Last week we received the latest Canada and US employment data for July, and it confirmed that our two labour markets continued along diverging trajectories last month. (US employment rose by 528,000 while Canadian employment fell by 31,000.)
Jobs data have increased importance now because ongoing labour shortages on both sides of the 49th parallel have fueled a steady rise in labour costs. To wit, the average wage in both countries has now risen by 5.2% year-over-year.
Both the Bank of Canada (BoC) and the US Federal Reserve (Fed) are concerned that rising labour costs will broaden inflation pressures, even as many of the prices that drove our initial inflation surge begin to moderate. If that happens, both central banks will have to keep raising their policy rates, even as headline inflation starts to decline from its current eye-popping levels.
Here’s how the latest US and Canadian employment data may impact Canadians who are currently in the market for a fixed or variable mortgage.
The Canadian economy is in the midst of being weaned off record levels of fiscal spending and the lowest borrowing rates on record. We are currently experiencing the highest inflation and the lowest unemployment rates in more than forty years as well as record high overall debt levels and house prices (at least for now).
Although this unusual current backdrop makes forecasting where rates are headed even more difficult than usual, there are some key signposts that can help us find our way.
In today’s post I’ll focus on three of those signposts and explain how they inform my outlook for Canadian fixed and variable mortgage rates.
In the meantime, here are links to three of my most popular recent posts:
Five Thoughts on the Bank of Canada’s Jumbo Rate Hike – The Bank of Canada (BoC) hiked by 1.00% on July 13 and in this post I provide highlights from, and my take on, the Bank’s accompanying communications that were used to justify its jumbo-sized hike.
Straight Talk From Our Central Bankers – In this post I imagine what BoC Governor Macklem and US Federal Reserve Chair Jerome Powell would write in an unvarnished, no holds barred op-ed offering their candid assessments of the current economic situation and what they plan to do about it.
New Mortgage-Rule Changes: HELOCs & Reverse Mortgages – This post outlines the two recent mortgage-rule changes that were announced by our banking regulator and offers my take on a rising risk that it failed to address.
The Bank of Canada (BoC) surprised markets last week with a super-sized 1.00% rate hike. Its policy rate now stands at 2.50%, a substantial increase from its 0.25% level in March.
Variable mortgage rates will rise by the same amount in short order, and that will increase each variable-rate borrower’s payment by approximately $53/month for every $100,000 in principal outstanding (assuming a 25-yr amortization).
The BoC justified its larger-than-expected move by predicting that a front-loaded jumbo increase now would decrease the total amount of tightening needed to bring inflation to heel and thereby increase the odds of a soft-landing for our economy.
Right now, the BoC’s policy rate stands at 1.50%, which is below its estimated neutral-rate range of 2.25% to 3.25%.
(The neutral-rate range is the rate level that neither stimulates nor reduces target inflation when the economy is operating at full capacity.)
The BoC is in a hurry to raise rates and course correct.
Last week was quiet for mortgage-rate news (whew!), so this week I’ll turn my attention to the latest update from our federal banking regulator, the Office of the Superintendent of Financial Institutions (OSFI).
Last Wednesday, OSFI announced the following changes, which will take effect at the end of 2023:
Statistics Canada confirmed that our overall Consumer Price Index (CPI) surged higher again last month, up from 6.8% in April to 7.7% in May on a year-over-year (YoY) basis. That marked its highest level in nearly forty years.
The single largest contributor to last month’s CPI spike was gasoline, which rose by 12% month-over-month (MoM), and have now risen by a whopping 48% YoY. (If we excluded gasoline, our overall CPI would have risen from 5.8% in April to 6.3% in May.)
Let’s try something different this week.
Instead of reporting on rate hikes and soaring bond yields, let’s imagine that Bank of Canada (BoC) Governor Macklem and US Federal Reserve Chair Jerome Powell decided to sit down to write an unvarnished, no holds barred op-ed offering their candid assessments of the current economic situation, what they plan to do about runaway inflation, and how they think it will all play out.
Here is what I think they would write …
Last week we received the latest US inflation and Canadian employment data, and the Bank of Canada (BoC) issued its latest Financial System Review with an accompanying press conference from BoC Governor Macklem.
In today’s post I offer quick hits on each and make my admittedly contrarian case for inflation and interest rates falling back more quickly than most market watchers expect.
That means lender prime rates, and, by association, our variable mortgage rates, will increase by the same amount in short order.
Government of Canada (GoC) bond yields, which our fixed mortgage rates are priced on, have also risen in response to the Bank’s accompanying policy statement, which was more hawkish than expected. (One major lender has already increased its fixed rates, and others are expected to soon follow.)
I was away this weekend so there won’t be a new post this week, but I’ll be back next Monday as usual.
In the meantime, here are links to five recent posts to get you caught up on all the mortgage news that has been fit to print lately:
- Inflation on the Brain – Canadian inflation surged higher in April, and in this post I offer my take on what the Bank of Canada is (and isn’t) likely to do about it.
- US Inflation Falls In April (Sort of) – In this post I explain why the April drop in US headline inflation came with some important caveats that caused the market to temper its reaction.
- Fixed vs Variable: Which One Is Now the Better Bet? – This post offers my latest take on the question every borrower loves to ask.
- Five Thoughts on Last Week’s Mortgage-Related News – This post covers the latest Canadian and US employment data, current recession odds, and the Fed’s most recent rate hike, and it offers my take on what all these factors may mean for Canadian mortgage rates going forward.
- How the 2022 Federal Budget Will Impact Our Real-Estate Markets – Our federal government touted a lot of key initiatives to address our housing affordability crisis. In this post I offer my take (and explain why most of them were all hat and no cattle).
The Bank of Canada (BoC) has faced plenty of criticism of late.
It has a mandate to “maintain low, stable inflation over time”, and with prices spiking to their highest levels in more than 30 years, today’s inflation is more aptly described as “high and volatile”.
In retrospect, when our federal government responded to COVID with massive levels of stimulus spending, the Bank should have tightened monetary policy sooner than it did to help keep demand, and inflation, in check. But what is now clear in hindsight was less so during an economic shock that had policy makers focused, first and foremost, on avoiding a repeat of the Great Depression.
Surging prices continue to dominate the headlines, but last week’s US inflation data offered the first glimmer of hope that inflation may finally have peaked.
The annual headline US Consumer Price Index (CPI) fell from 8.5% in March to 8.3% in April, and annual core US CPI, which strips out more volatile CPI inputs such as food and energy prices, dropped from 6.5% in March to 6.2% in April.
US inflation trends should provide some hint of what to expect when our own inflation data are released this Wednesday, but more importantly for readers of this blog, the US data will impact our bond yields and interest rates, which closely track their US equivalents.
Last week we received the April employment data on both sides of the 49th parallel, and the US Federal Reserve made its much-anticipated policy-rate announcement.
Let’s dive right into the details that will be noteworthy for anyone keeping an eye on Canadian mortgage rates.
Canadian mortgage rates have been on a tear lately.
The five-year Government of Canada (GoC) bond yield has more than doubled, from 1.25% in early January to 2.78% at last Friday’s close, and that has driven our five-year fixed mortgage rates up into the 4% range, marking their highest level in more than a decade.
Meanwhile, the Bank of Canada (BoC) has hiked its policy rate by a total of 0.75% over its last two meetings, and lender prime rates, and the variable mortgage rates that are priced on them, have increased by the same amount.
Those developments may have been big news on the home front, but they are mere sidenotes on the global stage. The biggest punch bowl at the global cheap-money party belongs to the US Federal Reserve, and the Fed is expected to start taking that punch bowl away when it meets this week.