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Jason Ellis analyzes the increase of jobs, upcoming rate hikes and more

  • Jason Ellis, Managing Director, Capital Markets

Greetings Canadian mortgage market participants.

Warning: Today’s post has a general lack of ‘pithiness’.  It wasn’t intentional…it just turned out that way.  It’s hard to believe, but economic data and interest rates just didn’t seem that funny this week.  Anyway…read on for some humdrum, even mundane, information, which is probably mostly accurate or at least indicative of actual events.

It’s payroll Friday so we’ll start with that.  Canada added more the FOUR TIMES the number of jobs predicted by economists in June and the unemployment rate fell from 6.6% to 6.5%.  Over 45,000 new jobs should almost guarantee the already largely anticipated rate increase next week.  Investors were already betting Governor Poloz will hike the overnight bank rate from 0.50% to 0.75% at the July 12th meeting.  The odds now are close to 100%.  Get your mortgage commitments in pronto!

Down south, the Change in Nonfarm Payrolls also exceeded expectations with 222,000 new jobs compared to 178,000 expected.  Despite the broad-based gains in employment, wage growth was below forecasts, moderating enthusiasm over the data.  Nonetheless, the report marks a good finish for the labour market in the second quarter and we can still expect the Fed to raise interest rates once more this year.

As you would expect from relatively strong economic data, the Canadian dollar rallied and bond prices fell (yields up) on the job news.  5 year Government of Canada bonds jumped 3 basis points to 1.47% and are now 52 basis points higher than one month ago. That’s a 55% increase in the 5 year bond yield.  That, gentle reader is why we hedge!  Treasury Guy is earning his paycheck now.  10 year yields are up 44 basis points over the same horizon. 

Residential mortgage lenders have been slow to respond to the sell-off in bonds.   RBC finally moved rates on its fixed term mortgages yesterday, but only by 20 basis points.  5 year mortgages went from 2.64% to 2.84%.  Treasury Guy predicts that the banks are going to use next week’s Bank of Canada rate hike as a smoke screen, and move mortgage rates higher then…and blame it on Poloz. 

Speaking of residential mortgages, Toronto housing registered a notable ‘slump’ following recent government measures to moderate prices.  Sales and prices fell for the second consecutive month in June.  Home sales in the GTA fell 37% compared to the same month last year and 21% compared to last month.  Average prices were still 6.3% higher than last year, but fell by 8% compared to last month.  New listings in June were 16% higher than last year and outstanding/active listings are almost 60% higher. 

Adding to the headwinds, rising mortgage rates will further reduce affordability, especially for high ratio first time home buyers.   I’m not saying this is good or bad, I’m just saying it is what it is.

No new mortgage securitizations to report on this week.  Unfortunately, that includes the fact that the anticipated REAL-T CMBS transaction from RBC has been put on hold.  Nothing to be alarmed about…just some unexpected structuring headwinds due to the volatile move in both the absolute level and term structure of rates.  Due to the sequential pay nature of CMBS transactions, the term structure of interest rates can make or break a deal for both the investor and the issuer.  I’m sure REAL-T will be back soon…stay tuned.

We did, however, get $3.75 billion new 5 year deposit notes from BMO and CIBC this week at 80 and 79 basis points over Canadas respectively.  The deals were very well subscribed, BUT, they did come with 3-5 basis points of new issue concessions.  The investors are there, but they want to get paid for participating.  Who can blame them?

That’s all for now.  I’m looking forward to the weekend and continuing my renewed efforts to live healthy and work out.  I’ve started ‘spinning’ which is going OK, but I saw the craziest thing last night.  Some idiot at the gym put his water bottle in the Pringles holder on the bike.   

Stay classy and stay healthy,

Treasury Guy.
Jason Ellis, Managing Director, Capital Markets