Dave Larock in Interest Rate Update, Mortgages and Finances
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The latest employment data for both Canada and the U.S. came in much higher than expected last Friday. The futures market quickly raised the odds to 75% that the U.S. Federal Reserve will hike rates at its December meeting, and bond yields on both sides of the 49th parallel surged higher in sympathy. Canadian mortgage lenders wasted no time in raising their fixed mortgage rates.
This is exactly the type of volatility that I warned about in last week’s post. The Fed’s revised wording in its latest policy statement had indicated that it was poised to raise its policy rate at its next meeting if the U.S. economic data continued to show encouraging signs. The biggest X factor in that data was U.S. employment momentum which had stalled over the previous two months after showing impressive strength over the prior twelve months. Markets reacted quickly to the upside surprise.
Here are the highlights from the U.S. non-farm payroll report for October:
While a Fed rate hike in December now seems likely, we will see one more months’ worth of U.S. employment data before their next meeting and there are plenty of other moving parts that could impact the Fed’s overall assessment of market conditions between now and then.
For example, expectations of an imminent U.S. rate hike are fuelling another surge in the U.S. dollar, which has impacts both at home and abroad. The surging Greenback has already created a headwind for the U.S. economy that is equivalent to about 100 basis points worth of Fed rate increases. If the U.S. dollar surges again, it will continue to do much of the heavy lifting for the Fed and will reduce the need for monetary-policy tightening. Furthermore, the Fed held off on raising its policy rate at its September meeting in part because of concerns about economic instability beyond its borders. Another U.S. dollar surge could fuel rising instability in emerging markets, thus exacerbating the Fed’s previous concerns.
While it appears increasingly likely that the Fed will raise its policy rate in December, if we’ve learned anything since 2008, it is that central banks take a lot longer to hike rates than we (or they) think they will, and that’s why I continue to believe that the Fed’s next rate decision is not yet a forgone conclusion.
While the Canadian employment data didn’t garner nearly as much ink, our labour market had a good month in October as well. Here were the highlights from the latest Statistics Canada report:
Five-year Government of Canada bond yields rose fifteen basis points last week, closing at 1.03% on Friday. Five-year fixed-mortgage rates rose across the board and are now available in 2.54% to 2.69% range. Not every lender raised by the same amount, so there a little more variance in offered rates than usual at the moment (making it a good time to shop around). Five-year pre-approval rates are now available at 2.74%.
While not directly driven by last week’s strong employment reports, five-year variable-rate discounts also shrank last week and are now being offered in the prime minus 0.60% to prime minus 0.50% range.
The Bottom Line: The latest Canadian employment data should take any prospects of another Bank of Canada (BoC) rate drop off the table, but not to the point of pushing the Bank into rate-hike territory. For now, it’s steady-as-she goes for the BoC while we wait and see whether our neighbours south of the border finally pull the trigger on their first rate increase in nearly a decade.
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