Why Markets Aren’t Likely To Overreact To the Latest U.S. Employment Data

We received the U.S. employment data for March last week, and while the headline number beat consensus expectations, the details in the data were mixed.

Today’s post will provide the highlights, and will also explain why comments made by U.S. Federal Reserve Chair Yellen last week should help temper the market’s reaction.

March U.S. Non-Farm Payroll Report Highlights

• The U.S. economy added a total of 215,000 net new jobs last month, which was a little above the 205,000 jobs that the consensus had expected.
• Average wages grew by 0.3%, recovering the 0.2% drop that we saw in February. Average wages have now increased by 2.3% on a year-over-year basis, which is encouraging, although it is believed that Fed Chair Yellen would like to see this number in the 3% to 4% range before considering average wage growth “healthy” in relation to current U.S. inflation trends.
• On a related note, the U.S. participation rate, which measures the percentage of working-age Americans who are either employed or are actively looking for work, rose from 62.9% in February to 63% in March, marking its highest level in two years. This caused the unemployment rate to increase from 4.9% to 5%, but only because disaffected workers came off the sidelines and are now counted among those who are actively looking for work (which is an encouraging trend for the labour market). The U.S. labour force has now increased by two million workers over the past five months. This expansion should help keep labour costs in check over the near term.
• The U.S. manufacturing sector continued to struggle, losing another 29,000 jobs in March, which marks this sector’s biggest drop since 2009. The average manufacturing workweek also shrunk, from 40.7 hours to 40.6 hours. While this may sound like a small change, economist David Rosenberg estimates that this drop is equivalent to another 30,000 manufacturing jobs lost. This sector’s ongoing struggles are primarily attributed to the surging U.S. dollar and it is hoped that the Greenback’s recent softening will help in that regard.

While Fed Chair Yellen was most likely encouraged by the latest employment data, I don’t think they will alter her current wait-and-see monetary-policy approach. She offered surprisingly dovish commentary about the expected path of U.S. monetary policy last Tuesday when she spoke at the Economic Club of New York, saying that the Fed would “proceed cautiously”, and that “global economic and financial developments since December” had made the Fed’s expected pace for future policy-rate increases “somewhat slower” as result. Not surprisingly, the U.S. dollar sold off after her speech, and markets are now pricing in odds for only one Fed rate hike this year, and even then, without much conviction.

Five-year Government of Canada (GoC) bond yields fell by three basis points last week, closing at 0.70% 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 2.40% to 2.30% using today’s prime rate of 2.70%.

The Bottom Line: The latest U.S. non-farm payroll data confirmed that U.S. labour market continues to heal, but only at a gradual pace that is not likely to compel the Fed to alter its cautious monetary-policy approach in the near future. This means that our fixed mortgage rates, which are priced on GoC bond yields that move in lockstep to their U.S. treasury equivalents, aren’t likely to be pushed higher by a material shift in Fed policy any time soon. Meanwhile, the Bank of Canada is likely to lag the Fed’s eventual policy-rate increases, perhaps by a significant margin, so variable-rate borrowers aren’t likely to be impacted until well after the Fed’s next rate rise.