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.
The latest Canadian and U.S. employment numbers were released last Friday and they painted two distinct pictures of the current economic momentum in each country.
First, a quick recap. If you’re keeping an eye on mortgage rates, the Canadian and U.S. employment data matter because employment rates affect the cost of labour, which is one of the most important determinants of inflation, and inflation, in turn, is one of the most significant determinants of mortgage rates.
If labour markets are tight, the cost of labour rises and it doesn’t usually take long before prices, and mortgage rates, follow. Conversely, if labour markets are loose and there is an abundant supply of unused labour, increases in wages are moderated and an economy should be able to grow for some time without pushing up costs and rates. Each new labour report helps us calibrate where we currently stand on this spectrum.
That said, despite the importance of the data, we should be careful not to overreact to any one report because the employment numbers bounce around a lot from month to month and there are often material revisions to the initial numbers in subsequent months. Better to pay attention to the longer term employment trends, which paint a more reliable picture of how the labour supply/demand balance might impact our future mortgage rates.
With that in mind, here are the highlights from the latest Canadian employment report:
If you’re searching for some silver linings in our latest data, consider that:
Silver linings aside, on an overall basis our economy’s ability to generate an adequate number of healthy new jobs leaves much to be desired. The Bank of Canada (BoC) is still holding out hope that increased business investment will provide the spark that our labour market needs, but in the meantime we continue to chug along at just above stall speed.
From an interest-rate perspective, the latest employment data leaves the BoC stuck in the same basic position it has been in for some time. On the one hand, concern over our record levels of household debt should keep the Bank from lowering its overnight rate in order to tempt business investment capital off of the sidelines. On the other hand, the BoC isn’t in any hurry to raise rates and heighten uncertainty in an already cautious business climate - especially when our economy appears to have a surplus of available workers to ensure that labour costs pose little threat to inflation over the short and medium term.
Here are the highlights from the latest U.S. employment data:
Despite the so-so headline, when the latest U.S. employment data are adjusted for the adverse weather conditions, most of the experts I read think that they will reassure the Fed that its tapering timetable should continue apace. To that end, a little more than 50% of the investors who bet on the future direction of the Fed funds rate are now betting that the Fed will increase its policy rate in June of 2015. Time will tell.
Five-year Government of Canada (GoC) bond yields rose by eight basis points last week, closing at 1.71% on Friday. Borrowers who are putting down at least 20% on the purchase of a new home should be able to find a five-year fixed rate in the 3.09% range, and borrowers who are putting down less than 20% can now find five-year fixed rates a little lower (albeit with more limited terms and conditions and the added cost of high-ratio mortgage insurance).
Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%. As anticipated, the Mortgage Qualifying Rate (MQR) that is used by lenders to underwrite variable-rate applications dropped from 5.24% to 4.99% last Wednesday. This makes it a little easier to qualify for borrowers who are interested in variable-rate options.
The Bottom Line: The latest Canadian employment data confirm that our economy’s job creation machine is still sputtering along, while the latest U.S. employment data were more encouraging. It appeared for some time that Canadian mortgage rates would be held back by the weak U.S. recovery, but if current employment trends continue, U.S. rates might now rise well in advance of their Canadian equivalents.
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