Dave Larock in Interest Rate Update, Mortgages and Finances
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Last Friday’s U.S. non-farm payroll report showed that the U.S. economy generated 142,000 new jobs in September, well below the 201,000 new jobs that the consensus was expecting.
This should give the data-dependent U.S. Federal Reserve all the cover that it needs to avoid raising its policy rate in October, or perhaps at all in 2015.
Here are the highlights from the latest U.S. employment data:
While the weak U.S. employment data should reassure Canadian mortgage borrowers that our rates aren’t likely to head higher for the foreseeable future (as if we needed more reassurance on that front), the slowing U.S. employment momentum is bad news for our broader economy.
Right now, we need a strong U.S. recovery to help fuel our own flagging economic growth, especially since China’s waning appetite for commodities is no longer buoying commodity prices and thereby providing a significant tailwind for resource-based economies like ours. Meanwhile, while it took longer than expected, the cheaper Loonie has been finally fuelling an encouraging bump in U.S. demand for our exports and Bank of Canada (BoC) Governor Poloz has long said that rising U.S. demand for our exports is critical for our economy’s return to healthy and sustainable growth. If the U.S. recovery falters, that long sought-after momentum will be lost, and if that happens, today’s ultra-low mortgages rates will provide only cold comfort.
The key question that follows last week’s disappointing September U.S. employment data concerns the impact on the Fed’s rate-rise timetable. I think the Fed will now argue that the surging Greenback, widening credit spreads, and falling equity prices are combining to create a headwind for the U.S. economy that is equivalent to significant monetary-policy tightening. Therefore, the Fed is likely to argue that this headwind reduces the need to raise rates any time soon. Furthermore, if the U.S. labour market continues to lose its hard-won momentum, that will likely lead to speculation that the Fed will consider re-introducing quantitative easing (QE) measures. If so, this will be despite the fact that there is little evidence that the previous rounds of QE had any appreciable positive impact on the employment market.
This would have sounded crazy to many market watchers even a week ago but circumstances can change quickly in today’s uncertain times and central banks have to keep raising the stakes if they want to move markets which have become increasingly numb to even radical interventions.
Five-year Government of Canada bond yields fell eight basis points last week, closing at 0.78% 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 2.64%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.75% range, depending on the size of your mortgage and the terms and conditions that are important to you. That said, most lenders have lowered their discounts on variable rate mortgages to prime minus 0.50%, so I expect these deeply discounted variable rates may well be gone by the time we have eaten our Thanksgiving turkeys.
The Bottom Line: The latest U.S. non-farm payroll data showed that the U.S. employment recovery is losing momentum and that makes it increasingly unlikely that the Fed will raise its policy rate in 2015. This latest development bolsters my belief that both our fixed and variable mortgage rates should stay at or near today’s levels for the foreseeable future but it also increases my concern that we’re living in the middle of a be-careful-what-you-wish-for moment, which historians will cite when teaching a cautionary tale to future generations.
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