What the Latest Canadian and U.S. Employment Data Mean for Our Mortgage Rates

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:

• Overall Canadian employment rose by 22,800 jobs, which means that our economy recovered only a portion of the 35,700 jobs that we lost in November.
• We added 29,200 part-time jobs and lost 6,400 full-time positions. The private sector lost 9,000 jobs and the public sector shed 8,400 jobs, while the self-employed ranks grew by 40,300. As a reminder, it is widely believed that the self-employed sector of our labour force contains a subset of would-be private sector workers who are actually unemployed but prefer to call themselves self-employed instead. As such, this type of spike in the self-employment is often taken as a signal of weakness.
• Looking out over the longer term, we averaged a good, but not great 10,400 new jobs/month in 2015 and we have averaged 13,200 new jobs/month over the last six months. This means that our economy should be close to keeping pace with the natural growth rate of our working age population, but only just.
• On a more positive note, average hours worked rose by 0.3% in December and average wages rose by 0.1% after rising by 0.6% in November. Looking out over the longer term, our average wages rose by about 3% in 2015, well above our average inflation rate of about 1.4% as measured by our Consumer Price Index (CPI). This means that the purchasing power of the average Canadian worker expanded in 2015.
• Manufacturing employment also rose by 6,100 new jobs in December, which was the fourth month in a row of net growth for this sector. The biggest gain was in Ontario, which added 34,900 new jobs, while the provinces which rely most heavily on energy-sector manufacturing employment saw their numbers drop: Alberta (3,900), Saskatchewan (4,600), Newfoundland (2,700).

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.