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 on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.
Canadian bond yields fell sharply last Friday when Statistics Canada released its latest employment data for December. Our economy shed 46,000 jobs last month, all of them full time.
This number was well below the 14,000 new jobs that economists were expecting and it pushes our unemployment rate from 6.9% to 7.2%, heightening fears that our economic momentum is stalling out.
We shouldn’t assign too much significance to one month’s employment report because these data are volatile and are often revised in subsequent months, but Canada’s job creation engine has been slowing for some time now. We averaged only 8,500 new jobs/month in 2013, well below our 2012 average of approximately 25,000 new jobs/month. Worse still is the fact that this number is not even close to the 20,000 new jobs/month our economy needs just to keep pace with our population growth.
When viewed strictly from a mortgage-rate perspective, this bad news is actually good news. If our economic momentum continues to slow, the Bank of Canada (BoC) will be less likely to raise its overnight rate, which our variable-rate mortgages are priced on. In fact, if things get much worse there is growing speculation that the BoC may consider lowering its overnight rate instead.
A weaker jobs market can also push fixed rates lower because higher unemployment will normally keep labour costs under control, and the cost of labour is the single most important driver of inflation. When investors expect inflation to rise in future they demand higher bond yields to offset this erosion of value. On the other hand, if investors expect lower inflation, the reverse is true.
So are bad economic data worth celebrating?
Over the last ten years, falling interest rates have provided the main fuel for house price appreciation across the country. With rates now at rock-bottom levels, the fuel for future house price appreciation will need to be provided by rising incomes. Our average hourly wages fell by 0.20% last month and they have barely kept pace with inflation, as measured by the Consumer Price Index, over the past several years.
Given the choice between rising mortgage rates caused by higher incomes and a strong housing market, or falling mortgage rates caused by lower incomes and a weak housing market, I know which scenario I would prefer.
Cheering falling interest rates in the face of stalling economic momentum reminds me of the old adage “penny wise, pound foolish”.
If we’re looking for a silver lining in the face of today’s worsening economic backdrop, I take much more comfort in the Loonie’s recent drop.
Canada has an export-led economy that depends heavily on U.S. demand. The combination of depressed U.S. economic growth and the surging Loonie has been a double whammy for our exporters, particularly those in the manufacturing sector. Manufacturing jobs are vital to our economy. They create a powerful multiplier effect that triggers job creation across our broader economy and they also tend to be higher paying.
The recent drop in the Loonie is now giving our manufacturers a much needed boost. Last month, this sector added 7,500 new jobs, reversing a long, downward spiral that recently saw manufacturing employment fall to its second lowest level since record keeping began in 1976.
There was still more welcome manufacturing news last week. David Rosenberg reported that capital investment in imported machinery and parts jumped by 8.5% in November, and this was the largest increase for that type of spending since May of 2006. If manufacturers are preparing to ramp up production, the nascent momentum we are now seeing in this sector may well increase.
While it’s true that a cheaper Loonie will lead to higher inflation due to the increased cost of imported goods, employment is a much more pressing concern at the moment, and as such, the lower Loonie seems well worth that trade off it for the time being.
Five-year Government of Canada (GoC) bond yields plummeted by twenty-one basis points last week, closing at 1.73% on Friday. If GoC bond yields stabilize at these levels, lenders should begin dropping their fixed rates in response.
Five-year variable rates are offered in the prime minus 0.55% range, which works out to 2.45% using today’s prime rate of 3.00%.
The Bottom Line: The latest employment data indicate that our economic momentum continues to slow. While this implies that both our fixed and variable mortgage rates should stay lower for longer, we should hold our applause. If current employment trends continue, low rates will provide a thin silver lining for what will otherwise be cloudy economic days ahead.
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