David Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
Monthly employment reports should be closely monitored by anyone keeping an eye
on mortgage rates because they provide a wealth of specific information about an
economy’s momentum.
We learn whether average incomes are rising or falling (which ties into many
other parts of the economy such as the cost of labour and consumer spending
rates). We learn where jobs are being created and lost (this tells us which
sectors and industries are strengthening and which are weakening). We learn
whether people are working more or less (which helps us gauge whether our
economy is gaining or losing momentum – expressed as the change in our GDP
output). We also learn, on an overall basis, what percentage of our total
available labour force is currently employed (this tells us how much more room
our economy has to grow before it reaches full capacity - a key threshold in our
economic cycle beyond which adding incremental production becomes more expensive
and as such, can lead to significantly higher rates of inflation).
In today’s environment, both the U.S. and Canadian employment reports have
taken on even more significance. U.S. Fed Chairman Ben Bernanke has made it
clear that the Fed’s monetary policy will be geared toward promoting employment
growth, even at the expense of above-target inflation for an extended period.
Meanwhile, Bank of Canada (BoC) Governor Mark Carney has predicted that Canadian
interest rates will rise faster than most are expecting in large part because he
believes that the Canadian economy will return to full capacity more quickly
than the consensus is forecasting.
On Friday of last week we received the latest Canadian and U.S. employment
reports for September and given their elevated importance, today’s Update will
take a look at both in detail.
The U.S. Employment
Report
The latest U.S. employment data was weaker than expected, although some
optimists argue that the numbers show a positive trend when compared to
employment growth in the early summer. (In my view the optimists are reaching
for a pretty thin silver lining here because the data still barely clears
today’s ultra-low bar of expectations for U.S .employment.)
Here were the highlights from the report:
(Side note: David Rosenberg recently pointed out that only about half of
the eight million U.S. jobs that have been lost since the start of the Great
Recession have been recovered, despite rampant and unsustainable levels of
government stimulus. He also offered a surprising statistic: there are now more
Americans enrolling in the federal food stamp program each month than there are
new jobs being created).
The Canadian Employment
Report
The latest Canadian employment report came in much higher than expected. But
while the overall Canadian employment picture is far rosier than the one south
of the 49th parallel, the details in our September employment data
still showed some areas of concern.
First, the positives:
(Side note: By comparison, if we use the same methodology that the U.S.
uses to calculate its unemployment rate of 7.8%, ours would be 5.8%.)
Now you’re probably wondering: If we have record employment levels, if most
of our new jobs are full-time and in the private sector, and if our incomes are
outpacing our rate of inflation, what’s not to like?
Consider the following:
Five-year Government of Canada (GoC) bond yields drifted lower through most
of last week before surging higher after our latest employment report was
released. When the dust settled the GoC five-year yield finished the week 3
basis points higher, closing at 1.33
to yesterday with the five-year yield rising another 4 basis points to close at
1.37%. But despite this continued volatility, the GoC five-year continues to
fluctuate in a fairly tight range between 1.25% to 1.50%. Five-year
fixed-mortgage rates can still be found in the 3.00% range and a few lenders
dropped their shorter-term fixed rates last week, bringing them more in line
with the market.
Variable rate discounts can be found in the prime minus 0.40% range (which
translates to 2.60% using today’s prime rate) and that is tweaking the curiosity
of borrowers who are looking to take advantage of the savings offered at the
short-end of the yield curve. To that group of borrowers I still suggest that a
one-year fixed rate may prove a better bet. Consider that my best one-year fixed
rate (2.49%) is currently lower than my best five-year variable rate (2.60%) and
that BoC Governor Mark Carney has made it very clear that he has no intention of
lowering the BoC’s overnight rate (on which variable mortgage rates are based)
any time soon.
The bottom line: The latest U.S. jobs report basically confirmed
that U.S. employment remains “stuck in the mud” (to use U.S. Fed Chairman Ben
Bernanke’s words). While the Canadian employment picture is more encouraging by
comparison, there is still plenty of slack in our economy and we’re a long way
from reaching full capacity. On balance then, these reports did not alter my
long-standing view that GoC bond yields (and our fixed-mortgage rates by
association), should remain at ultra-low levels for the foreseeable future.
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 (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave