Dave Larock in Interest Rate Update, Mortgages and Finances
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We received the latest Canadian employment data last week, for December, and it showed that our economy added 22,800 new jobs last month. That was well above the 8,000 new jobs that the consensus was expecting but the strong headline number belied some weakness in the data.
Here are the highlights:
Meanwhile, the December U.S. non-farm payroll data were much more encouraging. U.S. employment rose by 292,000 new jobs in December, well above the 200,000 new jobs that the consensus was expecting. In addition, the initial October and November estimates were revised upwards by another 50,000 jobs.
Somewhat surprisingly, average U.S. wages didn’t grow during the month and continue to lag the pick-up in U.S. job creation. The U.S. economy averaged wage growth of 2.5% over all of 2015. This was higher that the U.S. inflation rate of 0.5%, as measured by their CPI over roughly the same period, but policymakers were expecting wage growth closer to the 3% to 4% range. Wage growth is a lagging indicator, so the U.S. Federal Reserve is likely to become increasingly concerned unless average wages start mirroring the momentum we are seeing in U.S. job creation more closely.
Five-year Government of Canada bond yields fell by eight basis points last week, closing at 0.65% on Friday. Despite that, RBC raised its five-year fixed rate again last Friday, this time to 3.09%, and others are expected to follow. As has been the case so often lately, this rate rise was in response to higher securitization costs and warnings from our regulators that lenders will soon be required to allocate more of their balance-sheet capital to their mortgage portfolios. Five-year fixed-rate mortgages are available in the 2.59% to 2.74% range (for now), and five-year fixed pre-approval rates are offered at rates as low as 2.79%.
Five-year variable-rate mortgages are available in the prime minus 0.45% to prime minus 0.35% range, which translates into rates of 2.25% to 2.35% using today’s prime rate of 2.70%.
The Bottom Line: The divergence between the Canadian and U.S. employment growth rates is consistent with the overall trajectories for the two economies. It is not entirely clear why average Canadian wages rose faster than average U.S. wages in 2015 (3% vs. 2.5%), but those trends should correlate more closely with the overall economic momentum in each country as 2016 unfolds. From a mortgage-rate perspective, our lack of employment-growth momentum should keep the Bank of Canada on hold for the foreseeable future. That’s not a guarantee that our mortgage rates won’t rise however, because our policy makers are still watching our housing markets closely, and they may continue to raise back-end funding costs and lender capital requirements if they feel it is warranted.
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