All About CMHC’s Mortgage-Insurance Premium ChangesMarch 3, 2014
Why I Don’t Agree With BMO’s Forecast That Fixed Rates Will Now Outperform Variable RatesMarch 17, 2014
First, a quick recap. If you’re keeping an eye on mortgage rates, the Canadian and U.S. employment data matter because employment rates affect the cost of labour, which is one of the most important determinants of inflation, and inflation, in turn, is one of the most significant determinants of mortgage rates.
If labour markets are tight, the cost of labour rises and it doesn’t usually take long before prices, and mortgage rates, follow. Conversely, if labour markets are loose and there is an abundant supply of unused labour, increases in wages are moderated and an economy should be able to grow for some time without pushing up costs and rates. Each new labour report helps us calibrate where we currently stand on this spectrum.
That said, despite the importance of the data, we should be careful not to overreact to any one report because the employment numbers bounce around a lot from month to month and there are often material revisions to the initial numbers in subsequent months. Better to pay attention to the longer term employment trends, which paint a more reliable picture of how the labour supply/demand balance might impact our future mortgage rates.
With that in mind, here are the highlights from the latest Canadian employment report:
- Our economy shed 7,000 jobs in February, which was a far cry from the 15,000 new jobs that the consensus was expecting.
- We have now averaged 3,400 new jobs per month over the most recent six months, and 7,900 new jobs per month over the most recent twelve months. To put that number is perspective, consider that both trends are well below the estimated 20,000 new jobs per month that we need on average just to keep pace with the natural increase in the size of our labour force.
If you’re searching for some silver linings in our latest data, consider that:
- All of the employment losses were in part-time work and in the public sector.
- We created 18,900 new full-time jobs to partially offset the loss of 25,900 part-time jobs, and we created 35,200 new private sector positions, which partly offset the 50,700 public sector jobs that were lost during the month.
- Average hours worked rose 0.4% over the month and while average hourly wages fell by 0.1%, this was expected after last month’s highly unusual 0.60% surge in average earnings.
Silver linings aside, on an overall basis our economy’s ability to generate an adequate number of healthy new jobs leaves much to be desired. The Bank of Canada (BoC) is still holding out hope that increased business investment will provide the spark that our labour market needs, but in the meantime we continue to chug along at just above stall speed.
From an interest-rate perspective, the latest employment data leaves the BoC stuck in the same basic position it has been in for some time. On the one hand, concern over our record levels of household debt should keep the Bank from lowering its overnight rate in order to tempt business investment capital off of the sidelines. On the other hand, the BoC isn’t in any hurry to raise rates and heighten uncertainty in an already cautious business climate – especially when our economy appears to have a surplus of available workers to ensure that labour costs pose little threat to inflation over the short and medium term.
Here are the highlights from the latest U.S. employment data:
- The U.S. economy added 179,000 jobs in February. This represented a healthy increase of over 129,000 new jobs that were added in January and was above the 150,000 new jobs that the consensus was expecting. The original January estimate was also revised upwards by an additional 25,000 jobs, and December was revised up a little too, from 75,000 to 84,000.
- The latest result was almost bang on the most recent six-month average of 177,000 new U.S. jobs per month but it was below the twelve-month average of 189,000. This indicates that the U.S. economy’s job creation machine is still slowing.
- That said, the employment data are highly susceptible to adverse weather conditions and last month the U.S. was particularly hard hit, with 600,000 Americans, among the nearly 7 million who were surveyed, saying that they couldn’t get to work because of the weather. Consider also the related statistic that 6.9 million employed Americans worked less than a full week in February, the highest total for that category since record keeping began in 1978.
- Not surprisingly, improving job conditions encouraged 264,000 Americans to come off the sidelines and to once again be counted as part of the U.S. labour force. This increased the U.S. participation rate, and somewhat counterintuitively, caused the unemployment rate to rise from 6.6% to 6.7%.
- The best news was that the average American’s hourly earnings have now risen by 2.2% over the last twelve months, above the U.S. inflation rate of 1.6% over the same period. This means that the purchasing power of the average American worker is increasing, providing a critical ingredient in the U.S. economic recovery, which depends on domestic consumption for about 70% of its total GDP.
Despite the so-so headline, when the latest U.S. employment data are adjusted for the adverse weather conditions, most of the experts I read think that they will reassure the Fed that its tapering timetable should continue apace. To that end, a little more than 50% of the investors who bet on the future direction of the Fed funds rate are now betting that the Fed will increase its policy rate in June of 2015. Time will tell.
Five-year Government of Canada (GoC) bond yields rose by eight basis points last week, closing at 1.71% on Friday. Borrowers who are putting down at least 20% on the purchase of a new home should be able to find a five-year fixed rate in the 3.09% range, and borrowers who are putting down less than 20% can now find five-year fixed rates a little lower (albeit with more limited terms and conditions and the added cost of high-ratio mortgage insurance).
Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%. As anticipated, the Mortgage Qualifying Rate (MQR) that is used by lenders to underwrite variable-rate applications dropped from 5.24% to 4.99% last Wednesday. This makes it a little easier to qualify for borrowers who are interested in variable-rate options.
The Bottom Line: The latest Canadian employment data confirm that our economy’s job creation machine is still sputtering along, while the latest U.S. employment data were more encouraging. It appeared for some time that Canadian mortgage rates would be held back by the weak U.S. recovery, but if current employment trends continue, U.S. rates might now rise well in advance of their Canadian equivalents.