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.
These are tumultuous times for both Canadian mortgage rates and real estate.
The Bank of Canada (BoC) is currently in a disagreement with the bond market about our current inflation prospects. The Bank predicts that the recent run-up will prove transitory, but bond-market investors don’t agree. They expect inflationary pressures to intensify and have driven bond yields higher in anticipation.
Variable mortgage rates, which are priced on the BoC’s policy rate, have remained nailed to the floor, while fixed mortgage rates, which are priced on Government of Canada (GoC) bond yields, have spiked higher by about 0.50%.
There is similar disagreement about soaring real estate prices.
Canadian residential real-estate prices have risen rapidly and broadly during the pandemic, and as prices have surged, so too have calls for our policy makers to step in.
Last week, the Office of the Superintendent of Financial Institutions (OSFI), our banking regulator, made its first move. As is customary, OSFI put out a request for input to “interested stakeholders” on a proposal that is scheduled to take effect on June 1, 2021.
Bluntly put, this consultation phase is a mere formality. OSFI is proposing a change in the same way that parents suggest that their young children brush their teeth before bed – one way or the other, it’s going to happen.
The Bank of Canada (BoC) is facing increased pressure to accelerate its rate-hike timetable to slow house-price appreciation and stave off housing bubble risks.
Its promise to keep rates at ultra-low levels for years to come has combined with the growing belief that house prices will rise forever to form a potent, intoxicating mix.
Buyers are also haunted by the warning that they must buy now or be priced out forever, and would-be sellers who hold on to their properties are quickly rewarded with more gains.
There are other COVID-related factors that are helping to push prices higher.
Last week was a slow one for mortgage-rate news, so today I offer a recap of three recent posts.
In them, I explain why fixed rates have been rising while variable rates have been falling, and I also provide background on the current battle between bond-market investors and central banks.
In last week’s post I explained that the bond market and the Bank of Canada (BoC) are currently in a fight about future inflation.
In one corner we have bond-market investors driving up Government of Canada (GoC) bond yields (and the fixed-mortgage rates that are priced on them) over fears of rising inflation. To wit, both the five-year GoC bond yield and average five-year fixed mortgage rates have surged about 0.50% higher over the past few weeks.
In the other corner, the BoC is predicting that the current inflation run-up will prove transitory, and it just doubled down on keeping its policy rate (which our inflation variable mortgage rates are priced on) at 0.25% until sometime in 2023.
Last Wednesday, the US Federal Reserve took its turn pushing back against the mainstream narrative.
The five-year Government of Canada (GoC) bond yield that our five-year fixed mortgage rates are priced on has moved steadily higher of late in response to the consensus belief that inflation has turned the corner and will now rise sustainably.
It increased from 0.40% to 1.04% over the past month, and, not surprisingly, five-year fixed mortgage rates have risen by almost the same amount.
Today’s consensus inflation narrative is underpinned by improving US vaccination rates, the approval of new massive US stimulus programs, and better-than-expected economic data on both sides of the border. These factors are fueling the belief that growth is about to take off, and that, by association, inflation, and rates, have bottomed.
In the lead-up to the latest Bank of Canada (BoC) meeting, which took place last Wednesday, mainstream economists predicted that the improving backdrop would force it to adopt more hawkish language. Specifically, they expected the Bank to hint that it would soon begin to taper its quantitative easing (QE) programs, and to move up the expected timing of its next policy-rate increase.
The BoC had other plans.
Five-year fixed mortgage rates have reversed course and risen by about 0.25% recently, while five-year variable mortgage rates have continued to inch lower.
The rather sudden widening of the gap between these two options makes now a good time to revisit the age-old fixed vs. variable question.
Let’s start with a quick look back at how we reached this point.
The inflation trade pretty much exploded last week.
Investors bet that we’re going to get more inflation than our policy makers expect, and they drove up bond yields in response.
The Government of Canada (GoC) five-year bond yield that our five-year fixed mortgage rates are priced on surged from 0.67% at the start of the week to 0.88% at Friday’s close (and it was at only 0.43% when February began). Lenders responded by raising their five-year fixed rates anywhere from 0.15% to 0.25% (so far).
This bond yield surge is a global phenomenon that is primarily underpinned by the belief that US inflation is about to sustainably rise (which I also wrote about in last week’s post). If that happens, the US will export its rising inflation through trade, and it will permeate the globe.