Spikes, Nails, and Sharp Objects

This morning we all saw the release of the Canadian and US jobs reports, and WOW, were they a blowout. It has been a long time since I have seen employment reports those nice!! Almost every metric hit the marks – jobs were full time instead of part time, employment was in the private sector, not the the government sector, the unemployment rate dropped, and the gains were WELL above the consensus on both sides of the border. All in all this was an A plus report from an employment perspective.

But of course, every silver lining has a cloud, and what is great for job seekers is going to work against mortgage seekers. After this mornings numbers we witnessed a huge spike in interest rates. After all, if employment is firing away, the BOC and the US Fed are going to have a lot less temptation to trim those perky high interest rates. Canada 5’s rose 12 bps to finish off the day, and the US 10 year was up 8 bps, setting a 1 year high. This makes sense that Canada’s bond would react more so than the US, as there is a lot of negativity baked into Canadian bond pricing right now. A surprise like a blowout jobs number will have a blowout sized impact on bond yields.

For the sake of mortgage rates, let’s hope the December inflation report also isn’t a blowout, or you could see a wild ride for Canadian bond yields in the coming weeks. While everyone will argue with me that the inflation dragon has been slayed, and we only see lower prints from here – I am not so sure, and would think that we could see inflation start to creep back up. I am convinced at this point that people would spend their dying breaths in a hospital bed telling me I am wrong on inflation, but if we take a slightly more global look we can see the embers of inflation re igniting in Europe and Asia. Why would North America be so different? Now, please do not think this means we are going back up to the June 2022 highs of around 8-9%, but we may see the high 2’s to low 3’s again.

Now, this is what I really need to drive home. Inflation at 2.90% or 3.0% is not a deal killer – far from it. We can live with a 3% inflation number all day long. But, and reread this phrase if you need to – the bond market is pricing in inflation going down, or at least staying the status quo in Canada. If inflation returns to the high 2’s or low 3’s, bond yields will have to re adjust from where they currently sit. An inflation print in the low 3’s means you can take Tiff and Co out of the game, and rate cuts become a distant memory. Any pickup in inflation could be the nails in the tires of the housing market. Now, I didn’t say that they raise rates, but everyone and their brother is banking on rate cuts that will not materialize if we see higher inflation and a strong labour market. How much of Canada’s housing market is currently being supported by the ” rates will go down 75 bps this year” narrative? I would suggest about half the market is banking on that.

I am not saying rates spike, but I can certainly see a scenario where we see a grind higher on the fixed, and fewer than expected cuts on the overnight rate. What if Tiff decides to only cut once in 2025? Now, we are a little early in the game to call that play, and I would need to see a couple more months of reporting to confirm it, but December’s hot report followed a better than expected November employment report in Canada, and we have seen 2 months of inflation reports ( October and November ) that are telling us inflation isn’t exactly dropping. With the GST removal from December, January, and part of February 2025, that alone could raise inflation by .1% a month.

Of course, this week we saw all the big bank projections, and I always laugh when I see those, because they all pretty much say the same thing. No big bank economist ever wants to make a bold prediction or rock the boat. Everyone puts so much stock into what the big banks say. Well, if they were that good at reading the future, they would all be billionaires and retired by now. Interest rates and stock performance depend on economist predictions about as much as the weather relies on weather forecasts. I also see a consensus feel to where everyone ” knows ” interest rates are going, and every time in history there is this much agreeance on anything economic, it is usually a good time to take the other side of the trade. I see all the “experts” with their predictions of variables at 3.75%, and fixed around 3.99% – and that may very well happen, but we also need to be cognizant of the fact that we could see the variable right where it is now, and fixed rates 50 bps higher by the end of the year too. Not saying it is the case, but I wouldn’t bet against it either. Basically, I am saying that in order to be successful, you need to look at what can go right, but also at what can go wrong and derail your clients plans. Plan for the best, but have a backup plan for the worst. I think with the data coming in over the last 60 to 90 days, we need to be penciling out a plan for our careers if rates start going the wrong way. Even if no higher rates materialize, by reviewing your plan you will have a better sense of where your business vulnerabilities are and how you can correct them, change them, or make better plans.

As you head into a Friday night, you may want to take a moment and spend some time this weekend calling clients and getting rate holds in. There is a good chance we see rates move up on Monday or Tuesday. This may be a good opportunity to reach out to clients that are renewing in the next 120 days, and get that rate hold in now so that if rates do head higher your competition can’t match it. As always, it isn’t the market, it is how you react to it. Work hard, outsmart the other guys and gals, and keep your head on a swivel. Rates are moving and bouncing around as expected, and we are one hot inflation print away from a rapid rise in bond yields. As the pressure grows with stronger employment month after month, a hot inflation number could be what causes the bond yields to boil over.

Over the last week I have helped 3 clients with a renewal, and each time I was higher than what the incumbent lender offered. Not by a lot, but by 10 to 15 bps. Clients went with me for the experience, expertise, the plan, and the comfort I gave them in planning for their future. It isn’t all about the rate. I don’t say this to brag, but it is something that I am quite proud of. Our goal should be to be the resource our clients lean on in good times and in bad. Knowing what rates may do in the future will give you an edge over 60% of your competition. Knowing what pitfalls may fall on your client down that road, and making a plan for them now will put you above 80% of our industry. There are a lot of ways to make a successful career – no matter the rate environment, you just have to be willing to work for it.

And finally, my heart goes out to all the people affected by the Cali wildfires. Having lived through more natural disasters than I would like, I know how it can feel when you lose hope. Better days will come, but not right away. The human spirit and the help that will pour in after the fires are out will restore your faith in humanity, and allow you to rebuild.