The U.S. Federal Reserve Stops Its Music But the Beat Goes OnNovember 3, 2014
Why Hasn’t Ultra-Loose Monetary Policy Caused Higher Inflation?November 17, 2014
Last week we learned that the Canadian economy added 43,000 new jobs In October, a far cry from the 5,000 drop that the consensus was expecting for the month. In today’s post we’ll take a look at the latest employment data and discuss the implications for Canadian mortgage rates.
Here are the highlights:
- Canada’s job-creation engine finally broke out of its pattern of adding jobs one month only to surrender those gains in the following month. Here is what the employment data looked like in the six months prior to the latest release: September (+74,000), August (-11,000), July (+42,000), June (-9,400), May (+25,800), April (-29,000). Is it any wonder that our forecasters expected a pullback in the October data?
- The private sector grew by 71,000 jobs in October, adding impressive momentum to the 124,000 new jobs it created in September, albeit after shedding 112,000 jobs in August. There is hope that the pickup in export demand that has been fueled by the cheaper Loonie has finally led to a cyclical rebound in business hiring. Self-employment increased by 26,000 jobs, and the public sector shrank by 54,000 jobs.
- The manufacturing sector added 33,200 new jobs last month. Research shows that, on average, each of these jobs leads to the creation of 2.7 other jobs throughout our broader economy. This pickup is a particularly welcome sign because overall manufacturing employment levels still hover near all-time lows.
- On a related note, the U.S economy expanded by 214,000 jobs in October, marking the ninth straight month that it has added at least 200,000 new jobs to its labour force. This is an encouraging sign for Canada because improving U.S. economic momentum and the cheaper Loonie are combining to raise demand for our exports south of the border.
We have just experienced the best two-month run of job creation since the start of the Great Recession. But before we start assuming that our economy has turned the corner and that mortgages rates will rise more quickly than we have been expecting, consider the following:
- Our economy has created an average of about 15,000 new jobs over the last twelve months, and that is still less than the estimated 20,000 new jobs per month that we need just to keep pace with our population growth.
- Our participation rate, which measures the percentage of working-age Canadians who are either employed or actively looking for work, still hovers at 66%, which is the lowest it has been since 2001.
- We still have elevated numbers of long-term unemployed workers and of Canadians who are working part time only because they cannot find full-time positions. Over the past year, part-time employment has grown by 3% while full-time employment has grown much more slowly at 0.6%.
- The natural resources sector shed 22,200 in October, which wasn’t a surprise given the overall drop in commodity prices, and oil in particular. This loss of momentum is concerning because investment in the oil patch has underpinned most of our employment gains for some time now. If Alberta’s job-creation engine stalls, we will need to see significant improvement in other sectors of our economy in order to take up that slack.
- Despite the impressive job-creation data, average employment earnings over the most recent twelve months have increased by only 1.9%, which is slightly below our rate of inflation. While wage growth is typically a lagging indicator, meaning that it is slower than other data to respond to broad-based improvements in our economy, it will be hard to sustain our overall employment momentum if the purchasing power of the average Canadian is shrinking.
- The Canadian economy’s performance has historically mirrored global economic momentum and there are signs of slowing in the euro zone, China and Japan (three of the world’s four largest economies). With global GDP growth slowing and commodity prices falling steadily, there are still powerful headwinds buffeting against any rise in business and consumer confidence levels.
Concerns aside, if the improvement in our job-creation momentum continues it will help our long-term unemployed and non-participating working-age Canadians reintegrate into the work force and will eventually lead to higher earnings for the average worker. Time will tell.
Five-year Government of Canada bond yields fell one basis point last week, closing at 1.53% on Friday. Five-year fixed-rate mortgages remain in the 2.79% to 2.89% range, and five-year fixed-rate pre-approvals are offered at 2.99%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.
The Bottom Line: I believe that the Bank of Canada (BoC) will remain cautious on the timing of its next interest-rate hike, despite the encouraging signs in our employment-growth momentum. While the latest jobs data have brought forward the market’s expectations of when the BoC might raise short-term rates, that day is still expected to be a long way off and there are many more challenges for our economy to overcome between now and then. Stay tuned.