Dave Larock in Monday Interest Rate Update, Mortgages and Finances, Home Buying, Toronto Real Estate News
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Last week had several interesting developments with implications for Canadian mortgage rates. For starters, the Bank of Canada (BoC) met last Wednesday and, as expected, announced that it would keep its overnight rate unchanged at 1%. (Reminder: Our variable rates are priced using the BoC’s overnight rate).
Here are the highlights from the BoC’s accompanying statement, with my comments in italics:
- The Bank continued to attribute the recent spike in our inflation to “temporary factors”. In other words, it reconfirmed that it will not alter its monetary policy in response to what it sees as a short-term development.
- “The global economy is recovering largely as expected”, but the European recovery has weakened, largely as a result of the situation in the Ukraine. I think the European recovery has been vulnerable throughout and that it was only a matter of time before a new spark relit the crisis anew. The Ukraine file may well be that next spark.
- “In the United States, a solid recovery seems to be on track.” Is it just me or would that statement be a lot more reassuring without the word “seems” in it? Probably a prudent hedge though, given that the U.S. recovery has been in a pattern of two steps forward, one step back for some time now. The latest U.S. employment data released last week are a recent case in point. After several months of strong job creation, the August data showed that the U.S. economy only added 142,000 new jobs last month, well below the 230,000 new jobs the consensus was expecting.
- “Canadian exports surged in the second quarter”, largely as a result a cheaper Loonie. “This pickup will need to be sustained before it will translate into higher business investment and hiring.” The Bank is encouraged by this development but it is holding its applause until surging export demand proves sustainable and convinces businesses to jump in with both feet.
- “Activity in the housing market has been stronger than anticipated.” Our level of concern about the housing market is rising along with its incremental demand. Federal Finance Minister Oliver take note.
- “The Bank still expects excess capacity in the economy to be absorbed during the next two years.” The BoC has repeatedly linked the timing of its next overnight rate increase to our economy’s return to full capacity, so the Bank is hinting that it expects to start increasing its overnight rate at some point over the next two years – although that two-year window gives it a wide margin of error to work with.
On an overall basis, the BoC maintained its wait-and-see monetary-policy approach and continued to keep investors squarely on the fence about whether its next interest-rate move will be up or down. Put another way, the Bank’s message was that it will respond to material changes in our economic momentum when it sees them, but that it doesn’t see them yet.
Now let’s take a look at the latest Canadian employment report, which was released by Statistics Canada last Friday. It showed that our economy shed 11,000 jobs for the month, a performance much worse than the 10,000 new jobs that the consensus was expecting.
Here were the key points from the latest report:
- Public-sector employment grew by 14,000 jobs last month, while private-sector employment shrunk by 114,000 jobs. The private-sector drop was the largest on record (more on this below), and while this loss was partially offset by a record 87,000 newly created self-employed jobs, there is always a debate about how many people in this group would be more accurately classified as ‘employees in transition’.
- Our manufacturing sector shed 11,000 jobs last month. This means that there was no follow through from the 13,000 new manufacturing jobs that were created in July, which had marked the first gain for that sector thus far this year. Manufacturing jobs are critical to the health of our economy because research shows that each of them creates an average of 2.7 other jobs throughout our broader economy, and employment in this sector remains near its all-time low.
- Looking at the longer-term trends, we have averaged 7,000 new jobs per month over the past year, and 10,000 new jobs per month so far in 2014. Both numbers are well below the approximately 20,000 new jobs that our economy needs to create each month in order to keep pace with the average natural expansion of our labour force. Furthermore, over the past year, eight out of ten newly created jobs have been part time. These trends indicate that our economy is creating both fewer jobs and lower-paying jobs.
- Surprisingly, average hourly earnings rose by 0.90% for the month and have now risen by 2.5% over the past year. So if you are lucky enough to still have a job, you might have had a little more spending money in your pocket last month.
Several market analysts have commented that the latest private-sector employment losses don’t jibe with the otherwise improving economic data we have seen of late. That observation brings me back to a comment made by BoC Governor Poloz several months ago. He basically said that we are not in the midst of a standard, garden-variety recovery where businesses simply ramp up production in response to rising demand. That’s because the Great Recession wiped out many companies altogether, particularly in export manufacturing, and the new companies that are slowly emerging to take their place may well look very different from those that were lost.
One implication is that, on balance, Canada’s new private-sector companies may require less overall labour (for example, because of technological advancements). If that proves true, it will take longer than most market watchers expect before today’s excess labour capacity is absorbed into our economy, and this will keep labour costs, which are a key driver of inflation, contained well into the future.
Five-year Government of Canada bond yields rose seven basis points last week, closing at 1.59% on Friday. Five-year fixed-rate mortgages are available in the 2.79% to 2.89% range, and five-year fixed-rate pre-approvals are offered at rates as low as 2.99%.
Five-year variable-rate mortgages are available in the prime minus 0.75% to prime minus 0.60% range, depending on the terms and conditions that are important to you.
The Bottom Line: The BoC sounded cautiously optimistic about the strength of the U.S. and Canadian economic recoveries last week, but to my ears, it continues to sound as if its next overnight rate increase will not occur any time soon. This view was bolstered by the latest Canadian and U.S. employment reports, which indicated that the employment markets in both countries are still a long way from returning to full health. On balance then, last week’s developments imply that both fixed and variable mortgage rates should remain at or near today’s ultra-low levels well in to the foreseeable future.
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, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave