Will Mortgage Rates Head Higher in 2015?August 4, 2015
Why I’m Not Buying the Consensus View That the U.S. Federal Reserve Will Raise Its Policy Rate in SeptemberAugust 17, 2015
The U.S. nonfarm payroll report showed that the U.S. economy added 215,000 new jobs overall in July. The prior May and June nonfarm payroll estimates were also revised upwards by another 14,000 jobs. Digging a little deeper into the details, the U.S. economy added 536,000 new full-time jobs last month, with that number being partially offset with a big drop in part-time employment. Average hours worked rose by an impressive 0.5%.
Despite this continued strength in U.S. employment momentum, which lends support to the belief that a rate rise is imminent, there was still plenty of debate about how the report might influence the U.S. Fed’s decision to raise its policy rate for the first time in almost a decade when it meets in September.
That’s because average hourly wages only rose by 0.2% for the month, and they have only risen by about 2% over the most recent twelve months. That is an important statistic and it is not showing strength.
Some market watchers continue to believe that the slow rise in average U.S. wages combined with the complete lack of overall U.S. price inflation thus far in 2015, as measured by the Consumer Price Index, gives the Fed more time to be patient. Furthermore, a look at broader employment growth trends shows that the U.S. economy added an average of 246,000 new jobs per month in 2014, as compared with an average of 211,000 new jobs per month in 2015. Thus, while overall U.S. job growth continues, it is losing some momentum, and the Fed may be concerned that a rate rise could exacerbate that deceleration.
North of the border, the latest Canadian employment data showed that our economy added 6,600 new jobs in July, which was a little higher than the 5,000 new jobs that the consensus had been expecting. Despite this upside surprise, both numbers are low and the details in the report took some of the lustre off of that headline number.
We lost 17,300 full-time positions last month, and added 23,900 new part-time positions as on offset. Meanwhile, our private sector shrank by 28,000 jobs during the month, while the self-employed share of our workforce grew by 40,000. (As a reminder, growth in the self-employed category of workers is often taken with a grain of salt because it may include employees in the midst of a job transition who prefer to be counted as self-employed, rather than as unemployed.) Average hours worked also decreased by 0.4%.
Before we throw too much dirt on our latest employment data, we should add that full-time employment had grown by almost 150,000 over the prior three months, while part-time employment had plunged by more than 100,000 jobs over the same period. Given that, the latest month may just be the normalization of some monthly data noise in both categories. Also, average wages have grown by 3.4% on a year-over-year basis, so the purchasing power of the average Canadian worker has been expanding nicely of late (in contrast to the US situation).
Even more encouragingly for the Canadian economy, the weaker Loonie appears to have finally fueled an uptick in our export demand. We saw a 6.3% increase in export sales last month, and while we shouldn’t make too much of one month’s data point, this surge in export demand is an encouraging signal for our policy makers, the very one that they have been looking for.
The Bank of Canada has long said that any sustainable Canadian economic recovery will need to be underpinned by rising export demand that fuels increased business investment in productivity enhancements and capacity expansion. This hoped-for development has been slow to materialize, however, because many of our exporters were wiped out by the combined impact of the Great Recession and the sharp rise in the value of the Loonie that followed. As such, large swaths of our export sector have to be reinvented before our economy can take full advantage of our more competitive exchange rate with our largest trading partner. Last month’s export data may be an early and tentative sign that the benefits of that reinvention process may finally be starting to accrue.
Five-year Government of Canada bond yields rose one basis point last week, holding firm at 0.78% when markets closed on Friday. Five-year fixed-rate mortgages are offered in the 2.49% to 2.59% range and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the size of your mortgage and the terms and conditions that are important to you.
The Bottom Line: The latest U.S. employment data showed strong overall job growth, but some slowing in momentum. The consensus believes that the latest jobs report lends support to a Fed rate rise in September, but I think the slow rate of U.S. wage growth combined with no inflation in average U.S. prices so far in 2015 will stay the Fed’s hand for longer. Meanwhile, the latest Canadian employment data were less encouraging, showing a shift in momentum away from full-time work toward more part-time work, but that trend was offset by rising wages and signs of renewed export growth. While both the Canadian and U.S. employment reports had some encouraging signs, I think it will take more follow through, and time, before this momentum translates into higher fixed and variable rates for Canadian mortgage borrowers.