Should You Choose a Fixed or Variable Mortgage Rate Today?
February 29, 2016Happy March Break
March 14, 2016
We received the latest U.S. employment data last Friday, and the headline showed that the U.S. economy added an estimated 242,000 new jobs in February. This was well above the 195,000 new jobs that the consensus was expecting, and futures markets responded by raising the odds that the Fed will hike its policy rate later this year. (The odds of the next U.S. Fed hike occurring this November were increased from 45% to 53% on Friday.)
As has so often been the case however, a more detailed look at the latest U.S. non-farm payroll report told a different story than the headline.
Here are the highlights:
- The U.S. economy added 242,000 new jobs in February and estimates from previous months were revised upwards by another 30,000 jobs as well.
- All of the gains came from the private sector, which added 245,000 new jobs during the month. The biggest gains were in retail (+55,000), food services (+40,000), health care (+38,000), and private educational services (+28,000).
- The biggest losses, to no one’s surprise, were in mining (-19,000), resources (-18,000), and manufacturing (-16,000).
- Surprisingly, the overall workweek shrank from an average of 36.6 hours worked in January to an average of 34.4 hours worked in February. That was a big drop and it takes this measure down to its lowest level in two years.
- Average hourly earnings fell by 0.1% over the month (down three cents), after surging by 0.5% in January (although that rise was triggered by one-time minimum wage increases in several states). Average U.S. wages have now risen by 2.2% on a year-over-year basis, but that average is down from 2.5% in January.
- Not surprisingly, given the reduction in average hours worked combined with the reduction in average hourly wages, average overall U.S. income fell by 0.7% in February, reversing almost all of the 0.8% gain in average incomes that we saw in January.
On balance, the latest U.S. non-farm payroll data had a little something for everyone. The U.S. rate hawks saw an impressive headline number and dismissed the weakness in the underlying data as a giveback after the January surge in average wages earned, average hours worked, and average incomes. Meanwhile, U.S. rate doves dismissed February’s strong headline growth because the underlying data showed little carry-through momentum from the prior month. In other words, I doubt that the February employment data changed any market watcher’s pre-existing view of the Fed’s policy-rate plans over the near term.
For my part, I think the Fed’s most recent rate forecast is still out of touch with reality. It predicts four policy-rate increases in 2016 while the markets are now betting that there will be one, and even then, only with 53% odds. I think It’s hard for the market to believe that the Fed can increase its policy rate repeatedly when the rest of the developed world’s central banks are cutting theirs, and when nearly one-third of the world’s sovereign bonds are trading at negative yields.
If the Fed did repeatedly raise its policy rate, the U.S. dollar would be expected to continue to surge higher, and the experts I read estimate that the soaring Greenback has already produced a tightening impact on the U.S. economy that is equivalent to a 1% increase in the Fed’s policy rate. Given that, I think any additional Fed policy rate increases are unlikely until the employment data show deeper and more consistent momentum.
As a reminder, the U.S. employment data matter to Canadian mortgage borrowers because our fixed mortgage rates are priced off of Government of Canada (GoC) bond yields, and these rose in sympathy with their U.S counterparts on Friday, continuing a well-established pattern. Our bond yields have moved almost in lockstep with their U.S. treasury equivalents since the start of the Great Recession and our bond market movements are now actually more highly correlated to U.S. economic news than to our own. While it is clear that our two economies have been headed down increasingly divergent paths of late, our bond yield movements haven’t yet accounted for that. Therefore, U.S. economic data releases will largely determine the direction of our bond yields, and by association, our fixed mortgage rates, for as long as that remains the case.
Five-year GoC bond yields rose by one basis point last week, closing at 0.69% 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 2.79%.
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: I think that Friday’s surge in five-year U.S. treasury yields will be short lived. While the February U.S. headline non-farm payroll number came in higher than expected, the underlying details were less convincing. As such, I don’t expect this latest employment report to have any material impact on our bond yields, nor by association, on our fixed mortgage rates.