Dave Larock in Monday Interest Rate Update, Mortgages and Finances
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Last week we received the latest Canadian and U.S. employment reports and both offered useful information for anyone keeping an eye on Canadian mortgage rates.
Here are my key takeaways from the Canadian employment data for April:
- Our economy lost a total of 19,700 jobs last month, although this was due to a huge decline in part-time jobs (66,500) which was partially offset by a nice pick-up in higher quality full-time jobs (46,000).
- The private sector added 24,200 new jobs, and interestingly, the self-employment sector shed 24,100 jobs over the same period. It is widely believed that the self-employed sector of our labour force contains a subset of would-be private sector workers who are actually unemployed but prefer to call themselves self-employed instead. Last month’s almost perfect correlation between gains in the private sector and losses in the self-employment sector appears to support this belief.
- Most of the job losses were in retail (20,500), which doesn’t come as a surprise after the announcement of some large retail store closings like Target and Future Shop and in the construction sector (28,400), which won’t give our policy makers too much cause for concern if it signals slowing momentum in our housing sector.
- Our manufacturing sector added 10,400 new jobs last month and this will be taken as an encouraging sign that the cheaper Loonie is helping our exporters gain more traction. Also, manufacturing-sector growth fuels job creation in other areas of the labour market, so this is a positive development for overall economic growth.
- Average hours worked rose by 0.3% and average hourly wages grew by 0.6% last month. So while our overall economy shed jobs in April, those Canadians who were still gainfully employed worked longer hours and enjoyed a nice bump in their earnings, which have now risen by 2.3% on a year-over-year basis. When we compare that growth to our inflation rate of 1.2% over the same period (as measured by the Consumer Price Index), we see an encouraging uptick in the purchasing power of the average Canadian worker.
While our headline job growth was negative last month, there were some small but encouraging signs in our latest employment data. That said, a broader look at our longer-term job growth trend shows that our economy has added a monthly average of only 2,600 new jobs over the most recent six months, and that was with a surprising expansion in Alberta’s workforce in April. As such, I would interpret the bright spots in the latest employment data as silver linings in the development of our still cloudy overall job-market.
Here are my key takeaways from the U.S. employment data for April:
- The U.S. economy added 223,000 new jobs last month.
- The U.S. unemployment rate fell to 5.4% in April, marking a seven-year low. Over the past several years, the unemployment rate has fallen because of Americans who have given up looking for work, and as such, are no longer counted as officially unemployed. But the April drop corresponded with 166,000 Americans re-entering the workforce, so last month’s decline in the unemployment rate was a sign of the U.S. economy’s improving health and was no longer the by-product of a technicality in the way disenfranchised workers are classified.
- U.S. employment growth in March was revised downwards from an initial estimate of 126,000 new jobs to 85,000, making March the weakest month for job growth since June 2012. Regardless, the strong and immediate rebound in U.S. job growth in April makes the March slowdown looks like a one-off, especially when you consider that the U.S. labour market has now added more than 200,000 new jobs in thirteen of the last fourteen months, making this the best period of employment growth the U.S. economy has seen over the last fifteen years. The March drop also coincided with colder than normal weather and a port strike on the U.S. west coast that had a surprisingly strong impact on U.S. GDP growth for that month.
- Average U.S. wages rose by three cents in April, and average earnings have now risen by 2.2% on a year-over-year basis. Average inflation has been 0.1% over that same period, so just as in Canada, the average American worker has seen a slow but steady expansion in their purchasing power.
- Interestingly, the U.S. personal savings rate rose to 5.3% in April and it remains above its longer-term trend line. This indicates that U.S. workers are pocketing their extra disposable income for a rainy day, at least for the time being. If they become more confident and decide to spend more of that extra money in future, that could provide a significant boost to U.S. economic momentum.
Today, the most interesting U.S. employment trend to watch is the decline in U.S. labour productivity.
In simple terms, productivity measures the amount of labour that an economy requires to produce outputs. When labour is cheap and widely available, hiring more workers is often more attractive to businesses than investing in machinery and equipment to improve productivity. In such an environment, labour productivity levels fall, as they have in the U.S. for some time, where U.S. productivity growth has averaged 2.5% since 1948 but only 1.1% since 2011. But if labour costs continue to rise, in addition to expanding the purchasing power of average consumers, it should also fuel an increase in business investment, because more expensive labour makes investing in productivity enhancements a relatively more attractive option. If these two trends converge, this should buoy U.S. GDP growth and might give the U.S. economy the momentum it needs to achieve its long-sought after ‘escape velocity’.
Let’s close by summarizing what all of this means for Canadian mortgage rates.
U.S. job growth momentum continues to improve but U.S. Fed Chair Yellen has said that the Fed will be cautious until it sees more wage-growth momentum, which basically remained at trend in the April data. As such, markets continue to believe that the Fed will not increase its policy rate until its September meeting, or later. Since the Bank of Canada is expected to lag the Fed on the timing of its next overnight rate increase, this implies that our variable mortgage rates are not likely to change for the foreseeable future.
On the flipside, however, history has shown that labour costs tend to lag the other economic data during recoveries, and the continued strength in U.S. job-market momentum is heightening fears about the risk of higher-than-expected inflation, especially with U.S. and Canadian bond yields at today’s microscopic levels. Not surprisingly, government bond yields in both countries have been trending higher of late, and if this continues, our fixed mortgage rates will rise soon.
Five-year Government of Canada (GoC) bond yields fell by three basis points last week, closing at 1.02% 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 terms and conditions that are important to you.
The Bottom Line: Although the latest U.S. and Canadian employment data were encouraging, neither should significantly alter the timing of the next short-term policy-rate increase in either country, and that means that our variable mortgage rates should remain at current levels for the time being. On the other hand, the contiuation of robust U.S. employment momentum, despite the brief pause in March that was caused by one-off factors, is causing investors to become increasingly concerned about the risk of higher inflation. That concern is pushing government bond yields higher in both countries and if this continues, I expect to see a rise in fixed rates soon. As such, anyone who is in the market for a five-year fixed rate is well advised to lock in a pre-approval now, just in case.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave
May 11, 2015
Mortgage |