Did the Bond Market Over-React To the Latest Canadian Employment Data?

The latest Canadian employment report sure got the market’s attention last Friday.

It showed that our economy added a whopping 40,600 new jobs last month, which was well above the 10,000 new jobs that the consensus had been expecting. The five-year Government of Canada (GoC) bond yield, which our five-year fixed mortgage rates are priced on, shot up nearly 10 percent after the report was released.

While there were some encouraging developments in our March employment report, the underlying data are notoriously volatile and are regularly revised in subsequent months. David Parkinson at the Globe and Mail noted Stats Can’s claim that its initial March estimate is deemed accurate to within 29,800 jobs two-thirds of the time. In particular, the 18,900 rise in net new jobs in Alberta last month seems ripe for revision, to the point where I am wondering whether someone added instead of subtracted when tallying that province’s result.

Here are the highlights from our latest report:

• The Canadian economy added 40,600 new jobs in March, but this is after we lost 5,700 jobs in January and 2,300 jobs in February. Looking at the first quarter as a whole, we averaged a little more than 10,000 jobs/month, which is almost bang on our six- and twelve-month averages.
• Our overall unemployment rate dropped from 7.3% in February to 7.1% in March. While that is an impressive monthly improvement, February marked a three-year high in the unemployment rate, so the March rebound was off of a particularly weak result the prior month.
• Full-time employment increased by 35,300 new jobs, but that increase did not recover the 51,800 jobs that the full-time sector lost in February.
• The most concerning detail in the March report was the 31,800 manufacturing jobs that were lost last month, marking our biggest drop for this sector since the end of the Great Recession almost seven years ago. Research shows that, on average, each of these jobs leads to the creation of 2.7 other jobs throughout our broader economy, and Bank of Canada (BoC) Governor Poloz has repeatedly said that a healthy manufacturing sector is critical in any and all of the Bank’s sustainable-recovery scenarios for our economy. We had seen encouraging signs that the cheaper Loonie was finally fuelling an export-led rebound in manufacturing of late, but this drop now calls that momentum into question.
• The most encouraging detail in the March report was that average wages increased by 0.3% last month, adding to the 0.5% increase we saw in February. Our average wages have now grown by 3.3% on a year-over-year basis, which easily outpaces our inflation rate of 1.4% over the same period as measured by our Consumer Price Index. This means that the purchasing power of the average Canadian wage earner is expanding, and that there is room for an increase in consumer spending fuelled by higher earnings instead of by a continued rise in our household borrowing rates.

The initial market reaction to our latest employment report was quite bullish but I think that enthusiasm will be tempered after a more detailed look at the data for the reasons outlined above (and the March report seems particularly ripe for revision, especially with the jump in Alberta employment).

Five-year GoC bond yields rose by two basis points last week, closing at 0.72% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.59% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at rates as low as 2.69%.

Five-year variable-rate mortgages are available in the prime minus 0.30% to prime minus 0.40% range, which translates into rates of 2.30% to 2.40% using today’s prime rate of 2.70%.

The Bottom Line: I don’t think that Friday’s surge in the five-year GoC bond yield will be sustained or that the BoC is likely to alter its monetary-policy approach in response to the March employment data. As such, despite the market’s initial response, I don’t expect our March employment data to have a material impact on either fixed or variable mortgage rates going forward.