9 Dec

Bond market bets on 50-bps Bank of Canada rate cut next week after rise in unemployment

Interest Rates

Posted by: Dean Kimoto

Observers say that if there’s one economic indicator likely to be concerning Bank of Canada officials, it’s the higher-than-expected rise in Canada’s unemployment rate last month.”

According to the latest figures from Statistics Canada, the unemployment rate rose to 6.8%, up 0.3 percentage points from October and 0.2 percentage points higher than expected.

 

Excluding the pandemic years of 2020 and 2021, this marks the highest unemployment rate Canada has seen in nearly eight years.

“If there is one indicator that will stress the Bank of Canada, this would be the one,” wrote BMO’s Chief Economist, Douglas Porter.

In response to the sharp rise in the unemployment rate, BMO has revised its Bank of Canada rate cut forecast to expect a 50-basis-point cut at the BoC’s December 11 meeting.

It’s a call shared by Oxford Economics. “With slack continuing to build in the labour market, GDP growing at a soft below-potential pace, and inflation at the 2% target, we expect the Bank of Canada will push ahead with another 50bp rate cut next week,” wrote economist Michael Davenport.

Bond markets are now pricing in 75% odds that the Bank of Canada will deliver a second consecutive “oversized” rate cut next week, bringing the policy rate down to 3.25%—its lowest level since September 2022.

This would also result in a prime rate of 5.45%, further lowering interest costs for variable-rate mortgage holders and those with personal or home equity lines of credit.

However, Porter cautioned that there’s still a case for a more moderate 25-basis-point cut.

“Domestic demand is clearly reviving, core inflation picked up last report, the Fed is proceeding more cautiously, and the currency is pushing 20-year lows,” he noted. “But the Bank seems biased to ease quickly, and the high jobless rate provides them with a ready invitation.”

 

Echoing this, Desjardins is maintaining its call for a 25-basis-point cut, arguing that the rise in the unemployment rate ‘masks the strength under the hood’ of the Canadian economy.

“With outsized hiring in the month, CPI inflation having advanced by 2% or less in the three months to October, and Q4 2024 real GDP growth tracking in line with the BoC’s expectations, we remain of the view that the Bank will cut by 25-basis points next week,” wrote Randall Bartlett, Senior Director of Canadian Economics.

A dive into the November employment report

Although the economy added 50,000 net new jobs in November—54.2k full-time workers and a loss of 3.6k part-time positions—the growth fell short of keeping pace with the labour force participation rate.

StatCan reported that 138,000 people were actively seeking work, reflecting the rapid pace of population growth in the month. This marked the fastest pace of job seekers recorded outside of the pandemic years.

Oxford Economics - unemployment rate
Source: Oxford Economics/Haver Analytics

“Today’s jobs report had a lot of moving parts,” noted James Orlando of TD Economics. “Yes, the unemployment rate rose significantly, but this was due to a massive increase in the labour force rather than outright job losses.

The largest gains in employment were seen in wholesale/retail trade (+39,000), construction (+18,000), professional services (+17,000), education (+15,000), and accommodation/food services (+15,000). Declines were concentrated in manufacturing (-29,000), transportation/warehousing (-19,000), and natural resources (-6,300).

Regionally, job gains were highest in Alberta (+24,000), Quebec (+22,000) and Manitoba (+6,600), while remaining largely unchanged in the other provinces.

This article was written for Canadian Mortgage Trends by:

Steve Huebl

Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

3 Dec

Why three big banks raised fixed mortgage rates despite falling bond yields

Latest News

Posted by: Dean Kimoto

Despite low bond yields, banks and other lenders are continuing to raise rates. We talked to several rate experts to understand why.
Bond yields have plunged over 30 basis points (0.30 percentage points) over the past two weeks.

As regular readers of Canadian Mortgage Trends know, bond yields typically influence fixed mortgage rate pricing. However, that’s not the case right now. Several lenders, including three of the Big 5 banks, have recently raised rates on some of their fixed-rate products.

CIBC, Royal Bank, and TD raised their 3-, 4-, and 5-year fixed rates by 15-35 bps last week, while RBC also increased its 5-year insured and uninsured variable rates by 10 bps.

And they weren’t alone. Many other lenders across the country have also raised fixed rates, with the biggest increases typically seen in the 3- to 5-year fixed terms. At the same time, others have been reducing select rates slightly.

Government of Canada 5-year bond yield – 2024
If yields are down, why are rates going up?
There is no single factor that drives rates; instead, they are influenced by a combination of market conditions, geopolitical events, domestic data, and the broader outlook for the future.

Mortgage broker and rate expert Dave Larock noted in his latest blog that the current rate changes are “counter-intuitive,” as lenders are “concluding a round of increases to their fixed mortgage rates in response to the previous bond-yield run-up.”

He’s referencing the jump in bond yields since early October, from a level of 2.75% up to a high of 3.31% on Nov. 21.

Larock added that the rate increases could be reversed in the coming week if bond yields remain at current levels or fall further. “That outcome is far from certain,” he cautions.

Rate expert Ryan Sims agrees that banks are being slow to adjust to the rise in yields in November. “Although the [increases] are done, they are still more elevated than they were,” he said. “If bond yields stay lower, or seem to find a happy resting spot, then I could see some rate wars starting up,” he continued.

He added that since more borrowers are opting for variable-rate mortgages, he suspects lenders “are going to have to sacrifice some spread on fixed rates to get people to bite.”

If too many clients opt for variable rates, “banks could quickly get offside on term matching,” Sims says.

Lenders face a risk if they have too many variable-rate mortgages because of potential mismatches between short-term liabilities and long-term assets. If interest rates rise, it can disrupt their profitability and lead to higher costs, especially if they haven’t properly balanced their portfolio.

That, Sims says, is why some lenders have been decreasing their variable rate discounts on prime even as prime keeps falling with each Bank of Canada rate cut.

Are Canada’s big banks pulling back on competition?
As we’ve reported previously, Canada’s Big 6 banks have been unusually competitive with their mortgage pricing this fall, a trend John Webster, former CEO of Scotia Mortgage Authority, called a “silly business” as the big banks strive to meet quarterly revenue targets.

At an appearance last month Webster said a “confluence of circumstances” had driven the big banks to be more competitive with their mortgage pricing. However, he also suggested that this was unsustainable and expected more rational pricing to return by the first quarter.

Could this be the start of more rational pricing from the big banks?

Ron Butler of Butler Mortgage said there’s an aspect of seasonality to the recent increases.

“It’s the time of year when all banks end mortgage marketing campaigns, so rates always go up in December,” he told Canadian Mortgage Trends.

However, he also echoed comments from Larock and Sims, noting that despite the recent drop in bond yields, 3- and 5-year yields remain higher than they were since October.

This article was written for Candian Mortgage Trends by:

Steve Huebl

Steve Huebl is a graduate of Ryerson University’s School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.