Dave Larock in Monday Interest Rate Update, Mortgages and Finances
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Last week we received the latest Canadian and U.S. employment reports and both offered useful information for anyone keeping an eye on Canadian mortgage rates.
Here are my key takeaways from the Canadian employment data for April:
While our headline job growth was negative last month, there were some small but encouraging signs in our latest employment data. That said, a broader look at our longer-term job growth trend shows that our economy has added a monthly average of only 2,600 new jobs over the most recent six months, and that was with a surprising expansion in Alberta’s workforce in April. As such, I would interpret the bright spots in the latest employment data as silver linings in the development of our still cloudy overall job-market.
Here are my key takeaways from the U.S. employment data for April:
Today, the most interesting U.S. employment trend to watch is the decline in U.S. labour productivity.
In simple terms, productivity measures the amount of labour that an economy requires to produce outputs. When labour is cheap and widely available, hiring more workers is often more attractive to businesses than investing in machinery and equipment to improve productivity. In such an environment, labour productivity levels fall, as they have in the U.S. for some time, where U.S. productivity growth has averaged 2.5% since 1948 but only 1.1% since 2011. But if labour costs continue to rise, in addition to expanding the purchasing power of average consumers, it should also fuel an increase in business investment, because more expensive labour makes investing in productivity enhancements a relatively more attractive option. If these two trends converge, this should buoy U.S. GDP growth and might give the U.S. economy the momentum it needs to achieve its long-sought after ‘escape velocity’.
Let’s close by summarizing what all of this means for Canadian mortgage rates.
U.S. job growth momentum continues to improve but U.S. Fed Chair Yellen has said that the Fed will be cautious until it sees more wage-growth momentum, which basically remained at trend in the April data. As such, markets continue to believe that the Fed will not increase its policy rate until its September meeting, or later. Since the Bank of Canada is expected to lag the Fed on the timing of its next overnight rate increase, this implies that our variable mortgage rates are not likely to change for the foreseeable future.
On the flipside, however, history has shown that labour costs tend to lag the other economic data during recoveries, and the continued strength in U.S. job-market momentum is heightening fears about the risk of higher-than-expected inflation, especially with U.S. and Canadian bond yields at today’s microscopic levels. Not surprisingly, government bond yields in both countries have been trending higher of late, and if this continues, our fixed mortgage rates will rise soon.
Five-year Government of Canada (GoC) bond yields fell by three basis points last week, closing at 1.02% on Friday. Five-year fixed-rate mortgages are offered in the 2.49% to 2.59% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.
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: Although the latest U.S. and Canadian employment data were encouraging, neither should significantly alter the timing of the next short-term policy-rate increase in either country, and that means that our variable mortgage rates should remain at current levels for the time being. On the other hand, the contiuation of robust U.S. employment momentum, despite the brief pause in March that was caused by one-off factors, is causing investors to become increasingly concerned about the risk of higher inflation. That concern is pushing government bond yields higher in both countries and if this continues, I expect to see a rise in fixed rates soon. As such, anyone who is in the market for a five-year fixed rate is well advised to lock in a pre-approval now, just in case.
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