20 Jan

Bank of Canada Does Not Cut Rates

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In an evenly divided call by market analysts, the Bank of Canada maintained its target for the overnight rate at 1/2 percent. The Bank said that inflation prospects are largely as expected and that “the dynamics of the global economy are broadly as anticipated in the Bank’s October Monetary Policy Report (MPR).”

Really?  Oil prices have plummeted to unexpected lows. Stock markets are declining sharply and the Canadian dollar has fallen more than expected and certainly, the output gap will remain wider for longer than suggested in the October MPR.

The Bank called the setback for the Canadian economy from the further decline is oil prices temporary. The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016. The Bank projects Canada’s economy will grow by about 1-1/2 percent in 2016 and 2-1/2 per cent in 2017, with the output gap closing around the end of 2017. This is the Bank’s forecast without including the positive impact of fiscal measures expected in the next federal budget. 

Really? I feel like the economic forecasters at the Bank of Canada are living in an parallel universe–where things are a lot rosier than here on planet earth. 

Don’t get me wrong, there are a lot of good reasons for the Bank of Canada to have refrained from cutting rates.  The Canadian dollar has already fallen sharply and a rate cut could have imprudently triggered a currency rout. With so much concern about household debt, another rate cut would run the risk of encouraging excessive borrowing. As well, with interest rates already so low, another cut is likely to have very little macroeconomic benefit and the Bank should keep some powder dry in case things deteriorate further in coming months. Moreover, the feds are going to goose the economy with infrastructure spending, so taking a wait-and-see attitude makes sense. 

But to suggest that the current weakness is due to temporary factors and a rebound is in train without the fiscal stimulus lacks credibility and appears sanguine at best and irresponsible at worst. Oil prices are not falling due to temporary factors. The world is adjusting to an alternate reality where oil supply is well in excess of sustainable demand and more supply is coming on stream from Iran. Canadian oil is among the most expensive in the world to produce and prices received by Canadian oil producers (Western Canada Select (WCS) in the chart below) are well below prices elsewhere. This inevitably continues the painful restructuring in the oil patch. These are not temporary factors.

Norway–another oil giant with expensive production–recognizes its need to accelerate its economic transformation. In its October 2015 budget, the Norwegian government declared that “the economic outlook is different than we have been accustomed to over the past 10-15 years…Oil is no longer the growth engine of the economy.”  Faced with the need to restructure, the government is keen to shift Norway from its dependence on oil towards other industries. Norges Bank, the central bank of Norway, has given forward guidance that interest rates may be cut further in 2016 from record lows despite worries of a house price bubble in Oslo and elsewhere due to increasingly low rates. Norges Bank has warned that house price inflation was higher than expected and that household debt–already at record highs–would continue to outpace income growth.

The Bank of Canada has been behind the curve ever since the decline in oil prices began in 2014, revising down its forecast for the Canadian economy in each quarterly Monetary Policy Report. How long can unanticipated temporary factors be blamed?

 

 

 

Thank you for your insight Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
15 Jan

Will The Bank of Canada Cut Rates Next Week?

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Expectations of a Bank of Canada rate cut next week are mounting and for good reason. The Canadian economy is showing signs of considerable weakness and business investment plans have been cut. Oil prices continue to decline sharply and Iranian oil supply will be coming on stream shortly. Energy companies continue to slash payrolls and dividends. Alberta’s economy will contract sharply this quarter and although the Canadian trade deficit has improved, the decline is nowhere near sufficient to offset the dampening effects of the oil rout, despite the sharp decline in the loonie.

The loonie has just posted its worst 10-day performance since it was allowed to trade freely against the U.S. dollar in 1971. Part of the reason the Canadian dollar has fallen so much is the widening prospect of a Bank of Canada rate cut on January 20–a quarter-point cut to 25 basis points, its lowest level since the 2009 financial crisis. Is this warranted? I think so. The Bank cut rates in a surprise move this time last year when the economy was newly hit by the oil price decline. Since that time, oil prices have  declined dramatically further, especially for Canadian oil.

Some have argued that oil prices will remain low for an extended period and see the prospect of an initial public offering (IPO) of Saudi Arabia’s oil company, Aramco, as a sign of the end of the oil age, triggered by excess supply and  international efforts to combat global warming. Saudi Arabia sees the need to diversify its economy away from oil and so should Canada.

It is not that another rate cut will have a dramatic effect on the economy–with interest rates already so low, the Bank has little ammunition left, even if they take rates into negative territory, as they suggest is possible. They might be reticent to encourage household borrowing at a time when debt levels are at record highs and the government has taken actions to slow the growth in housing. Nevertheless, some Canadian banks nudged up mortgage rates recently, and a BoC rate cut might discourage further increases and could even trigger a rollback.

Fiscal stimulus is certainly coming, but when and how is still uncertain and the economy needs all the help it can get. Market interest rates are at record lows, the stock market has fallen sharply this year, and consumers are worried as food prices continue to rise, which hurst lower-income Canadians proportionately more than others.

In addition, the Federal government has gone ahead with its high-income tax increases (as well as middle class tax cuts), which could well discourage entrepreneurs, business investment and job creation. The tax increases to levels well above those in many other countries also make  it more difficult for Canadian business to attract foreign talent. The decline in the Canadian dollar, while boosting exports and foreign investment, reduces the value of the money Canadians earn and invest. The negative wealth effect damages consumer confidence. 

These are difficult times for Canada and extreme measures should be taken. The Bank should cut rates and the government should introduce larger increases in infrastructure spending than were promised during the election campaign. None of Canada’s economic pain was our own doing, but counter-cyclical policy measures can and should reduce the pain as we work our way towards a more diversified economy.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

13 Jan

Why homeowners and buyers can expect more mortgage rate hikes from the big banks

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Hi there, I’ve had several questions over the past few days about mortgage rates and the expectation of increasing rates… specifically with bond rates dropping.. why is this happening? Why can clients expect more increases to interest rates?  This is a GREAT report that summarizes what is happening in the rate environment!

http://www.financialpost.com/m/wp/news/blog.html?b=business.financialpost.com/news/economy/why-homeowners-and-buyers-can-expect-more-mortgage-rate-hikes-from-the-big-banks&pubdate=2016-01-07

8 Jan

Market Update

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Market Update

The past few weeks have seen some unusual patterns starting to unfold in the Canadian mortgage industry.

Royal Bank increased their rates this week,  which is contrary to the falling bond rate situation. Bonds have dropped 50-60  basis points since Nov. 2015 due to weak global markets.

The recently announced mortgage changes included a section which dealt with new additional capital requirements OFSI will be requiring. There is currently an unusual large spread on rates between lenders, It is too early to tell where all this will end up.

Also the spread between fixed and variable rates mortgages, has continued to shrink.
5 year fixed rates are still in the 2.64-2.84% range with variable rates being between prime(2.7%) less .2-.45%.

Here is a link to a bond site for those who want to follow this more closely, this is the site we rely on for our information.

http://www.investing.com/rates-bonds/canada-5-year-bond-yield-streaming-chart


P.S. If you, your family, or co-workers require guidance on current market trends, please call me, I am always available to help.

8 Jan

U.S. Job Strength Vindicates Fed Rate Hike, But Canada Still Weak

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Once again, the Canadian economy showed signs of struggle as the December jobs report showed gains only in Ontario, while jobs were flat or down in every other province. In marked contrast, payrolls in the U.S. rose more than projected as the unemployment rate remained at a low 5%. U.S. strength vindicated the Fed’s recent rate rise.

Canada added 22,800 jobs in December, rebounding from a loss of 36,00 in November, but the unemployment rate remained at 7.1%–posting a rise of 0.4 percentage points over the course of 2015. While today’s employment report surpassed expectations, most of the job gains were in part-time positions. December’s gains capped a rocky year for job growth as the natural resource sector shed thousands of jobs. Employment increased among people aged 55 and older last month and was little changed for the other demographic groups.

Provincially, Ontario was the lone province posting job gains, up 35,000, lowering the unemployment rate to 6.7%.The hard-hit resources sector took its toll again in Alberta, which lost 3,900 jobs and in Saskatchewan, where there were 4,600 fewer people working in December.

For 2015 as a whole, the fastest employment growth was in British Columbia, up 2.3% compared to just under 1% for the country as a whole. Despite this, the jobless rate in B.C. increased to 6.7% as more people looked for work. Job growth in Alberta was flat last year as declines in full-time jobs were offset by gains in part-time work, but the unemployment rate rose to 7%, its highest level in nearly six years. Employment declined in Newfoundland.

By sector, the biggest job losses last year were in natural resources–down 6.8%. Most of the decline was in Alberta, although there were smaller declines in Saskatchewan, Newfoundland and Nova Scotia. The service sector outperformed goods producers, led by employment in professional, scientific and technical services. There were also significant gains in health care and social assistance. Employment in manufacturing increased just over 2%–the first increase since 2012–mostly in British Columbia.

While the Canadian employment report in December surpassed Bay Street expectations, the underlying story is that the private sector remains weak, especially the energy and mining sectors. Given the recent global market rout and a deepening oil market slump, the Canadian economy is vulnerable to further weakness and Alberta, in particular, has yet to see the worst of it.
 
There is fresh pain for producers of the world’s cheapest crude as the Canadian heavy grade oil prices reached a record low, raising the prospect of more production coming offline. Northern Alberta’s vast oil sands hold the world’s third-largest crude reserves but carry some of the highest production costs globally — up to US$50 a barrel — because of the energy-intensive production process. The spot price for Western Canadian Select fell below US$20 a barrel earlier this week, its lowest level since tracking began in 2008, according to Bloomberg. The decline was precipitated by the report of a surge in U.S. gasoline inventories to its highest level in 22 years and the climb in crude supplies at the American storage hub in Oklahoma to a record high.

Canadian oil producers are cushioned somewhat by the weak loonie, as they are paid in U.S. dollars and most of their costs are in loonies. Most Canadian companies will likely keep producing to pay bills and loans, even if the crude price does not cover cash operating costs.

We are likely to suffer continued weakness in the Canadian dollar and the underperformance of the Canadian stock market. Mortgage rates are rising and government actions to cool the housing market will also contribute to downward pressure on the economy. However, the weak loonie will help to spur exports and to attract foreign capital. Tourism will no doubt rise. The New York Times today deemed Toronto the top tourist destination for 2016. Government fiscal stimulus will help and cannot come too soon and Governor Poloz is ready to use unconventional monetary policy tools if needed.

The United States is leading the global economy as weakness in China, Russia, Brazil and other emerging economies is driving down commodity prices and stock markets. The U.S. December jobs report confirmed the strength in the economy as payroll growth surged, capping the second-best year for American workers since 1999. While U.S. employers continue to add to the head count, wages have yet to show a sustainable pickup.

Hence, monetary policy will continue to diverge in Canada and the U.S. 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres