Last Thursday, Stats Can released the labour force survey which showed that Canada added 25,000 jobs (on a net basis) but even with these added jobs there was actually a decline in the employment rate. If you are wondering how this is possible the simple answer is that Canada added more people to its population then it did jobs.

(For the labour force release directly from Stats Can – click here

On the surface, adding jobs sounds like a great thing but hiding within the data reveals something of a bigger concern – another sign of a cooling economy. In this longer post, I will go through some of those signs and explain what it means for mortgage rates.

Mortgage rates have been a big topic of conversation since the Bank of Canada started hiking rates in early 2022. Today, they remain a big topic of conversation because:

• Bank of Canada Governor, Tiff Macklem, announced last Wednesday (Dec 6th) that they would be holding rates
• They affect so many people whether you are purchasing your home, renewing your mortgage, or even considering refinancing your home.

There is a service that I subscribe to, Edge Realty Analytics, that helps keep me best informed as well as providing a well-rounded overview of Canada and the macro-environment. In a recent publication they highlighted three red flags in the labour market:

1. Increase in unemployment rate from 5.7% to 5.8%
2. Decline in average hours worked
3. The significant layoffs in the financial services industry

Unemployment Rate

There is a principle, called the Sahm Rule, which said that recessions in the US are overwhelmingly likely when the 3-month average unemployment rate moves 50 bps (or 0.5%) about the 12-month low. Claudia Sahm, yes the creator the of the rule, revised this in 2021 to say that she thought that 60 bps was a better metric. As of right now, Canada is 70 basis points over the 12 month low.

There is a direct relationship between unemployment rate and how it trends when smoothed out over 3-months. As this trend gains momentum, it tends to go on for a prolonged period of time. The research team highlighted that even if you ignore COVID lockdowns, the other times where the Sahm rule applies (going back to as far as 1977) unemployment rose on average an additional 170 bps (or 1.7%). The Bank of Canada has long talked about how it needs to loosen the labour market to lower rates (which means substantial unemployment).

Hours worked – Going down?

This struck me as odd given all the anecdotal evidence around household indebtedness and the fact that a lot of people have looked for additional sources of income to offset inflation and higher mortgage payments. (Arguably the importance of about facts vs. anecdotes )

Despite the increases in employment, hours worked fell 0.7% which is the largest monthly decline since early 2022 and compared to the last 3 months its a drop of 1%. This kind of drop has only happened six times since the financial crisis. This appears to be a reflection of is the fact that businesses had such a tough time attracting employees in the past few years. As a result, they are more likely to cut hours or scale back overtime compared to let workers go even as the economy continues to weaken.

What is going on in the Financial Services Industry

We’ve seen lots of stories in the news about banks cutting staff recently as these (including real estate and leasing companies as well as insurance) being tied to the domestic economy. As of now, this sector has reduced staff for the the last four months which has led to a cumulatie lay-off of 4.4% of its staff. This sort of data has not been seen in almost 50 years, including during every recession throughout this timespan.

So what does this mean for rates?

The general rule of thumb is this:

• Fixed mortgage rates are tied to government bond yields
• Adjustable and Variable rate mortgages are tied to the economy and more pointedly economic bad news = lower rates

After the Bank of Canada held rates this week and these data points came out, traders started betting that the first set of cuts would happen in March 2024. Is it a guarantee that this happens? Not at all.

Here is what traders revised their projections to:

Again, this doesn’t mean its going to happen exactly as projected as nobody projected the rate hiking cycle that we’ve been on since early 2022.

There were basically two interesting revisions made in consensus:

• Rate cut date change (mentioned above but as seen they now think rates will happen a month sooner then they did last month)
• Rates are forecasted to to drop a total of 1.25% next year (two weeks ago this 0.75%)

While those are projections, I will tell you that fixed mortgage rates have dropped steadily over the last 3 months due to a decline in government bond yields. This has resulted in an average savings for borrowers of $145/month (note: fixed mortgages don’t get repriced … this savings is between someone that bought a house 4 months ago vs. someone who bought one last week).