The US headline consumer price index (CPI) fell from 5.4% to 5.3%, but the personal consumption expenditures (CPE) index, which is the US Federal Reserve’s preferred inflation measure, rose from 4.2% to 4.3%, marking its highest level in thirty years.
In a speech last Wednesday, Fed Chair Powell continued to attribute the inflation spike to supply-chain disruptions, and he reiterated the Fed’s belief that these will prove transitory. But he also acknowledged that “it’s very difficult to say how big the effects will be in the meantime, or how long they will last”.
Bond-market investors have grown tired of waiting for inflationary pressures to ease. Spiking inflation has eroded their returns, and they are now driving bond yields higher to restore them.
That development forces our central bankers to walk an increasingly fine line.
Last week the US Federal Reserve indicated that it expects to begin tapering its massive quantitative easing (QE) programs soon. More surprisingly, the Fed also indicated that it expects to fully unwind its QE purchases by the middle of next year.
That is a faster tightening pace than financial markets had anticipated, and investors reacted in typical fashion – by shooting first and asking questions later.
Our Government of Canada (GoC) bond yields surged higher in response, and that may push up our fixed mortgage rates, which are priced on them, over the near term. The Fed also had some comments that will be of interest (pun intended) to variable-rate borrowers.
In today’s post I’ll summarize what the Fed said last week, point out some inconsistencies, and offer my take on how its updated guidance (and taper plans) may impact our mortgage rates going forward.
Last week Statistics Canada confirmed that our overall inflation rate, as measured by our Consumer Price Index (CPI), spiked to 4.1% in August.
Inflation is at the forefront of people’s minds these days, and it has caused many to predict that higher mortgage rates are on the way.
I continue to disagree with that assessment.
It is certainly possible that a stubborn inflation spike could push the Government of Canada (GoC) bond yields, which our fixed mortgage rates are priced on, higher over the near term. But even if that happened, I wouldn’t expect the run-up to last very long.
Here are ten thoughts to support my admittedly contrarian view.
The Bank of Canada (BoC) held its policy rate steady last Wednesday and, as expected, refrained from materially altering its forward guidance in deference to our current federal election.
Because the Bank effectively stood pat last week, in this week’s post I will offer my assessments of the mortgage-specific proposals being put forth by our three main political parties.
Let’s start with a summary of what each party has put forward, with the courtesy of Move Smartly’s editor Urmi Desai:
The Bank of Canada (BoC) will be in a tough spot when it meets this week.
Normally it would try to hold steady in the middle of a federal election so that its words and actions aren’t seen to be favouring one party over another. But normal left town when the pandemic arrived and hasn’t been seen since.
The BoC will have to acknowledge our latest GDP data, which confirmed that our economy is on shakier footing than it previously believed, and more broadly, that we face a tougher road ahead.
Last Friday US Federal Reserve Chairman Jerome Powell delivered his much-anticipated speech at the Jackson Hole symposium, an annual global conference for central bankers, finance ministers, academics, and prominent investors.
In the lead up, the market consensus predicted (again) that rising inflationary pressures would compel Powell to signal a more hawkish Fed shift, and US bond yields rose in anticipation.
Powell acknowledged that the recent run-up in US inflation had been more intense and persistent than expected, but he qualified that observation with a detailed review of why the Fed continues to believe those pressures will dissipate. He also recommitted the Fed to its slow-and-steady approach, and US bond yields fell immediately afterwards.
If you’re keeping an eye on Canadian mortgage rates, Powell’s commentary is worth a quick review.
Fixed-rate mortgages offer stability, but variable-rate mortgages come with lower starting rates and, in most cases, produce net saving over the full term.
When the spread between fixed and variable rates is narrow (or non-existent) most borrowers lean toward fixed rates, but when it widens out, as it has of late, variable-rate options become more tempting.
It’s easy to understand why.
In addition to offering an upfront saving, variable rates come with the option to convert to a fixed rate at any time (at no cost) and a penalty of only three months’ interest if you decide to refinance or sell before the end of your term.
History is also on the variable-rate borrower’s side.
The Bank of Canada (BoC) and the US Federal Reserve plan/hope to keep their quantitative easing (QE) taps open and their policy rates nailed to the floor until their respective economies have fully recovered from their pandemic shocks.
But inflation could be the fly in their ointment.
If it proves to be persistent, the BoC and the Fed may be forced to start tightening their monetary policies sooner than they would ideally prefer.
Labour represents the largest single cost for most businesses, and there are a lot of unfilled job openings in both countries right now. The mainstream media have relayed anecdotal feedback about employers who have had to increase pay and/or add incentives to lure back sidelined workers.
If labour shortages continue and employers are forced to continue increasing their pay offerings, inflationary pressures (and mortgage rates) are likely to sustainably rise. But that outcome is far from guaranteed, and both the Bank of Canada (BoC) and the US Federal Reserve have committed to maintaining their ultra-accommodative monetary policies until their respective labour markets have fully recovered to pre-pandemic levels.
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).