The past several days have seen the release of more poor economic data as well as negative developments in the ongoing European debt saga.
Canada’s employment report for August (released Friday) was disappointing – a rise in the unemployment rate and a net decline in the number of jobs was worse than the market had expected. Additionally, poor jobless claims numbers out of the US on Thursday and a disappointing “jobs plan” from President Obama did little to stem concerns around the direction of the economy.
Further, there has been considerable drama unfolding in Europe as Greece has reportedly failed to fully implement austerity measures prescribed as part of its bailout and grandstanding reaches a fever pitch. European Central Bank Chief Economist Jurgen Stark resigned on Friday for “personal reasons” (widely believed to reflect his objection to the central bank buying government bonds – Europe’s quantitative easing), and politicians have openly begun to discuss a Greek default.
Despite having not yet fully implemented the agreed upon austerity measures, the Greek economy has contracted more than what had been projected by EU / IMF economists for the economy once the “all-in” level of cuts were to have been achieved. Markets are quickly realizing that austerity makes for good politics but only serves to exacerbate an already dire economic situation and is unlikely to restore sustainability.
Generally speaking, a poor economic outlook tends to drive bond yields lower as money moves out of equities and into fixed income. The ultimate impact on mortgage rates however, is also dependant on credit spreads, which tend to widen during such periods.