How Will the Latest Canadian and U.S. Employment Data Affect Canadian Mortgage Rates?

Last week we received the latest Canadian and U.S. employment reports, and in today’s post I’ll provide the highlights and offer my take on the impact that this new data may have on Canadian mortgage rates.

The Canadian Labour Force Survey for January

• Our economy added a total of 35,400 new jobs in January.
• We lost 11,800 full-time jobs during the month and added 47,200 part-time jobs, which makes the headline number a little less exciting. That said, we saw strong gains in full-time employment over the prior four months and large losses in part-time employment over the prior two months, so these short-term reversals in momentum may just indicate some month-to-month normalization in both categories.
• Almost all of the gains were in the self-employed category, which added 41,100 new positions, as compared to private sector employment, which added only 1,100 new jobs, and public sector employment, which shed 6,700 jobs. This is a concerning trend because when we see a rise in self-employment that corresponds with otherwise weak job-growth momentum, past experience suggests that these newly self-employed workers are really just in the midst of a job transition.
• Somewhat surprisingly, Alberta had a strong month for employment growth, adding 13,700 new jobs in January. That said, it is only a matter of time before the negative impacts from the recent sharp drop in oil prices show up in the province’s employment data, so this momentum is not expected to last.
• On a more positive note, average hourly wages rose by 0.5% in January, and have now risen by 2.0% on a year-over-year basis. When compared to our current inflation rate of 1.5%, as measured by the Consumer Price Index (CPI), this rise in average wages means that workers are seeing an increase in their purchasing power. If this trend holds, it should fuel a rise in consumer spending that would act as a tailwind, albeit a small one, for our lagging growth momentum.

The U.S. Non-Farm Payroll Report for January

• The U.S. economy added an estimated 257,000 new jobs in January.
• The good news didn’t stop there. Previous non-farm payroll estimates for November and December were revised upwards by another 147,000 jobs, and the January result marked the eleventh month in a row that the U.S. economy added at least 200,000 new jobs. This is now the longest streak of its kind since the mid-1990s.
• Until January, average earnings had been slow to respond to this impressive run of U.S. job creation, but that finally changed last month. Average earnings rose by 0.5% for the month and they have now increased by 2.2% on a year-over-year basis, which is well above the average inflation rate of 0.8% that has been experienced over roughly the same period. Just as in Canada, if earnings growth outpaces inflation growth, we would expect this expanded consumer purchasing power to fuel higher demand and provide a tailwind for overall U.S. economic momentum.

The latest Canadian and U.S. employment reports are not likely to significantly alter the cautious overall monetary-policy stance of the Bank of Canada (BoC). Bluntly put, our economy continues to experience slowing overall momentum and this is expected to weaken our employment data further in the coming months. While a strengthening U.S. economy (and a cheaper Loonie) should provide a much-needed lift for our export manufacturers in time, this benefit will take longer to accrue and is not yet apparent in the data.

A more interesting development is occurring south of the border. The U.S. Federal Reserve has long pinned the timing of its next policy-rate hike on improving employment momentum, which is now undeniably occurring. If the Fed is true to its word, then it will have to raise its policy rate in the middle of 2015. Some experts are skeptical and believe that the Fed won’t tighten until it sees U.S. inflation running above its 2% target for a period of time, and that could take much longer. Meanwhile, looser monetary policy in places like Japan, China and Europe has fueled a surge in the U.S. dollar and this acts as a de facto form of U.S. monetary-policy tightening. This too may help stay the Fed’s hand.

Regardless, at some point the Fed is going to have to match its action with its words or it risks losing its credibility. The key question now is whether it will be the words or the actions that will move more closely in alignment with the other.

Five-year Government of Canada bond yields rose by eighteen basis points last week, closing at 0.78% on Friday. This type of surge would normally imply that higher fixed-mortgage rates were on the horizon, but in this case the rise came off of all-time lows and in the current environment, lenders still have healthy margins to work with. As such, last week’s move is not expected to push fixed mortgage rates higher than their current 2.69% to 2.59% range. Meanwhile, pre-approvals are offered at rates as low as 2.79%.

Five-year variable-rate mortgages are still available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you. As a reminder, prime rates recently fell from 3.00% to 2.85%.

The Bottom Line: Last week’s Canadian and U.S. employment data showed a widening gap in the momentum being experienced by both countries. Canadian employment growth justifies continued caution by the BoC, and while another months of strong U.S. employment growth should accelerate the U.S. Fed’s tightening timetable, other less transparent factors may keep the Fed on hold for longer than expected. All told, over the near term, I don’t expect the latest employment data from either country to have a material impact on either our variable or fixed mortgage rates.