This week’s top stories include how Bay Street traders are underestimating the extent of the interest rate hikes that are yet to come, how Canada beat having to initiate the bank tax, how building permits were up in the month of May across Canada, how housing starts were down in the month of May, how breaches at brokerages caused the privacy czar to audit mortgage brokerages, how the commercial market is quite strong, how there was a trade surplus in the month of April and how Canada witnessed the fastest growth in a decade during the first quarter of this year.
Underestimating rate hikes
Derek Holt, vice president of economics at Scotia Capital, stated this week that many Bay Street traders are underestimating the Bank of Canada (BoC) when it comes to interest rate hikes. Traders are currently pricing in a 36% chance that the BoC will raise interest rates by 0.25%, or 25 Basis Points (Bps), at their next meeting in July.
Holt stated, “That’s likely too low and thus represents mispriced opportunity at the short end, as the BoC faces the need to continue tightening monetary policy.” Scotia Capital expects rate hikes over the remainder of this year and expects the overnight lending rate to reach 2.75% by next summer. The overnight lending rate is currently at 0.5%. Holt went on to say that he does not rule out a pause from the BoC while it waits for the U.S. Federal Reserve to raise interest rates in the first quarter of next year so that the two central banks can move in tandem.
The current rate hike is not expected to be felt in the economy until the overnight lending rate gets much higher. Although traders seem to be looking at the spreads, the actual factor on mortgage rates is the bond yield as this is how mortgage rates are priced. I think traders need to take a better look at the bond yield before commenting on the next rate hike. What do you think? Please comment below.
Canada beats bank tax
Canada won a key fight this weekend against a global bank tax. The G20 finance ministers approved a plan on Saturday that allows countries to manage this issue as they deem fit. Europe and the United States can go at it their own way but the plan allows the rest of the G20 to avoid the idea and find alternative ways to reduce banking risks.
Finance Minister Jim Flaherty commented by saying, “The majority of countries in the G20 do not support an ex ante bank tax, that is clear. At the end of the day, different countries will choose different ways of reaching the goal (that banks should pay for government interventions) but there is no agreement to proceed with an ex ante bank tax.”
G20 finance ministers and central bankers said that the financial sector must make a fair and substantial contribution to paying for the burdens associated with government intervention. The statement also included wording that will allow most G20 members to avoid a bank tax if they choose to. The requirement for banks to pay back government aid has been limited to those countries that actually bailed out their banks.
So it seems that the bank tax is going no where in Canada and by the looks of it, also going no where anywhere else. I understand why a country like Canada would be left to handle their own banks but what security will this provide south of the border where bank bailouts were a dime a dozen. What do you think? Please comment below.
Building permits rise
Increased commercial projects helped raise the value of building permits across Canada by 5.4% in the month of May. The economy is gaining traction as the non residential market picks up the slack as demand for industrial, retail and commercial space continues to pick up. This was the latest news released from Statistics Canada on Friday of last week.
Residential development is down and showing signs that the sector may be cooling off. The non residential sector saw the value of permits rise for the third straight month in April, up a whopping 32.2% to $2.8 billion. Permit values were down 8% in March to $3.9 billion as declines in home building in Ontario, British Columbia and Quebec dwindled. Toronto saw building permits rise 17.4% to $1.254 billion. The increase was seen in the commercial sector where permits were up 119% from the month of March with residential permits dropping 23%.
Housing starts down in May
Canada Mortgage and Housing Corporation (CMHC) released a report on Tuesday outlining the decline in single unit and multi unit housing starts. May saw numbers fall below April’s housing start numbers. The seasonally adjusted annual rate of starts reached 189 100 starts last month when compared to a revised 201 800 units in the month of April.
Bob Dugan, CMHC’s chief economist stated, “Housing starts decreased in both the singles and the multiples segments in May. The decrease in housing starts in May is consistent with our forecast that housing starts for 2010 will reach 182 000 units.” Urban starts were down 9.5% to 165 200 units in the month of May. Multiple unit activity was also down 5.6% to 92 800 with single starts down 14.1% to 72 400.
Construction fell off 21.8% in the Prairie region, 13% in Quebec, 12.9% in B.C and 2.7% in Ontario according to CMHC. Urban starts were up 23.3% in the Atlantic Canada region. Rural starts reached 23 900 unit in the month of May on a seasonally adjusted annual basis.
Breaches at brokerages
The federal privacy commissioner stated this week that the personal financial information of thousands of Canadian consumers has been compromised because of a lack of security at some Toronto area mortgage brokerages. The problem was brought to the commissioner after brokerages started reporting problems.
Jennifer Stoddart stated, “There are a whole army of rogue thieves, an industry of criminality that is increasingly targeting personal information. You can take someone’s credit card and go buy things; you can empty their bank account with the right information. In each case, someone impersonating an experienced mortgage agent downloaded credit reports for people who hadn’t even applied for a mortgage.”
Stoddart launched an investigation into the brokerages after they reported 14 suspicious breaches within a few months back in 2008. Roughly 2500 people across Canada were effected by the breach. York Regional Police and Peel Regional Police are investigating the complaints. I’m glad to say that none of the brokerages that have represented, or represent now, were involved in the breach. What do you think of it all? Please comment below.
Commercial sector strong
Commercial properties in Canada held their value through the recession for one main reason – there were no distress sales. This is also because owners of commercial properties could refinance their debts inexpensively through Canada Housing and Mortgage Corporation (CMHC). This provided access to credit at a time where the debt markets were completely closed.
With mortgage rates on the rise, buyers are rushing to make commercial purchases while mortgage interest rates are still quite low. RealNet Canada tracks sales in Canada and stated that first quarter sales volumes decreased in majority of Canada at a time when other commercial sectors were showing strong signs of recovery. Although it has nothing to do with the sector itself, it does show how reluctant sellers are to part with income generating properties.
April trade surplus
Statistics Canada reported yesterday that Canada’s balance of trade with the rest of the world was in a surplus in the month of April as imports fell more than exports. Canada posted a trade surplus of $175 million in April after seeing a $236 million deficit in the month of March.
Exports were down 1% with imports falling 2.2%. Economists had previously expected a surplus of roughly $600 -$700 million in the month of April. Statistics Canada also revised March trade figures downward from the original estimate of a $254 million surplus.
Ian Pollick, strategist at TD Securities commented by saying, “Overall, this was somewhat of a disappointing trade report, mainly given the miss between expectations and the actual print. The decline seen in exports during the month highlights the fragility of the recovery in global demand in April. Going forward, while it is too early to pinpoint precise GDP implications, the ongoing economic recovery should assist in the rebound in global aggregate demand.”
Fastest growth in a decade
A new report from RBC Economics predicts that gross domestic product (GDP) growth of 3.6% will help Canada’s economy surge in 2010. This is expected to be a result of strong demand and increased job creation in Canada. Canada’s real GDP grew 6.1% in the first quarter of this year, which was the fastest pace seen in the last ten years.
Craig Wright, senior vice president and chief economist at RBC stated, “Canada’s economy continued to surge ahead as domestic demand was backed by increases in consumer, housing and government spending. Looking ahead, positive signs in the job market indicate that the recovery will continue in the near term, as private investment increases follow a sharp decline during the recession and core inflation remains on target.”
Stronger than expected data and higher inflation has reduced the need for the emergency low interest rates that we have been taking advantage of for some time now. There is still an uncertainty about the European debt crisis, which will add caution to the Bank of Canada’s decision to increase rates again. Growth is expected at 3.5% in 2011.
{ 6 comments… read them below or add one }
The rate hikes are old news…
October 26, 2007
Globe Says Lock In
Lock-in-Mortgage Rob Carrick from the Globe & Mail is ringing the alarm. With mortgage rates at 6-year highs and shrinking variable-rate discounts, he says it’s time to lock in now.
The low rates have pushed real estate higher. With problems around the world (debt). Rates going much higher will kill real estate, if you believe that then now is the time to sell.
The real problem maybe the economy slowing down and a new wave of lay offs starting at the high levels of unemployment. Plus the HST should act like a interest rate hike anyway.
Actually Brian. The rate hikes are still around the corner. Prime is expected to reach 4.5% by December of next year and the 5 year fixed rate is expected to be between 6% – 7% by the end of this year. Who ever posted that article on October 26, 2007 was dead wrong and his advice may have cost some people thousands of dollars more in interest.
I do agree with your statement on the HST. It will cause many consumers in Canada to spend more rather than save more as the government had promised. Thanks for the comment and feel free to share your opinion anytime.
The writer is Rob Carrick from the Globe and Mail. The advise is like FOX news, light on facts minus the nice looking women. CIBC, TD have all said similar things in the past.
If we get high wage growth at least 4% which is not matched by higher taxes. Higher paying jobs, then we will get higher interest rates. Until then, this will not be going to happen.
Plus…
The odds of rate increases is very slim…
Why? Auto Sales Down in May by over 4%. Very high debts levels and negative savings. Higher interest rates = higher job losses = falling real estate prices. The government is concerned tha Canadians are not saving enough, so now they (government) are talking about increasing CPP contributions!
In the early 90′s this was about 4% of gross income now it is just under 10%!
Brian
Ps. Railroad traffic in the US has fallen to -25 annual rate. No traffic means no recovery.
Brian,
Great feedback. I understand your points and they all make solid sense but I think the variable rate will still continue to increase. Canada can not manage to keep pressing forward if we keep rates at emergency lows for much longer. The fixed rate has pulled back a bit but the outlook is that the variable rate will reach 4.5% by December of next year according to the Bank of Canada and they control all rate increases so it’s going to be hard to against their statement. We always appreciate opinions and look forward to your next one.
Paul,
Take the BOC with a grain of salt. Their real concerns are high real estate prices and negative savings. Does not seem like a good growth story.
In the US… Housing starts fell 10% to a seasonally adjusted annual rate of 593,000 in May, the lowest level since December, after a federal tax break for home buyers expired. The details were even worse, as starts of single-family homes plunged 17% to a seasonally adjusted rate of 468,000, the lowest in a year. Single-family starts suffered the largest drop since 1991.
I could be wrong but after doing this for 15 years of going short term, I don’t see a change anytime soon. At the end of the year if prime goes as high as you say it will, I will buy you a beer. If not you can buy me one. Cheers!
Brian
Brian,
Sounds good!!