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Market watchers were surprised last Friday when the
initial U.S. and Canadian employment data for October came in stronger
than expected, and bond yields rose on the news.
today’s post I’ll summarize the latest employment reports, but more
importantly, I’ll explain the implications of an obscure Fed research
paper that was also published last week. This report suggests that U.S.
employment data will have to climb much higher than markets are
expecting before the Fed will consider altering its monetary policy.
Canadian Employment in October
The latest Labour Force Survey
showed that our economy added 13,200 new jobs last month, which was
higher than the 11,000 new jobs the consensus was expecting.
who considered this to be a strong report liked the fact that all of
the net new jobs were in full-time positions. Average hours worked rose
by 0.40%, which David Rosenberg estimates is equivalent to adding
another 75,000 more jobs to our economic landscape. Average wages also
rose by 0.40%, following a robust 1.8% increase in September. This
latter change is positive because it means that wages are growing faster
than prices (as measured by CPI), and that increases the purchasing
power of the average Canadian.
all of the details behind the headline data were positive. While the
public sector grew last month, the private and self-employment sectors
shrank. Our federal and provincial governments still need to reduce
their budgets in the long run so any uptick in the employment data that
is led by public-sector growth can’t be sustained over the medium and
We also lost another 6,400
manufacturing jobs last month, and these are the jobs that fuel
additional, downstream employment growth. Tavia Grant at the Globe and
Mail reports that our economy now has the second lowest level of
Canadian manufacturing jobs since these records began in 1976.
summary, while our latest employment report was a little better than
expected and held some encouraging signs, it didn’t materially change
our employment picture. Our economy is still struggling to create enough
jobs to outpace the natural rate of our labour force expansion, and
until that changes, our employment growth will not produce any positive
economic impact of significance.
U.S. Employment in October
The latest U.S. employment
data showed that employers shook off the budget and debt-ceiling drama
in Washington last month and added a surprising 204,000 new jobs in
October, with another 60,000 jobs added in revisions to the initial
employment data from the prior two months. This was well above the
120,000 new jobs that the consensus was expecting and was in line with
the most recent three-month average.
employers added 212,000 new jobs and unlike in Canada, there was a
surge in U.S. manufacturing jobs (+19k) and goods-producing employment
(+35k). Average wages also rose by 0.50% in October, and this continues
an encouraging trend that, as in Canada, shows U.S. earnings rising more
quickly than official U.S. inflation.
while the report was certainly stronger than expected, some market
watchers tempered their enthusiasm by noting that the U.S. labour force
participation rate declined again, from 63.2% to 62.8%, and that much of
the related U.S. economic growth in October was the result of inventory
expansion. When businesses increase spending to add to inventories, it
creates a short-term growth surge, but if there is no follow-through
demand from buyers, that momentum fades quickly. In such a scenario,
inventory expansion merely shifts the employment benefits of future
demand to the present and, as such, does not signal sustainable economic
While the latest U.S. employment
report was a net positive, market watchers might want to think twice
before using these data to recalibrate their estimates of when the U.S.
Fed will taper its QE programs and eventually raise short-term interest
rates. The Fed has a habit of moving the goal posts when its employment
targets are met, and there is fresh evidence that this may happen again.
new research paper that was published last week by William English, a
senior Fed staffer, argues that before considering a shift in its
monetary policy, the Fed should now wait until the U.S. employment rate
drops to 5.5% rather than to the 6.5% level the Fed has repeatedly cited
when offering guidance to markets. Interestingly, he bases this
argument on the fundamental assumption that today’s record-low
participation rate is a result of cyclical factors that can be overcome
with appropriate levels of Fed monetary-policy stimulus. Personally, I
subscribe to the counter argument that today’s ultra-low U.S.
participation rate is in fact structural, instead of cyclical, and that
the Fed’s aggressive monetary policy actions have achieved little of
their desired impact. (Stay tuned for more about this in next week’s
that U.S. and Canadian monetary policies are so closely linked, when
the Fed shifts its tapering timing and/or its guidance on future
short-term rate increases, there are major implications for Canadian
mortgage borrowers. Any additional delays in either Fed policy should
directly translate into extended ultra-low rates for Canadian
variable-rate mortgage borrowers and new fixed-rate borrowers.
Government of Canada bond yields were six basis points higher last
week, closing at 1.84% on Friday. Five-year fixed rates with excellent
terms and conditions are now available in the 3.45% range and
shorter-term fixed rates are also attractively priced.
variable rates are still about 1% cheaper than the equivalent five-year
fixed-rate alternatives. All considered, I continue to think variable
rates are the more compelling option for borrowers who are comfortable
taking on the risk that rates could rise in the future.
The Bottom Line:
Canadian mortgage borrowers should be forgiven for believing that the
interest-rate deck remains stacked in their favour. When U.S. employment
data are weak, bond yields fall as markets expect the Fed to delay
tapering and keep U.S. short-term rates lower for longer. When U.S.
employment data are strong, as was the case this month, the Fed hints
that it will push back the goal posts that it uses to gauge its shifts
in monetary policy. So, as perverse as it may seem, if bond yields
continue to rise in response to the latest U.S. employment data, fear
not, because the Fed will ride to the rescue. At least … for as long as
the bond market will allow it to do so ...
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