Dave Larock in Monday Interest Rate Update, Mortgages and Finances, Home Buying
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Last week we received the latest U.S. and Canadian employment reports, and both provided us with valuable insight into where our mortgage rates may be headed.
When employment growth is strong and the demand for labour increases, the cost of labour should rise. Because the cost of labour is one of the key drivers of inflation, a strengthening job market would be expected to push average prices higher. If that happens, bond yields normally rise in response and eventually the Bank of Canada (BoC) would raise its overnight rate to maintain price stability and keep inflation under control. Conversely, if employment demand falls, then over time the cost of labour should fall as well, and that would help push inflation, and eventually interest rates, lower.
Here are the highlights from the latest reports:
Non-Farm U.S. Employment – December
The Canadian Labour Force Survey – December
Given the volatility in the initial employment data, which are often revised in the months that follow, it is important to avoid making too much of one month’s labour report. That said, trends do emerge over time, and these should be given increasing weight if they are further confirmed by ongoing data.
To that end, the U.S. economy continues to produce new jobs at an impressive rate, but it is unusual to see this happening while the participation rate and average wages are falling. The Fed must weigh the threat that lagging-wages pressures will surge to the fore against the threat that raising interest rates too quickly could choke off a domestic recovery that can’t rely on support from beyond its borders.
Meanwhile, the Canadian economy managed to produce relatively healthy job growth last month, but our view of the horizon is less optimistic in the face of sharply lower resources prices, most especially, oil, and our continuing loss of highly desirable manufacturing jobs.
Five-year GoC bond yields fell nine basis points last week, closing at 1.22% on Friday. Lenders are much slower to lower their rates than they are to raise them and, as such, five-year fixed-rate mortgages remain in the 2.79% to 2.89% range, while five-year fixed-rate pre-approvals are offered at 2.99%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.
The Bottom Line: The latest U.S. employment data continue an impressive job-growth run for another month and this probably tilts the U.S. Fed a little more towards raising its policy rate sooner rather than later. While the Canadian employment data were also encouraging overall, despite the disappointing headline number, I think the BoC will be much more cautious than the U.S. Fed because recent developments, such as sharply lower resource prices, will have a much more profound impact on our economic momentum.
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