Canada employment data -- ignore the headline

At first blush,  Canadian employment data for April, released by StatsCan this morning, look disappointing.  The analysts' consensus had been looking for a 20,000 increase in employment, but in the event the actual number was a decline of 1,100, well within the statistical error of this volatile data series.  Even so, further analysis of the details suggests that the report is neutral, at worst, in terms of its implications for Bank of Canada policy.  Consider:

• The unemployment rate remained at 5.8 percent, a 40-year low;

• Full-time employment rose by almost 29,000 in the month; the near-flat headline number was the result of a loss of less-desirable part-time positions.  Over the past year the economy has added 378,000 full time jobs, only partly offset by a reduction of about 100,000 in the number of part-time positions.

• Wage gains continue to move higher, with the year-on-year increase in hourly wages up to 3.6 percent.

It is this last factor that is most likely to get the Bank of Canada's attention, particularly with headline CPI (as well as the Bank's preferred inflation measures) all at or above the 2 percent target and set to move higher in the near term.  It remains probable that a further 25 basis point rate hike will come within the next three months.

And after that?  It seems likely that the Bank will be more cautious than the Fed about pushing rates up quickly.  One reason for that is the housing market and the associated high level of household debt.  This week the Bank raised its benchmark mortgage reference rate by 20 basis points, to 5.34 percent.  

Of course, the Bank of Canada itself does not make mortgage loans; this reference rate is designed to allow lenders to assess the ability of new borrowers to meet their mortgage payments, as part of the tighter rules imposed at the start of the year.  Uniquely, it can be described as a "reactive" central bank rate, set in response to the 5-year mortgage rates posted by the chartered banks.  Those rates have been rising in the past few weeks, reflecting rising bond yields, and the Bank of Canada has raised its reference rate in response.  

The good folks at CIBC Capital Markets estimate that a remarkable 47 percent of all Canadian mortgages come up for renewal this year, so rising mortgage rates and the higher reference rate will bite into household spending power.  Add in the fact that the household debt/income ratio remains perilously close to its all-time high, and it becomes easy to see that the all-important consumer sector of the economy could face headwinds this year, even if the job market remains strong.  This week's increase in the mortgage reference rate may well be the most important policy move the Bank of Canada makes this year.