March Employment Numbers Push CDN Bond Yields Down But U.S. Stagflation Threat Rising (Monday Interest Rate Update)

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

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The latest Canadian and U.S. employment reports were released last Friday and
the data in both came in well below expectations.  

U.S. and Canadian employment data should always be counted among the most
important economic indicators for anyone keeping an eye on where Canadian
mortgage rates are headed. In normal times, this is primarily because rising
labour costs have an 80%+ correlation with rising inflation which then leads to
higher mortgage rates. But in today’s world, the employment data in both
countries take on an even greater significance. Here’s why:

  • The U.S. Federal Reserve has stated that it will continue its current
    quantitative easing programs until U.S. unemployment reaches 6.50%, provided
    that U.S. inflation does not exceed 2.50%. (This unconventional and
    unprecedented level of monetary stimulus adds $85 billion to the U.S. Fed’s
    already bloated balance sheet each month.)
  • Canadian Federal Finance Minister Jim Flaherty has said that the Bank of
    Canada’s near-term monetary-policy objectives should also be focused primarily
    on job growth. He introduced the term “flexible-inflation targeting” when
    explaining that short-term interest rates should be allowed to remain at
    ultra-low levels, even if that means letting the Consumer Price Index (CPI)
    temporarily rise beyond its 1% to 3% target range over the short term. Our
    recent inflation data don’t indicate that we will exceed this target any time
    soon, but Mr. Flaherty’s comments on the subject confirm that Canada’s near-term
    monetary-policy objectives are also focused on employment growth above all

Now that we have reaffirmed the importance of the employment data in both
Canada and the U.S., let’s take a closer look at what was in the latest reports
and draw out some of the implications:

The March U.S. Nonfarm Payroll

The U.S. economy added only 88,000 new jobs in March. To put that number in
perspective, the U.S. economy needs to create 150,000 new jobs each month just
to keep pace with its population growth and it needs to average 200,000+ new
jobs per month over an extended period to reach the U.S. Federal Reserve’s goal
of 6.50% unemployment – at least in the way that was intended.

I say that because the U.S. unemployment rate actually fell from 7.70% to
7.60% in March, technically bringing the U.S. Fed closer to its 6.50% goal. But
that was because the U.S. participation rate (which measures the number of
Americans who are either employed or are actively looking for work) fell from
63.5% to 63.3%. This drop was the result of 496,000 more Americans disengaging
from the labour market in March, bringing the U.S. participation rate down to
its lowest level in thirty years.

So what are the 90 million Americans who have withdrawn from the U.S. labour
force doing? Many have borrowed to go back to school to upgrade their skills,
which the U.S. government is actively encouraging, and in theory at least, for
good reason.

Most readers will be surprised to learn that many U.S. companies are
complaining that there aren’t enough skilled workers to fill their job openings.
In fact, U.S. job openings have risen to their highest level since the start of
the Great Recession and over the past twelve months, the U.S. economy has seen
six new job openings for each newly filled position. This has the makings of the
perfect storm – a shortage of skilled workers that drives up the cost of labour
(triggering “cost-push inflation”) combined with a record number of
under-qualified, unemployed Americans who exert a heavy drag on the U.S.’s
overall economic momentum. This high inflation, low growth scenario is called
stagflation – and it is one the U.S. federal government wants to avoid at all

To combat this developing trend, the U.S. government has facilitated a huge
increase in student lending. Overall U.S. student debt now hits new record highs
on a monthly basis and unfortunately has record default levels to match. This is
the next U.S. credit bubble still in the making, a by-product of excess
liquidity and of the federal government’s desire to implement policies that
should theoretically address the rising threat of stagflation. But as with many
(most) government policies that are implemented on such a massive scale, the
original intent is being lost in a wave of misallocation, over borrowing and
outright abuse.

If out-of-work Americans were being trained to fill the same highly skilled
positions that today sit vacant at many U.S. companies, aggressive student-loan
lending would be justified. But the mostly young Americans who are borrowing to
fund their expensive educations will leave school saddled with record debt
levels and enter a labour market that pays relatively little for the skills that
most of them can offer. For example, the U.S. education system is still
graduating too many marketing specialists and not enough engineers. If that
skills gap remains, all that record student lending will do is create more
economically vulnerable Americans who are ill-prepared for more tough times

Most of these same young and already over-indebted Americans are in the heart
of today’s first-time home-buyers cohort and that’s why I remain skeptical about
claims that the U.S. economic recovery is now on a more stable footing. Any such
theory seems to be based in large part on the belief that the U.S. housing
market is in full recovery mode, but the rebound in U.S. house prices has been
primarily fueled by investors who are taking advantage of unmet demand for
rental properties. Those renters are the same would be first-time buyers who
remain noticeably absent from the housing rebound. Until they enter the housing
market, we won’t see the kind of organic housing demand that a healthy economic
recovery requires to sustain itself over the long term. And that won’t happen
until young Americans enjoy far brighter job prospects than they do today.

Canada’s March Labour Force

The Canadian employment data have been confounding economists for some time
because our recent of record of robust job growth has not been supported by any
of our other major economic indicators. As I have written in past posts on this
subject, eventually either our economic growth has to pick up, or our rate of
job creation has to slow, or even contract. 

Our latest employment report confirmed the latter, indicating that our
economy lost 54,000 jobs in March.

The private sector was the hardest hit, shedding 85,400 jobs for the month
and marking the largest one-month decline since we started tracking these data
in 1976.  Of this number, the manufacturing sector lost another 24,200 jobs,
bringing its cumulative decline over the past three months to 71,400. Remember
that manufacturing jobs are especially important because they produce a powerful
multiplier effect that spreads throughout the broader economy. (This was
highlighted in a report by the Department of Finance last year which estimated
that each manufacturing job in the automotive industry produces 3.6 other jobs,
2.4 of which are in non-manufacturing sectors.)

On an overall basis, our economy has now lost a total of 26,000 jobs so far
this year. While that is discouraging, the employment picture in Canada is still
far healthier than in the U.S. We have long since recovered all of the jobs that
were lost since the start of the Great Recession, unlike in the U.S. where that
goal remains a long way off. When differences in the way our unemployment rates
are taken into account, Canadian unemployment levels are still significantly

That said, our economic momentum is still slowing and important questions
about the sustainability of our recovery remain.

While the federal government’s just released budget shows the kind of
restraint that debt-rating agency analysts will admire, is its austerity-light
theme appropriate for our current economic circumstances?

Although our federal government’s decisions not to engage in seemingly
reckless quantitative easing programs or the beggar-thy-neighbour currency wars
that are escalating beyond our borders are still prudent long-term policy
decisions, how will the export-led sectors of our economy cope in the

If businesses are reluctant to invest in the face of so much uncertainty and
if government spending initiatives designed to provide short-term economic
stimulus aren’t on the horizon, are we really pinning our hopes on the already
over-indebted Canadian consumer?

Lastly, In light of all of these troubling questions, how can the Bank of
Canada still maintain its tightening bias with a straight face?    

Five-year Government of Canada (GoC) bond yields fell seven basis points last
week and closed at 1.23% last Friday. Five-year fixed rates are offered at well
below 3% and ten-year fixed rates at well below 4%. The vast majority of
borrowers are still opting for five-year fixed-rate mortgages and as such,
should pay very special attention to the differences in the terms and conditions
offered by different lenders. For example, while fixed-rate competition between
lenders is spring-market tight, there are still huge differences in the way
lenders calculate fixed-rate
mortgage penalties
(Hint: Watch out for Canada’s Big Six banks who
exclusively use the “Discount Rate” and “Posted Rate” IRD penalty methods
described in my post link above.)

Five-year variable rates are offered in the prime minus .40% to .45% range
(which works out to 2.60% to 2.55% using today’s prime rate).  

The Bottom Line: The March employment data for both Canada and the
U.S. confirm that there is still only sputtering economic momentum in both
countries. The latest reports continued to stoke uncertainty about the future
and this further increased investor demand for safe-haven assets like GoC bonds.
This in turn drove GoC bond yields down again last week, to the benefit of
Canadian mortgage borrowers everywhere.

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 ( and on his own blog Email Dave

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