Why Aren’t Average Incomes Rising More Rapidly?

Monday Morning Interest Rate Update for August 21, 2017

by David Larock

toronto mortgage ratesCentral bankers must continually grapple with the disconnect between economic theory and practice.

They design intricate models that try to predict how today’s policy decisions will affect future economic outcomes, but there are myriad variables involved and things often do not rarely turn out as planned. (This has led to the quip: economists exist to make the weather forecasters look good.)

Today, our policy makers can’t fully explain why average incomes aren’t rising at a much faster rate. Over the past several years, both Canada and the U.S. have seen strong job creation coincide with average income growth of about 2% and that’s barely higher than our respective rates of inflation. For a point of reference, Fed Chair Yellen has said that in the current environment, average wage growth of 4% to 5% would be a sign that the U.S. labour market has turned the corner.

Classic economic theory says that strong job creation should lead to tighter labour market conditions as the demand for labour grows in relation to its supply. When labour becomes scarcer, employers should be compelled to increase compensation in order to attract new workers. Then, as the cost of labour rises, companies would be expected to increase prices to maintain their profit margins, thereby fuelling increased inflation across the broader economy.

Central bankers are charged with maintaining overall price stability and they don’t want to wait until this process plays out fully before raising rates. Labour costs are a key component in most forms of economic output. If they rise quickly, it will create higher-than-expected inflation that will then require more severe policy actions to rein it in.

That’s why their instinct is to tighten monetary policy pre-emptively.

True to form, when the Bank of Canada (BoC) and the U.S. Federal Reserve started their current rate-hike cycles, both cited strengthening labour-market conditions as key factors in their decisions. The BoC’s policy pivot came in a speech by Deputy Governor Carolyn Wilkens where she emphasized that it takes time for monetary-policy changes to impact economic momentum and that the Bank must “anticipate the road ahead”.

But what if central bank forecasts are wrong and incomes don’t start rising more quickly? Are there other factors influencing average incomes that central bank models have difficulty accounting for?

This is the key question for anyone keeping an eye on mortgage rates today because they should move in the same direction as average incomes over time, and at a similar speed. I have read many theories about why average wages aren’t rising as expected and a recent article, Wages vs. Jobs by Gary Shilling, offers particularly valuable insight. His observations focus on the U.S. labour market, but much of what he says also applies to Canada.

Here is a summary of Shilling’s key points with my comments included as well:

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Five Key Questions for Mortgage Borrowers to Focus On

Monday Morning Interest Rate Update for August 14, 2017

by David Larock

toronto mortgage ratesLast week was relatively quiet for mortgage-related news.

The latest U.S. inflation data (for July) showed that overall U.S. inflation increased by 0.1% on a year-over-year basis, which was less than the 0.2% rise the consensus had been expecting. Bluntly put, this latest report isn’t likely to change anyone’s pre-existing view of what the U.S. Federal Reserve might do next.

In today’s post I’ll reflect on some of the forces that will affect Canadian mortgage rates in future by highlighting five key questions that borrowers should be focused on as we look toward the fall market (in order of importance)

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

What Do Strong Job Growth and Weak Wage Growth Mean for Our Mortgage Rates?

Monday Morning Interest Rate Update for August 8, 2017

by David Larock

Last Friday we received the latest Canadian employment data and while the headline number came in a little lower than expected, the underlying details were encouraging.

Bluntly put, if you’re looking for mortgage-rate implications there is nothing in the latest data that would discourage the Bank of Canada (BoC) from increasing its policy rate by another 0.25% before the end of the year, which it is now widely expected to do. That said, there also weren’t any new indications that our average labour costs are increasing to a degree that would require the Bank to accelerate its rate-hike timetable further.

Here is a summary of the key details from the latest report:

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Canadian GDP Surges Higher in May. Will Mortgage Rates Follow?

Monday Morning Interest Rate Update for July 31, 2017

by David Larock

canada mortgage ratesThe Canadian economy continues to defy expectations.

Last Friday we learned that Canadian GDP grew by 0.6% in May, three times the consensus estimate of 0.2% for the month. It now looks as if our second-quarter growth rate will come close to matching the 3.7% rate we saw in the first quarter (which led the G7 countries).

Last month’s growth surge was broad based, with increases recorded in fourteen of the twenty sectors tracked by Statistics Canada.

The Bank of Canada (BoC) has expressed increased confidence in the strength of our economic recovery, and the latest GDP result bolsters that view. It also raises the odds that the BoC will increase its policy rate by at least another 0.25% before the end of this year, thereby eliminating the 0.50% in emergency rate cuts that the Bank made in 2015 as oil prices plummeted.

Interestingly, while Government of Canada (GoC) bond yields initially surged higher on the news, they actually closed lower by end of day on Friday. While that may seem counterintuitive, because bond yields should rise if investors expect higher interest rates in future, here are some of the factors that may have contributed to that outcome:

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Three Reasons Why I Think the Market Is Overestimating the Future Path For Canadian Mortgage Rates

Monday Morning Interest Rate Update for July 24, 2017

by David Larock

toronto mortgage ratesMarket watchers (and mortgage borrowers) are paying close attention to our economic data after the Bank of Canada (BoC) recently moved off the sidelines and raised its policy rate for the first time in more than seven years.

They are looking for signs that reinforce the view that the BoC will continue to raise rates – and suddenly every positive economic data point is being interpreted as further proof that more near-term rate hikes are inevitable.

If you pick up any newspaper today, you can read arguments in support of this view, so in today’s post I am going to put on my contrarian hat (it’s never too far from reach) and make the case that the consensus is now overestimating future path for Canadian mortgage rates.  

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Canadian Variable Mortgage Rates Rise for the First Time in Over Seven Years. What’s Next?

Monday Morning Interest Rate Update for July 17, 2017

by David Larock

canada mortgage ratesThe Bank of Canada (BoC) raised its overnight rate by 0.25% last Wednesday, as expected, and lenders wasted no time in increasing their prime rates, on which our variable-rate mortgages are priced, by the same amount.

The key question now is what happens next? Should we expect more increases by the BoC at their upcoming meetings? Or will the BoC adopt a more cautious wait-and-see approach? How will our economy, with its newfound momentum still far from assured, respond?

In today’s post we’ll look at the highlights from the latest BoC statement that accompanied its rate hike, and I also recommend a review of the Bank’s latest Monetary Policy Report (MPR), which gives us the BoC’s latest assessment of the current economic conditions at home and abroad, and offers forecasts on what lies ahead. If you’re trying to figure out what the BoC will do next, the MPR provides important clues.

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Rate Hikes Are Now a Virtual Certainty In Both Canada and the U.S. After the Release of the Latest Employment Data

Monday Morning Interest Rate Update for July 10, 2017

by David Larock

toronto mortgage ratesThe latest Canadian employment data handily beat consensus estimates once again, and the futures market is now assigning a 96% probability that the Bank of Canada (BoC) will raise its overnight rate by 0.25% when it meets this Wednesday.

Not to be outdone, the latest U.S. employment headline number also beat expectations and investors are now assigning 97% odds that the U.S. Federal Reserve will raise its policy rate by another 0.25% at its next meeting later this month.

Let’s start by taking a quick look at the latest employment report highlights for both countries:  

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Canadian Mortgage Rates Are Rising – Should Variable-Rate Borrowers Lock In?

Monday Morning Interest Rate Update for July 4, 2017

by David Larock

canada mortgage ratesLast week Bank of Canada (BoC) Governor Poloz eliminated any doubt about the BoC’s near-term plans. During an interview on CNBC he said that the two 0.25% overnight-rate cuts that the Bank made in 2015 in response to the oil-price shock have “done their job” and he expressed confidence that our economy’s “surprisingly” strong first-quarter growth rebound would continue.

The market’s reaction was swift.

The futures market raised the odds of a BoC rate rise at its July meeting to better than 50% and the Loonie soared against the Greenback, reaching a nine-month high. Government of Canada (GoC) bond yields surged higher and mortgage lenders wasted no time, quickly raising their fixed rates, which are priced on GoC bond yields, in response.

This marks a rare moment for many of our variable-rate borrowers because the BoC hasn’t raised its overnight rate in more than seven years, which means there are many among this group who have never experienced a rate rise (this is the part where the older generations shake their heads).

Suddenly these borrowers have just been told by the BoC that their rates are going to go up and at the same time, they are nervously eyeing fixed mortgage rates, otherwise known as their conversion parachutes, moving higher.

In today’s post, I’ll explain why the BoC is planning to raise its overnight rate soon, offer my take on the impacts that this will have on our economy, and most urgently, offer my two cents on whether variable-rate borrowers should now convert to a fixed-rate mortgage.

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

The Latest Inflation Data Give Us the Proof in the Bank of Canada’s Rhetorical Pudding

Monday Morning Interest Rate Update for June 26, 2017

by David Larock

toronto mortgage ratesBefore they were anointed modern-day superheros who could stave off economic downturns with their mighty printing presses, inflate asset bubbles with their ultra-low policy rates and help financial markets leap over bad economic data in a single bound with only a few calming words, central bankers had a simple (and rather boring) mandate: to promote economic stability by using their monetary-policy tools to keep inflation under control.

It is important to remember the Bank of Canada’s (BoC) official mandate in the current context because while the Bank recently adopted a more hawkish stance around the timing of future rate hikes, it still cannot ignore our inflation levels when determining the correct policy-rate path forward.

While investors initially reacted to the BoC’s more hawkish language by bidding up both Government of Canada (GoC) bond yields and the Loonie in anticipation of higher of rates to come, Statistic Canada’s release of our latest inflation data last week, for May, gives us the real proof in the Bank’s rhetorical pudding.

To measure our rate of inflation, the BoC now uses four different Consumer Price Index (CPI) gauges, and its stated goal is to keep each of them within a range of 1% to 3%, and ideally, trending toward its official target rate of 2%.

Perhaps somewhat disappointingly for the BoC, the latest inflation data continue to show benign, gradual price growth that isn’t calling for monetary-policy tightening any time soon. If the BoC were to raise rates against our current backdrop of low inflation, there is a risk that prices might stop rising altogether, and possibly even fall instead (and that phenomenon, known as deflation, is what really keeps central bankers up at night).

Let’s look at the May CPI data and briefly revisit what each of the BoC’s CPI inflation gauges is designed to measure:

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

The Bank of Canada May Test the Courage of Variable-Rate Borrowers Sooner Than Expected

Monday Morning Interest Rate Update for June 19, 2017

by David Larock

The Bank of Canada (BoC) took a surprisingly hawkish turn last week and Government of Canada (GoC) bond yields surged higher in response.

Last Monday, Senior Deputy Governor Carolyn Wilkins gave a speech in Winnipeg and offered the following insights into the Bank’s evolving policy-rate view:

  • The Deputy Governor reiterated the BoC’s belief that “the adjustment to lower oil prices is now largely behind us”. That statement is significant because the Bank’s last two policy-rate cuts, in 2015, were made in direct response to collapsing oil prices. If the BoC believes that our economy has completed the necessary adjustments to that oil-price shock, those emergency rate cuts may now be unwound.
  • The Bank wouldn’t raise its policy rate if it thought that the rest of the economy still needed emergency-level stimulus, and to that end, Deputy Governor Wilkens observed that there are “encouraging signs that growth is broadening across regions and sectors”. Our economy has grown by an average of 3.5% over the last three quarters and Ms. Wilkens noted that “70 per cent of industries have been expanding and the labour market continues to improve”, although, as I noted last week, more jobs have not led to more pay for the average Canadian worker thus far.
  • Deputy Governor Wilkins reiterated that the Bank’s main policy-rate objective is maintaining its target of “a 2 per cent inflation rate”, even at the expense of promoting growth. All of our inflation gauges remain well below the BoC’s target, but that statement gives added importance to this Friday’s release of the Consumer Price Index (CPI) inflation data.
  • Like every good economist, Deputy Governor Wilkens hedged a little by noting that “slack in our economy is still translating into below-target inflation” and that “risks to the outlook remain”. That said, she noted that “monetary policy must anticipate the road ahead” and her underlying message was that policy-rate hikes may now be approaching more quickly than previously expected.

The market’s reaction to the Deputy Governor’s speech was somewhat dramatic as both Government of Canada (GoC) bond yields and the Loonie increased sharply. The BoC has repeatedly cited its concern about the “competitiveness challenges” of the Loonie’s strength relative to a basket of other currencies, and its more hawkish policy-rate language has now exacerbated the impact of that challenge.

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

More Jobs Don’t Mean More Pay … for Now

Monday Morning Interest Rate Update for June 12, 2017

by David Larock

toronto mortgage ratesThe Canadian economy added an estimated 55,000 new jobs in May, which was more than three times the forecast of 15,000 new jobs that the consensus had been expecting.

This impressive job growth was an encouraging sign that the surge in our first-quarter GDP has stimulated momentum in our broader economy. Interestingly, and somewhat confoundingly, that momentum still hasn’t fueled any meaningful increase in our average wage growth – so while willing Canadians are working, they aren’t seeing an increase in their purchasing power.

Here are five key highlights from the latest Canadian employment data (for May):  

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Why the Latest U.S. Employment Report Disappointed and Why the Fed Is About To Raise Rates Anyway

Monday Morning Interest Rate Update for June 5, 2017

by David Larock

canada mortgage ratesThe U.S. economy added 138,000 new jobs in May, well below the consensus forecast of 184,000. More importantly, the May headline number came in well under the average of 160,0000 new jobs that were created over the prior six months.

This result bolsters the view that the U.S. labour market is losing momentum and much of the detailed data further support that assessment. Despite this, the U.S. Federal Reserve continues to prepare financial markets for another policy-rate increase in June, and the futures market is currently assigning a 94% probability that this will occur.

At first glance, this timing seems counter-intuitive for a Fed that has until now focused its monetary-policy muscle on helping to improve the health of the U.S. labour market. But I think the Fed’s upcoming decision will mark a change in approach and in today’s post, I explain why.

Let’s start by taking a quick look at the key details in the most recent U.S. non-farm payroll report (for May):

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

The Bank of Canada Warns … and Waits

Monday Morning Interest Rate Update for May 29, 2017

by David Larock

toronto mortgage ratesThe Bank of Canada (BoC) held its policy rate steady last week, as was universally expected, and it also issued a statement that outlined its current view of how both domestic and foreign forces are impacting our economic momentum.

The Bank knows that its words are carefully parsed, and in today’s post I’ll highlight the key phrases that it used in its latest statement and offer my take on the implications for our mortgage rates:

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Canadian Mortgage Rates Explained: Why a Smaller Down Payment Comes with a Lower Mortgage Rate

Monday Morning Interest Rate Update for May 23, 2017

by David Larock

canada mortgage ratesDid you know that home buyers who make down payments of less than 20% of their purchase price have access to lower mortgage rates than buyers who put down more than that?

This comes as a surprise to many borrowers. After all, doesn’t loan risk decrease as the down payment increases? Why should borrowers who have less skin in the game enjoy lower rates?

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Should You Choose a Fixed or Variable Mortgage Rate Today?

Monday Morning Interest Rate Update for May 15, 2017

by David Larock

toronto mortgage ratesIt’s time to take another look at a mortgage question that is as old as the hills: Should you go with a fixed or variable mortgage rate?

In today’s post I outline the key points for and against each option and offer my take on which one is likely to save you money over the next five years.

Three Reasons to Choose Today’s Five-Year Fixed Rate

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David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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