A Review of Our Latest Employment Report with Implications for Canadian Mortgage Rates (Monday Interest Rate Update)

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

Editor's Note: Dave's Monday Morning Interest Rate Update appears
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Anyone keeping an eye on Canadian mortgage rates should pay special attention to
our Labour Force Survey (commonly referred to as our ‘employment report’), which
is released by Statistics Canada each month.

The Survey gives us a bevy of useful information about whether and where our
economy is adding jobs, whether average incomes are rising or falling, and
whether the average worker is putting in more or less hours of work each month.
Together, these factors combine to give us valuable insight into where our
overall economic momentum is headed.  

Here are the data from the latest
, which was released last Friday, with some thoughts on its
implications for Canadian mortgage rates:

  • Our economy added 12,500 new jobs overall last month, almost bang on the
    12,400 new jobs that we have averaged over the last six months. The federal
    government has hinted that over the near term the Bank of Canada (BoC) will lean
    its monetary policy more towards job creation than tight inflation control and
    the April employment data shouldn’t give them any cause to alter that approach.
  • The public sector added 34,200 new jobs in April. In other words, full-time
    government hiring was the only reason we added jobs over the past month. That’s
    an unsustainable trend that can’t be relied upon in this age of austerity-themed
    government budgets.
  • The private sector lost 20,000 jobs in April and has now shed 105,400 jobs
    over the past two months. In fact, this sector has grown by only 0.1% over the
    past year so our current private-sector hiring slump is actually very well
    entrenched. This is a big concern because private-sector job growth and GDP
    growth go hand-in-hand, making it unlikely that we will see any real change in
    our overall economic momentum until private-sector hiring looks very different
    than it does today.

  • The manufacturing sector added 21,000 new jobs in April. That would be a
    more encouraging development if the same sector hadn’t shed 54,000 jobs in
    March, meaning that we’re still down 33,000 manufacturing jobs over the last two
    months. In fact, we have seen the total number of manufacturing jobs shrink by
    52,000 over the past twelve months, so this slump is also well entrenched. Manufacturing is a key sector of our economy because its jobs
    produce a powerful multiplier effect that ripples through the broader economy.
    This impact was highlighted in a report by the Department of Finance last year
    which estimated that each manufacturing job in the automotive industry, for
    example, produces 3.6 other jobs, 2.4 of which are in non-manufacturing sectors.
    Here’s hoping that the recent hiring pick up in manufacturing continues.
  • Average hourly wages rose by 2.9% for the month, which was well above the
    rate of inflation. At first glance this is not intuitive. Why would labour costs
    be significantly outpacing our overall rate of inflation when we still have
    surplus labour available? David Rosenberg is now highlighting the risk that a
    shortage of skilled labour could trigger cost-push inflation. (While he is
    primarily focusing on the U.S. labour market, the risk exists here in Canada as
    well.) This type of inflation is caused when there is a skills mismatch between
    unemployed workers and the jobs available to them, forcing employers to bid up
    the cost of qualified skilled labour. There is an 80%+ correlation between
    rising labour costs and rising inflation, so if skilled labour remains in short
    supply over an extended period, higher prices will inevitably follow. This
    raises the medium-term risk of stagflation, a scenario we last faced in the
    1970’s when high inflation coincided slowing economic growth and high levels of

Government of Canada (GoC) five-year bond yields were 11 basis points higher
for the week, closing at 1.34% on Friday. Most of that spike happened on Friday
so I’ll be watching to see if that momentum carries through into this week. Only
a few smaller lenders have raised their fixed-mortgage rates in response thus
far but if the five-year GoC yield continues to move higher, more are sure to
follow. As such, anyone currently in the market for a five-year fixed-rate
mortgage will be wise to lock in today’s sub-3% rates while they still can.

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

The Bottom Line: The April employment report confirmed that
private-sector employment continued to shrink last month. While our ongoing
private-sector slump was temporarily offset by an increase in full-time
public-sector jobs, the experts I read expect government hiring to slow in the
near future. Normally excess labour capacity would coincide with continued low
inflation and mortgage rates, but the threat of stagflation, which would trigger
higher inflation and mortgage rates, is slowly rising. While this is still a
distant threat, we should stay tuned on that front.

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

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