Dave Larock in Interest Rate Update, Mortgages and Finances
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Last week we received the Canadian and U.S. employment reports for June, and they stood in stark contrast to each other - Canadian employment fell last month while U.S. employment surged higher.
In today’s post we’ll look at the lowights and highlights from both reports and I’ll explain how ongoing exchange-rate adjustments should help to narrow the employment-momentum gap between our two countries over time (albeit much more slowly than most expected).
Canadian Employment Lowlights for June
Not surprisingly, the Loonie fell sharply on Friday as financial markets digested the new and contrasting employment data from both countries. When the Loonie falls it makes our exports into U.S. markets more competitive, and that should, in theory, provide us with an effective stabiliser when our economic trajectory lags that of the U.S. for any length of time. But the follow through just hasn’t been happening. We had a nice surge in exports in January, but today that momentum is long gone – our total export sales have actually fallen in four of the last five months.
The lag between the cheaper Loonie and expanding export sales is not a complete mystery to our policy makers. The Bank of Canada has said that it can take up to two years for exchange rate movements to work their way through our economy in normal times. Today, we are not in normal times and we are still redefining our export sector after swaths of it were decimated at the start of the Great Recession, when U.S. demand dried up, when the Loonie soared above par with the Greenback, and when so many businesses closed their doors for good. This is going to take time.
Our policy makers have been clear about what they think it will take to get our economy rolling again - we need export growth to fuel the increased business investment that will increase the demand for labour, preferably of the more skilled varieties. But like it or not, our policy makers just can’t force our economy through this transition.
U.S. Employment Highlights for June
While U.S. financial markets turned more bullish after the U.S. non-farm payroll report was released, the futures market only moved its bet on the timing of the Fed’s next rate hike from its meeting in July, 2017 to its meeting in May, 2017. So the latest U.S. employment report, solid as it was, wasn’t a mortgage-rate game changer on either side of the 49th parallel.
Let’s not forget that U.S. GDP growth has averaged only about 1% over the first six months of 2016. And with U.S. inflation hovering at around 1% (well below the Fed’s 2% target), the Fed isn’t likely to feel compelled to tighten its monetary policy in order to preserve price stability any time soon.
Five-year Government of Canada bond yields rose one basis point last week, closing at 0.61% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.49% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at about 2.54%.
Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.50% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.
The Bottom Line: The latest U.S. employment report was as good as the Canadian report was bad. This disparity led to a sharp drop in the Loonie on Friday, and while any further depreciation of our currency should help to fuel a rise in our exports, it hasn’t worked out that way so far. Instead, our policy makers stall for time and pray for rain. What does this all mean for mortgage rates? Well, they don’t typically rise against this backdrop.
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