November Newsletter
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Articles
Interest Rate Forecast- Sept. 2010
The economic slowdown is more evident with each passing month and the Bank of Canada looks to acknowledge it by holding its policy rate at 1.00% ruling out a fourth consecutive rate increase.
The economic slowdown lasts into 2011 and once better growth prospects emerge, the Bank resumes its rate normalization process. A rising but low interest rate environment in the next two years is foreseen with considerable swings in bond yields reflecting uncertainty and economic growth variability.
Click here to download the whole article
Interest_Rate_Forecast_September_2010.pdf
Carney plots cautious rate path
Jeremy Torobin Globe and Mail
Mark Carney is taking a cautious approach to raising interest rates, weighing Canada’s powerful
economic rebound against the uncertainty of an “increasingly uneven” recovery across the globe.
The Bank of Canada Governor became the first central banker in the Group of Seven to raise
borrowing costs since the financial crisis and recession, increasing the benchmark overnight rate
Tuesday by one-quarter of a percentage point to a still exceptionally low 0.5 per cent.
Policy makers will keep an eye on Europe’s troubles, and won’t move more aggressively than they see
fit, the Bank of Canada suggested, even though the economy is rebounding rapidly and inflation will
likely exceed its 2-per-cent target this year. Much like in 2008 when the U.S. financial crisis pulled
Canada into recession, the country’s economic health depends in large part on policy makers in other
countries successfully containing homemade problems.
“Interest rates are incredibly low, given the strength of the domestic economy, but the global story is
where it’s at right now,” Eric Lascelles, chief economic strategist at TD Securities in Toronto, said in an
interview. “The level of uncertainty suggests there’s not a lot of confidence in the forecasts.’’ The
open-ended nature of the announcement sparked a fall in the Canadian dollar and yields on two-year
government bonds as investors pulled back their bets on what they had expected might be a series of
uninterrupted rate hikes going forward.
Mark Carney is taking a cautious approach to raising interest rates, weighing Canada’s powerful
economic rebound against the uncertainty of an “increasingly uneven” recovery across the globe.
The Bank of Canada Governor became the first central banker in the Group of Seven to raise
borrowing costs since the financial crisis and recession, increasing the benchmark overnight rate
Tuesday by one-quarter of a percentage point to a still exceptionally low 0.5 per cent.
Policy makers will keep an eye on Europe’s troubles, and won’t move more aggressively than they see
fit, the Bank of Canada suggested, even though the economy is rebounding rapidly and inflation will
likely exceed its 2-per-cent target this year. Much like in 2008 when the U.S. financial crisis pulled
Canada into recession, the country’s economic health depends in large part on policy makers in other
countries successfully containing homemade problems.
“Interest rates are incredibly low, given the strength of the domestic economy, but the global story is
where it’s at right now,” Eric Lascelles, chief economic strategist at TD Securities in Toronto, said in an
interview. “The level of uncertainty suggests there’s not a lot of confidence in the forecasts.’’ The
open-ended nature of the announcement sparked a fall in the Canadian dollar and yields on two-year
government bonds as investors pulled back their bets on what they had expected might be a series of
uninterrupted rate hikes going forward.
Government of Canada Takes Action to Strengthen Housing Financing
The Honourable Jim Flaherty, Minister of Finance, today announced a number of
measured steps to support the long-term stability of Canada's housing market and
continue to encourage home ownership for Canadians.
"Canada's housing market is healthy, stable and supported by our country's solid
economic fundamentals," said Minister Flaherty. "However, a key lesson of the global
financial crisis is that early policy action can help prevent negative trends from
developing."
The Government will therefore adjust the rules for government-backed insured mortgages
as follows:
"There's no clear evidence of a housing bubble, but we're taking proactive,
prudent and cautious steps today to help prevent one. Our Government is acting to
help prevent Canadian households from getting overextended, and acting to help
prevent some lenders from facilitating it," said Minister Flaherty. "If some lenders
aren't willing to act themselves, we will act. These measures demonstrate the
Government is committed to taking action when necessary to support the longterm
stability of a sector that is so vital to our economy and the financial wellbeing
of Canadian families."
These adjustments to the mortgage insurance guarantee framework are intended to
come into force on April 19, 2010.
Backgrounder
International Monetary Fund, our housing market is fully supported by sound
economic factors, such as low interest rates, rising incomes and a growing
population. Moreover, mortgage arrears—overdue mortgage payments—have also
remained low.
Today's announcement is part of the Government's policy of proactively adjusting
to developments in the housing market that could take root and cause instability.
These steps are timely, targeted and measured, and will reinforce the importance
of Canadians borrowing responsibly and using home ownership as a savings
mechanism.
credit risk management tool that protects lenders from losses on mortgage loans.
If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the
property are insufficient to cover the resulting loss, the lender submits a claim to
the mortgage insurer to recover its losses.
The law requires federally regulated lenders to obtain mortgage insurance on
loans in which the homebuyer has made a down payment of less than 20 per cent
of the purchase price (also called high loan-to-value ratio loans). The homebuyer
pays the premium for this insurance, which protects the lender if the homebuyer
defaults.
The Government ultimately backs most insured mortgages in Canada. It is
responsible for the obligations of Canada Mortgage and Housing Corporation
(CMHC) as it is an agent Crown corporation. In order for private mortgage
insurers to compete with CMHC, the Government backs private mortgage
insurers' obligations to lenders, subject to a deductible equal to 10 per cent of the
original principal amount of the loan.
In October 2008, the Government adjusted its minimum standards for
government-backed, high-ratio mortgages, including:
government-backed mortgages.
affordability of housing for Canadians. It is important that Canadians borrow
prudently and are able to manage their debt loads when interest rates rise.
Lender and mortgage insurers look at two key ratios when assessing the ability of
a borrower to make payments on a mortgage loan:
borrowers qualify for their mortgage amount using the greater of the contract rate or the
interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS
ratios.
This measure is intended to protect Canadians by providing them with additional
flexibility to support mortgage payments at higher interest rates in the future.
Borrowers seeking financial flexibility can currently refinance their mortgage and
increase the amount they are borrowing on the security of their home up to a limit of 95
per cent of the value of the property. This type of refinancing lowers the borrower's
equity in their home. The adjustments today will lower the maximum amount of the
mortgage loan in a refinancing of a government-backed high ratio mortgage loan to 90
per cent of the value of the property, consistent with the principle that home ownership is
a tool for savings.
mortgage insurance on non-owner-occupied properties purchased for speculation.
Currently, borrowers may purchase a residential property with a 5 per cent down
payment. Today's change will require a 20 per cent down payment for small (i.e., 1- to 4-
unit) non-owner-occupied residential rental properties. Borrowers purchasing owneroccupied
residential properties which also include some rental units (e.g., borrowers
purchasing a duplex to live in one unit and rent out the other) will still be able to access
government-backed mortgage insurance with a 5 per cent down payment.
Moving to the New Framework
These adjustments to the mortgage insurance guarantee framework are intended to come
into force on April 19, 2010. Exceptions would be allowed after April 19 where they are
needed to satisfy a binding purchase and sale, financing, or refinancing agreement
entered into before April 19, 2010.
measured steps to support the long-term stability of Canada's housing market and
continue to encourage home ownership for Canadians.
"Canada's housing market is healthy, stable and supported by our country's solid
economic fundamentals," said Minister Flaherty. "However, a key lesson of the global
financial crisis is that early policy action can help prevent negative trends from
developing."
The Government will therefore adjust the rules for government-backed insured mortgages
as follows:
- Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
- Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
- Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
"There's no clear evidence of a housing bubble, but we're taking proactive,
prudent and cautious steps today to help prevent one. Our Government is acting to
help prevent Canadian households from getting overextended, and acting to help
prevent some lenders from facilitating it," said Minister Flaherty. "If some lenders
aren't willing to act themselves, we will act. These measures demonstrate the
Government is committed to taking action when necessary to support the longterm
stability of a sector that is so vital to our economy and the financial wellbeing
of Canadian families."
These adjustments to the mortgage insurance guarantee framework are intended to
come into force on April 19, 2010.
Backgrounder
Canada's Housing Market Remains Strong
Canada's housing market remains healthy and stable. According to theInternational Monetary Fund, our housing market is fully supported by sound
economic factors, such as low interest rates, rising incomes and a growing
population. Moreover, mortgage arrears—overdue mortgage payments—have also
remained low.
Today's announcement is part of the Government's policy of proactively adjusting
to developments in the housing market that could take root and cause instability.
These steps are timely, targeted and measured, and will reinforce the importance
of Canadians borrowing responsibly and using home ownership as a savings
mechanism.
Mortgage Insurance
Mortgage insurance (which is sometimes called mortgage default insurance) is acredit risk management tool that protects lenders from losses on mortgage loans.
If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the
property are insufficient to cover the resulting loss, the lender submits a claim to
the mortgage insurer to recover its losses.
The law requires federally regulated lenders to obtain mortgage insurance on
loans in which the homebuyer has made a down payment of less than 20 per cent
of the purchase price (also called high loan-to-value ratio loans). The homebuyer
pays the premium for this insurance, which protects the lender if the homebuyer
defaults.
The Government ultimately backs most insured mortgages in Canada. It is
responsible for the obligations of Canada Mortgage and Housing Corporation
(CMHC) as it is an agent Crown corporation. In order for private mortgage
insurers to compete with CMHC, the Government backs private mortgage
insurers' obligations to lenders, subject to a deductible equal to 10 per cent of the
original principal amount of the loan.
In October 2008, the Government adjusted its minimum standards for
government-backed, high-ratio mortgages, including:
- Fixing the maximum amortization period for new government-backedmortgages to 35 years.
- Requiring a minimum down payment of five per cent for newgovernment-backed mortgages.
- Establishing a consistent minimum credit score requirement.
- Requiring the lender to make a reasonable effort to verify that theborrower can afford the loan payment.
- Introducing new loan documentation standards to ensure that there isevidence of reasonableness of property value and of the borrower'ssources and level of income.
Measures Announced Today
Today, the Government announced three changes to the standards governinggovernment-backed mortgages.
Qualifying at a Five-Year Rate
Current interest rates are at record low levels, which has improved theaffordability of housing for Canadians. It is important that Canadians borrow
prudently and are able to manage their debt loads when interest rates rise.
Lender and mortgage insurers look at two key ratios when assessing the ability of
a borrower to make payments on a mortgage loan:
- Gross Debt Service (GDS) ratio—the ratio of the carrying costs of thehome, including the mortgage payment, taxes and heating costs, to theborrower's income.
- Total Debt Service (TDS) ratio—the ratio of the carrying costs of thehome and all other debt payments to the borrower's total income.Currently, the interest rate used to determine the mortgage payment for these calculationsis either the rate fixed for the term of the mortgage or, in the case of a variable-ratemortgage and mortgages with terms of less than three years, the greater of the contractrate and the prevailing three-year fixed rate.
borrowers qualify for their mortgage amount using the greater of the contract rate or the
interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS
ratios.
This measure is intended to protect Canadians by providing them with additional
flexibility to support mortgage payments at higher interest rates in the future.
Limit the Maximum Refinancing Amount to 90 per cent of the Loan-to-
Value Ratio
Borrowers seeking financial flexibility can currently refinance their mortgage and
increase the amount they are borrowing on the security of their home up to a limit of 95
per cent of the value of the property. This type of refinancing lowers the borrower's
equity in their home. The adjustments today will lower the maximum amount of the
mortgage loan in a refinancing of a government-backed high ratio mortgage loan to 90
per cent of the value of the property, consistent with the principle that home ownership is
a tool for savings.
Discouraging Speculation by Requiring a Minimum Down Payment of 20
per cent for non-owner-occupied properties
This measure will require a minimum down payment of 20 per cent for governmentbackedmortgage insurance on non-owner-occupied properties purchased for speculation.
Currently, borrowers may purchase a residential property with a 5 per cent down
payment. Today's change will require a 20 per cent down payment for small (i.e., 1- to 4-
unit) non-owner-occupied residential rental properties. Borrowers purchasing owneroccupied
residential properties which also include some rental units (e.g., borrowers
purchasing a duplex to live in one unit and rent out the other) will still be able to access
government-backed mortgage insurance with a 5 per cent down payment.
Moving to the New Framework
These adjustments to the mortgage insurance guarantee framework are intended to comeinto force on April 19, 2010. Exceptions would be allowed after April 19 where they are
needed to satisfy a binding purchase and sale, financing, or refinancing agreement
entered into before April 19, 2010.
NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS Feb 27
The bad news is that US fourth quarter GDP was revised downward to show a dazzling 6.2% decline (annual
rate). This was the sharpest decline since the 1982 recession. The good news is that this quarter is behind us.
The main contributors to the revision were lower investment in inventories, lower exports, and weaker
consumer spending on non-durable goods. From the data we have to date regarding the current quarter, it
appears that real US GDP will fall by an additional 5% (annual rate). So this is as bad as it gets. In fact, we can
make the point that while the US economy will remain in negative territory for the next 4-5 months, the rate at
which it is declining is slowing.
The 10-year US Treasury yield is just under 3%, up about a full percentage point from its December low. Back
then, the 10-year yield plunged following the Fed's announcement that it was exploring the idea of purchasing
longer-term treasury securities. The recent increase in long-term rates was largely due to increased supply and
a daunting federal budget deficit which will clearly be dealt with by the Fed. Rising treasury yields are
complicating matters for the Federal Reserves; since higher long-term rates restrict growth. At this stage of the
game, the Fed will probably look into buying these securities in order to lock-in the improvement in long-term
mortgage rates.
The issue of a de facto nationalism of American banks is clearly impacting markets. Following two injections of
capital, the US Treasury will convert up to $27.5 billion of preferred Citigroup shares into common stock issued
under the Capital Purchase Program. This is on top of the $45 billion allocated to Citigroup in 2008 to shore it
up. The move increases the bank’s tangible common equity from $29.7 billion to $81 billion and is intended to
strengthen its capital structure. This means that the government has increased its ownership of close to 36%
of Citigroup's outstanding common stock. And this is before the stress test the government will conduct on
banks with over $100 billion in assets. So potentially the government can control even a larger portion of the
bank.
The main point made by the White House, Treasury and the Fed regarding this issue has been that
nationalization is not the issue since the government will still be a minority shareholder. With the financial
system still impaired, policymakers have few choices.
In Canada, the market is currently discounting only a 25 basis points rate cut by the Bank of Canada next
week. The thinking here is that with the Bank being so optimistic about a robust growth in 2010 (3.8%) and
given the lagged impact of monetary policy, why cut by more? But given the weakness in the US and the clear
deterioration in the Canadian labour and housing markets, we might see the Bank cutting by 50 basis points.
The first quarter results from Canadian banks were generally better than expected, reflecting the strength of
this sector in comparison to virtually any other financial sectors worldwide. This does not mean that Canadian
banks will not face challenges in the coming six months. Retail banking activity is slowing, reflecting a
significant softening in demand for credit as well as rising delinquency rates. The mortgage market will
probably remain flat in the coming twelve months following a 14% increase last year. And the cumulative
number of personal bankruptcies will probably rise by 20% or so in the coming twelve months.
Benjamin Tal
Senior Economist
Read the whole article: weekly_market_update_feb_27_09.pdf
NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
The current recession will be characterized by de-leveraging by households and corporations. Household credit
will be little changed in the course of the coming 12 months, and for the first time in many years the very
important debt-to-income ratio will stop rising.
The most notable softening will be seen in the mortgage market. After rising by 12-13% in 2008, look for
mortgage outstanding to rise by only 2-3% in 2009. On average, house prices will fall by roughly 10% in 2009
versus the average value in 2008.
Yes, we are in a recession. But like previous recessions this one will also end, and the sun will shine again.
Meantime we have to try to understand the nature of this recession and see how we can position ourselves to
take advantage of the opportunities presented by the current situation and prepare ourselves for the eventual
recovery.
One of the derivatives of the recession is that the savings rate will rise. Households are reducing reliance on
debt (which is negative savings), and lower consumer confidence is leading to increase in precautionary
savings. Overall, we expect the savings rate to rise to 5% in the coming year. This is a significant increase. And
the money will have to go somewhere. In this context the timing of the introduction of the Tax-Free Savings
Account (TFSA) is ideal since it provides Canadian with a tax efficient way to park these precautionary savings.
Given the expectations that the economy will start showing some pulse in the second half of the year, and the
fact that equity markets tend to lead the economy, there is a growing sense that the coming few months will
see a rally in the stock market (some say it is going to be a bear market rally), a fact that might lead to some
renew inflow into mutual funds.
In the near-term the bond market might also provide some opportunities. After all, we will have to wait for
some further narrowing in spreads and lower rates before we see a notable improvement in the stock market.
So in the short-term, the government bond market and potentially the corporate bond market can lead to nice
returns.
An addition to the unprecedented efforts by central banks, global governments in general, and in North
America in particular, are engaged in a massive fiscal stimulus which will include a combination of tax cuts but
more importantly, infrastructure spending. Given that every one billion dollar of infrastructure spending in
Canada works to lift the overall economy by close to 0.15% and create no less than 11,500 new jobs, such
programs will not only work towards closing the Canada's $120 billion infrastructure gap, but also in providing
a badly necessary lift to a recessionary economy. And at the back of this discussion, US and Canadian
infrastructure stocks have been rallying recently—in anticipation for a new injection of public money.
Benjamin Tal
Senior Economist
Market Update Dec 15th
| An increasingly challenging economic environment compels us to trim our market target for the TSX by 1,000 points to 11,000 next year. While the implied 20%-plus return warrants a full weighting in stocks, the near-term risks to the market from a contracting North American economy stand in the way of overweighting stocks at this point. We continue to expect the North American economy to contract over the first half of the year, with nearterm punitive consequences for earnings. With M&A deal risks out of the way, we have added weight to telecoms and remain overweight the traditional defensive TSX sectors. The enormity of the fiscal response from Washington should resuscitate growth by the second half of the year, spelling a recovery in both earnings and commodity prices, particularly energy. While demand destruction from the current recession has sent oil prices plunging below $50/bbl, supply destruction, including cancellations in the Canadian oil sands and offshore projects around the world, will see crude soar back to triple-digit territory toward the end of next year and into 2010. |
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