We sell about 80% of everything we export into US markets, and about 50% of our total imports come back the other way.
This extensive trade relationship with a country whose GDP is more than ten times our own explains why our Government of Canada (GoC) bond yields, which our fixed-mortgage rates are priced on, tend to move in lockstep with their US equivalents.
In addition, our broad and deep economic ties also severely limit the Bank of Canada’s (BoC) ability to deviate its policy rate, which our variable mortgage rates are priced on, from the Fed funds rate (which I detailed in this recent post).
At the moment, the BoC is forecasting that it will raise its policy rate some time in the second half of 2022, but that prediction is based in large part on the assumption that our economy will be buoyed by an export-led recovery.
My Take on the Bank of Canada’s Latest Forecasts
This post provided highlights from the Bank of Canada’s latest policy statement and Monetary Policy Report.
Canadian Employment Surges, But Bond Yields Don’t
This post explains why our employment data surged in June, and why our bond market (uncharacteristically) shrugged at that news.
Why the US Employment Data Are Key for Canadian Mortgage Rates
This post provided highlights from the latest US employment report and explains why the US jobs data may impact Canadian mortgage rates more than our own over the near term.
How Will Canadian Mortgage Rates Be Impacted by the Fed’s New Rate-Hike Timetable?
This post provided highlights from the Fed’s most recent policy statement. I interpreted the Fed’s comments as being more dovish than the consensus initially assessed and predicted that the associated run-up in bond yields would be short lived (which proved correct).
Fixed or Variable? Let the Current Inflation Debate Be Your Guide
Finally, no highlight of recent posts would be complete without including my latest take on the mortgage question every borrower loves to ask: Will I save more with a fixed or variable rate over the next five years?The Bottom Line: Fixed and variable rates held steady last week.
That said, there was a noteworthy plunge in the Government of Canada five-year bond yield that our five-year fixed mortgage rates are priced on, from around 1.00% down to .80%.
If it holds at that level, we may soon see a small reduction in the five-year fixed rates offered by the most competitively priced lenders.
The Bank of Canada (BoC) held its policy rate steady last week as expected.
The Bank’s latest policy statement was accompanied by BoC Governor Macklem’s press conference and the release of its latest quarterly Monetary Policy Report (MPR), which offered a detailed assessment of current economic conditions both at home and abroad.
If you’re keeping an eye on mortgage rates, this is where the rubber meets the road.
Last week Statistics Canada confirmed that our economy added an estimated 231,000 new jobs in June, which was higher than the consensus forecast of 195,000.
In normal times that type of job growth would have sent Government of Canada (GoC) bond yields soaring as investors priced in rising inflation risks and future Bank of Canada (BoC) rate hikes, but this time around, bond-market investors met our latest employment headline with a shrug.
A quick look at the composition of last month’s job growth makes it clear why:
The ongoing debate about where rates are headed centres on inflation, and more specifically, on whether its current run-up will prove transitory or longer lasting.
The answer will be determined in large part by the path of labour costs because they represent the largest expense for most businesses. And as I will show, the US employment data might well have more impact on Canadian mortgage rates than our own.
Let’s start with a quick recap of the significant ways the US economy impacts ours.
Last week was a slow one on the mortgage news front, so this post will be shorter than normal.
The key question on everyone’s mind was how financial markets would react to the US Federal Reserve’s slightly more hawkish tilt. Spoiler alert: Not much.
If you’re keeping an eye on mortgage rates, it should be noted that the five-year Government of Canada (GoC) bond yield that our five-year fixed mortgage rates are priced on is now back to 1.00%, which is about the level where our lenders last chose to raise. This yield will need to continue moving higher before they start announcing another round of increases, but in the meantime, a 20-basis-point rise over the last two weeks is a noteworthy development (see chart).
The US Federal Reserve held its policy rate steady last week. But its latest dot-plot chart, which summarizes each individual Fed official’s forecast of where its policy rate is headed, now indicates that its members expect an average of two 0.25% hikes by the end of 2023.
That was a noteworthy change because up until now, this key chart wasn’t projecting another increase until 2024.
The market’s reaction was as expected. US bond yields surged higher and Canadian bond yields, which usually move in near lockstep with their US equivalents, were taken along for the ride.
The Bank of Canada (BoC) held a steady course at its meeting last week, as expected.
While there weren’t any major shifts in its outlook, the Bank’s latest policy statement did contain a few noteworthy items for anyone keeping an eye on Canadian mortgage rates.
Before I get to those, let’s do a quick recap of the events that led up to last week.
Last week we received the latest US and Canadian employment reports, for May, and once again, both fell short of expectations.
If you’re wondering how these results might impact Canadian mortgage rates, I continue to expect that the US employment data will matter more than the Canadian data over the near term.
That’s because the Bank of Canada (BoC) will be unlikely to hike its policy rate ahead of the US Federal Reserve (as I explained in this recent post).
Long story short, if the BoC moves first, it will push the Loonie higher against the Greenback and significantly inhibit the export-led recovery that the Bank is counting on. Also, the US economy is farther along in its reopening phase, so developments south of the border offer insight into how our economy will likely respond when our lockdowns finally abate.
If that happens, our mortgage rates will rise above today’s levels, and anyone who locks in a fixed-rate term now will likely come out ahead.
That said, a (growing) minority of market participants, which includes our central banks, continues to argue that our current inflation run-up will prove transitory, and that fears about sustainably higher inflation are overblown.
If they are proven right, today’s variable rates will likely end up being cheaper than their fixed-rate alternatives.
Update on Increase to the Mortgage Stress-Test Rate
Last week our federal Department of Finance confirmed that the stress-test rate used to qualify all default-insured mortgages will also increase to 5.25% on June 1.
This change will reduce every borrower’s maximum mortgage amount by just under 5%.
I’ll be back with my usual more comprehensive update next Monday but in the meantime, here are links to some of my most popular recent posts.
The inflation bogeyman has arrived.
Last week we learned that the US Consumer Price Index (CPI) spiked to 4.2% in April, coming in well above the consensus forecast of 3.6% and marking its highest reading since September 2008.
US core inflation, which strips out the more volatile CPI inputs like food and energy, surged to 3.0% in April. That result also far surpassed the consensus forecast of 2.3% and was the highest result since January 1996.
Last week’s employment data came in worse than expected on both sides of the 49th parallel, casting doubt on the market consensus narrative that labour costs, and, by association, overall inflation, will rise more quickly than both the Bank of Canada (BoC) and the US Federal Reserve are forecasting.
The Canadian economy shed 207,000 jobs last month.
Losses were expected after the reintroduction of lockdowns across the country, but the total came in higher than the consensus forecast of 175,000. Our economy has thus far shown surprising resilience coming out of lockdowns, but the more of them we have and the longer they last, the greater the odds that more permanent economic scarring will occur.
The US headline was the bigger story.
In its most recent policy statement, the Bank of Canada (BoC) moved up the timing of its next policy-rate increase to “sometime in the second half of 2022”, and the consensus wasted no time in warning variable-rate mortgage borrowers to lock in.
In last week’s post, I offered a different take.
I argued that our rates will likely stay lower for longer, and that the BoC’s statement was primarily designed to help cool our red-hot housing markets. I noted that the Bank left itself plenty of wiggle room by repeatedly emphasizing uncertainty throughout its forecast and by making clear that its ultimate timing would be outcome based, not calendar based. I also predicted that the BoC would not raise ahead of the US Federal Reserve and reminded readers that the Fed was not projecting its next rate hike until 2024.
In this week’s post, I’ll offer more detail on why I think the BoC will lag the Fed, and then provide an update on what the Fed said last Wednesday at its latest policy-rate meeting.
The Bank of Canada (BoC) and the bond market have been in a fight about where inflation and interest rates are headed.
Until last week, the Bank predicted that neither would rise sustainably for years to come. BoC Governor Macklem told us to prepare for a “tough slog” and warned that it would be a “long climb back” to full recovery. Against that backdrop, last November, he said that “Canadians can be confident that borrowing costs are going to remain very low for a long time”.
Bond-market investors disagreed.