The Least Discussed Risk to Canadian Mortgage Rates in 2018January 29, 2018
Why the Bank of Canada Will Be Cautious in 2018 (And It Isn’t Just Because of the January Employment Data)February 12, 2018
Bond-market bears have been looking for signs that U.S. inflationary pressures are building and the latest employment data fuelled speculation that U.S. labour costs may finally be breaking out.
The five-year Government of Canada (GoC) bond yield rose in sympathy with its U.S. counterpart and if that upward momentum carries over into this week, we will see another round of increases to our five-year fixed mortgage rates.
Here are the highlights from the latest U.S. employment data that got the market’s attention:
- The U.S. economy added an estimated 200,000 new jobs in January, and that exceeded the consensus forecast of 180,000 for the month.
- Average U.S. hourly earnings increased by 0.3% in January and the initial estimate of a 0.3% increase in December was revised upwards to 0.4%. Average hourly earnings have now risen by 2.9% on a year-over-year basis and that marks the best increase for this measure in more than eight years.
- The overall U.S. unemployment rate held steady at 4.1% (which marks a 17-year low).
The lack of meaningful growth in the average U.S. wage (until recently) has confounded market watchers because the U.S. economy seems to have had drum-tight labour-market conditions for some time now. It has been puzzling that wages have barely outpaced overall inflation under those conditions.
There are many market watchers who believe that the recent rise in average wages is a sign that labour costs may now finally be headed materially higher. Many are now speculating that the Fed will be forced to hike rates more quickly than expected. The Fed is forecasting that it will raise its policy rate three times in 2018 but the consensus forecast is now leaning towards four hikes in the coming year.
With that said, the contrarian in me can’t resist pointing out there were some important details in the latest U.S. employment report that suggest bond-market investors may have over-reacted:
- The average work week declined from 34.5 hours to 34.3 hours. That may not sound like much but economist David Rosenberg estimates that this drop in the work week is equivalent to a loss of 727,000 jobs for the U.S. economy, and it caused a 0.2% decline in the total U.S. hourly wage income earned for the month. This negative data point therefore dwarfs the impacts that the newly created jobs and the improvement in average hourly wages had on the U.S. economy last month.
- The previous headline estimates for U.S. job growth in November and December were revised down by 24,000 jobs.
- The U6 unemployment rate, which is a broader measure of unemployment that captures working-age Americans who are not actively looking for a job, increased from 8.1% to 8.2% and has now risen to a four-month high.
- While average hourly earnings increased impressively year over year, hourly earnings for non-supervisory workers (who comprise about 80% of all hourly workers), held steady at 2.4% last month. In other words, the majority of U.S. workers who are paid hourly didn’t actually see their income growth rate accelerate in January.
Bond-market investors have been making do with ultra-low yields for the past decade and that makes them hyper-sensitive to any signs that rising inflationary pressures will eat away at their meagre returns.
Against that backdrop, it is understandable that they will tend to shoot first and ask questions later when new data are released – but it will be interesting to see if this week the ‘asking questions’ part of that approach causes a reversal in last Friday’s bond-yield run up.
As is often the case, the simple conclusions drawn from the headline, and from the market’s initial knee-jerk reaction, don’t fully hold up under more rigorous analysis.
The Bottom Line: Last week’s U.S. employment report has fuelled a rise in bond yields that may cause our fixed mortgage rates to rise over the very near term, but that doesn’t change my overall view that longer-term forces will still conspire to keep them lower for longer than the consensus expects.