Dave Larock in Interest Rate Update, Mortgages and Finances
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Over the past several weeks investors had been increasing their bets that the U.S. Federal Reserve would raise its policy rate in the near future, with the odds of a Fed rate hike in July peaking at about 58% last week.
This speculation was fueled by increasingly hawkish comments from several Fed members who warned that the improving U.S. economy would soon be ready for another round of monetary-policy tightening.
I had been sceptical about whether the Fed would actually follow through on its warnings because we have seen many recent examples of Fed talk not translating into action. And I don’t think it was a coincidence that the Fed’s rate-hike warnings grew louder at a time when the bond-futures market was pricing in odds of no Fed rate increases until early 2017.
Over the past several years the Fed has repeatedly used hawkish rhetoric to keep investors from becoming complacent whenever the lower-for-longer view started to really sink in. For my money, this latest rate-rise talk was just the most recent example of the Fed using the power of its words to keep moral hazard risks at bay.
That said, we’ll never know for sure because the latest U.S. employment report, released last Friday, was so bad that investors quickly reversed course and lowered the odds of a Fed rate hike in July all the way down to 31% in less than a day.
Here are the highlights from the latest U.S. employment report, which was about as close to a stinker all round as we have seen in a long time:
Against this backdrop, it’s very hard to imagine the Fed raising its policy rate in the near future. The data in the latest report are not one-offs that can be dismissed as anomalies. Rather, they confirm the continuation, and intensification, of a slowdown in U.S. employment momentum.
To be clear, I don’t expect the Fed to completely capitulate on its rate-hike speculation when it meets next Wednesday. In fact, it may well continue to hint at the possibility of near-term rate rises, but only in the hopes that it will help keep lower-for-longer speculation at bay, and not as a serious indication that it will tighten monetary policy now that U.S. economic momentum is so dramatically waning.
Five-year Government of Canada (GoC) bond yields plunged by eighteen basis points last week, closing at 0.61% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.59% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at around 2.69%.
Five-year variable-rate mortgages are available in the prime minus 0.30% to prime minus 0.40% range, which translates into rates of 2.30% to 2.40% using today’s prime rate of 2.70%.
The Bottom Line: The latest U.S. employment report should end any further speculation about near-term Fed rate hikes. By association, this report also reduces the risk of a short-term run up in our GoC bond yields, which would have been expected to rise in sympathy with their U.S. equivalents if a Fed raise had appeared increasingly likely - and that means that both our fixed and variable mortgage rates should remain at or near today’s low levels for the foreseeable future.
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