a trade that our policy makers would willingly make because it typically replaces higher-paying jobs with lower paying ones.
• Goods-producing employment dropped by another 4,300 jobs in July, failing to recover from the 46,000 jobs this sector lost in June. As a reminder, goods producing employment has outsized importance because these jobs spur employment growth across the broader economy (a study by the Canadian government estimated that, on average, each new goods-producing job stimulates the creation of 2.7 other jobs throughout our broader economy).
• Our unemployment rate rose from 6.8% to 6.9%, and would have risen to 7% had our participation rate not fallen from 65.5% to 64.5 (as a reminder, our participation rate measures the percentage of working-age Canadians who are either employed or who are actively looking for work). Our participation rate now sits at its lowest level since the turn of the century.
• Our overall employment momentum has clearly stalled. We had a nice surge in March of this year, but at that time some savvy economists cautioned that employers were “hiring up” in anticipation of a rise in future demand that might not materialize. So far, that call has looked prescient.

Not surprisingly, the Loonie fell sharply on Friday as financial markets digested the new and contrasting employment data from both countries. When the Loonie falls it makes our exports into U.S. markets more competitive, and that should, in theory, provide us with an effective stabiliser when our economic trajectory lags that of the U.S. for any length of time. But the follow through just hasn’t been happening. We had a nice surge in exports in January, but today that momentum is long gone – our total export sales have actually fallen in four of the last five months.

The lag between the cheaper Loonie and expanding export sales is not a complete mystery to our policy makers. The Bank of Canada has said that it can take up to two years for exchange rate movements to work their way through our economy in normal times. Today, we are not in normal times and we are still redefining our export sector after swaths of it were decimated at the start of the Great Recession, when U.S. demand dried up, when the Loonie soared above par with the Greenback, and when so many businesses closed their doors for good. This is going to take time.

Our policy makers have been clear about what they think it will take to get our economy rolling again – we need export growth to fuel the increased business investment that will increase the demand for labour, preferably of the more skilled varieties. But like it or not, our policy makers just can’t force our economy through this transition.

U.S. Employment Highlights for June

• The U.S. economy added 255,000 new jobs in July, well above the 180,000 jobs that the consensus had been expecting. U.S. job creation has recovered nicely since stalling in May, when only 24,000 new jobs were created. Since then, both June (+292,000) and July (+255,000) have bolstered the market’s belief that May’s tally was just an outlier.
• Full-time employment surged higher by 306,000 jobs, a number which is especially impressive when it is added to the 451,000 jump in full-time jobs that we saw in June.
• The average U.S. work week expanded from 34.4 hours to 34.5, and while this may seem like a small increase, economist David Rosenberg estimates that it is equivalent to an additional 355,000 jobs being added to the U.S. economy last month.
• Average wages rose by 0.3% in July, and they have now risen by 2.6% on a year-over-year basis. That is comfortably above average U.S. inflation of about 1% over the same period (as measured by the Consumer Price Index), so at the margin, the purchasing power of the average U.S. worker is expanding.
• Notably, employment for those age 25 to 34 surged by 150,000 new jobs last month, and that now gives this group 420,000 new jobs over the last three months. That is a welcome development for the U.S. economy because there has been a pattern of younger people losing job opportunities to older workers since the start of the Great Recession. There is also talk about this being a good omen for the long-lost first-time home buyer’s segment of the U.S. housing market, but I think that call is premature because, unfortunately, those age 25 to 34 are also now contending with record levels of student debt.

While U.S. financial markets turned more bullish after the U.S. non-farm payroll report was released, the futures market only moved its bet on the timing of the Fed’s next rate hike from its meeting in July, 2017 to its meeting in May, 2017. So the latest U.S. employment report, solid as it was, wasn’t a mortgage-rate game changer on either side of the 49^th parallel.

Let’s not forget that U.S. GDP growth has averaged only about 1% over the first six months of 2016. And with U.S. inflation hovering at around 1% (well below the Fed’s 2% target), the Fed isn’t likely to feel compelled to tighten its monetary policy in order to preserve price stability any time soon.

Five-year Government of Canada bond yields rose one basis point last week, closing at 0.61% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.49% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at about 2.54%.

Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.50% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.

The Bottom Line: The latest U.S. employment report was as good as the Canadian report was bad. This disparity led to a sharp drop in the Loonie on Friday, and while any further depreciation of our currency should help to fuel a rise in our exports, it hasn’t worked out that way so far. Instead, our policy makers stall for time and pray for rain. What does this all mean for mortgage rates? Well, they don’t typically rise against this backdrop.