The increase in Australia’s key lending rate has led investors to believe that Canada will have to increase rates sooner rather than later. This expectation was priced into the Canadian Bond Market on Thursday and Friday of last week. The increase should translate into higher fixed mortgage rates before the end of the week.
Please do not be alarmed. This is a natural reaction to Australia’s move, the stronger than expected employment numbers from Canada and our robust housing market. Although these economic indicators would lead us to believe that the Bank of Canada must increase rates we must keep in mind that the Canadian Dollar will have a say in all of this. With a dollar that is almost at par, our Central Bank understands the ramifications of increasing interest rates too quickly, and the Governor of the Bank of Canada has made mention of this in the past week.
Bond rates jump up and down when the market interprets economic information from Canada and around the globe. In this instance the market expects the strong economic numbers from Canada and the Australian Central Banks move to all but guarantee an increase in our Overnight Rate on or before June of 2010.
This expectation leads to an increase in our Bond yields as the market expects rates to increase. As Bond yields increase mortgage lenders must increase their mortgage rates to sell mortgages at competitive yields.
Here are some factors that we believe should bring the fixed rates back down in the short term.
- Australia may have increased their key lending rate but their largest trading partner is not the United States of America, but rather China. China has fared much better in the past 18 months than the U.S.A and is roaring out of this recession with a huge appetite for trade. Canada’s trade growth is heavily reliant on the U.S. Consumer; Americans are not only spending less money but will be unlikely to by Canadian when our dollar is at par and our goods and services become far more expensive.
- Our Employment numbers may have looked great when they were released last week but it is important to look at the report more closely to identify some trends that might not inspire great confidence. Primarily, the report identifies that many of the jobs were created in the Government Sector. Secondly that an unusually abysmal summer Student job market this summer should have impacted the seasonal adjustment usually placed on the employment number less than it actually did (each year Statistics Canada adjusts the October employment numbers to adjust for the number of students that are leaving the job market, since fewer students actually had jobs this adjustment lead to an increase in the actual employment rate). Finally, in a bad economy people stop looking for work and are therefore taken off of the list of unemployed, thereby reducing the unemployment rate.
- Our housing boom. Although prices are increasing it is because of affordability and not because of a roaring Canadian economy. The rush of people now buying are simply those who put everything on hold while the world was collapsing. This pent up demand will soon move through the system and bring our housing market to a more normal level.
In short we feel that a variable rate is still a great place to be, but if you are concerned about no being able to lock into a super low 5 year fixed rate it may be time to give us a call and discuss a fixed rate strategy.
Marcus Tzaferis
