Friday, 11 May 2018

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.  

Thursday, 10 May 2018

Racial stereotyping at the Toronto Star

Today's print edition of the Toronto Star contains not one but two articles accusing Canada of being a racist country, both written by women of colour.  Both articles riff off a nasty incident a few weeks ago in which a white woman at a Denny's restaurant in Alberta got into a shouting match with a group of Afghan immigrant men.  That raises an interesting question, of course: if racism is as all-pervasive across Canada as these two columnists claim, how come they both have to rely on the same small incident to make their point?

The woman in Denny's deserves to be named and shamed, which has now very comprehensively happened.  But does the whole country and every one of its citizens have to be called out too?  These columnists are using this one example, appalling as it is, to cast all Canadians in a very negative light.  Isn't that the very definition of racial stereotyping?

Ask yourself this: if a right-wing journalist were to pen a piece saying that all Muslims are terrorists or all Jamaicans are drug dealers or all Mexicans are layabouts, would the Toronto Star publish it?  Of course it wouldn't, and shouldn't -- and it should have thought long and hard about publishing these two articles as well. 

Monday, 7 May 2018

Down with the gerontocracy!

It's pretty depressing to look at the US political scene and consider the ages of the principal players.  Donald Trump is 71.  Hillary Clinton is 70.  Joe Biden? 75.  Bernie Sanders is 76 and Nancy Pelosi clocks in at 78. 

I'm younger than all of these people and I still have most of the marbles I started out with, but I wouldn't dream of running for high political office.  My ability to tolerate fools was never one of my strong points, and now I'm worse than ever.  I might not have as short a fuse as Trump, but I wouldn't have the staying power to do the job properly -- which is, come to think of it, one of the few things that Trump and I have in common.

If you look across to Europe, things are only slightly better.  Angela Merkel is 63, while Theresa May and Jeremy Corbyn are 61 and 68 respectively.  There are a few younger leaders -- Macron in France, Paradkar in Ireland -- but they're still the exception.

I think this matters.  Older people tend to be needy and greedy.  Many years ago a whole generation of older New Zealanders were dubbed "the grey greedies" because, when a financial crisis hit the country, the refused to sacrifice any of their extensive social benefits. Younger political leaders, and younger people in general, have to live with the consequences of their decisions, for good or ill, in ways that the current bevy of oldsters simply won't.

That doesn't mean we should want all our leaders to be contemporaries of Kim Jong-Un.  But it does mean that when the big summit meeting happens, Kim is looking at a much longer time horizon than Trump.  That means he has more to gain if he plays his cards right, and much more to lose if he messes up.   

Friday, 27 April 2018

Bond market speaks, mortgage rates rise

By the standards that geezers like me used to live by, Canadian interest rates are still extremely low.  What used to be the benchmark long bond, a 30-year instrument that will finally mature in 2021, carried a coupon of 9.75 percent.  That was the risk-free rate that the government of the day had to pay back in the early 1980s.

Still, bond yields are definitely on the rise right now, with the 5-year Canada trading near 2.2 percent and the 10-year above 2.3 percent.  Rates in the US, where the Federal Reserve is seen as bent on tightening, are higher still, with the 10-year Treasury at 3 percent for the first time since 2014.  Canadian banks have taken heed, and today the two biggest -- TD and Royal -- hiked their fixed mortgage rates.  TD boosted its 5-year rate, the most popular choice among borrowers, by 0.45 percent, to 5.59 percent.

The Canadian housing market is already struggling to regain momentum, and these rate moves -- which are all but certain to be followed by the other banks -- must surely put the final nail into realtors' lingering hopes for a rebound later in the year.  That may be no bad thing: the markets in Toronto and Vancouver are still overvalued by historical standards.  However, with household debt still at elevated levels, it is very likely that the upward trend of interest rates will bite into household consumption, and thereby into overall economic growth.

What are the bond markets worried about?  It doesn't seem to be excessively rapid growth and the risk of overheating, at least for now: both the Canadian and US economies have slowed from the pace seen a year or two ago.  That means, in turn, that concerns over a return to much higher levels of inflation cannot be the primary factors driving rates higher.  Although inflation rates on both sides of the border have edged higher, the increase is mainly the result of higher energy prices.  Labour markets look tight, but there is little sign of the sort of upturn in wages that would get either the Fed or the Bank of Canada seriously concerned.

Rather, the concerns seem to be about the fiscal outlook in both countries.  The fiscal stance of the Trump administration is breathtakingly rash, providing a reminder (if one was needed) that Republicans are only fiscal hawks when Democrats are in power.  Choosing this moment to antagonize the biggest buyer of US debt -- China -- by threatening to start a trade war seems foolish indeed, though these days it can hardly be called surprising.

Meanwhile in Canada, the Liberal government up in Ottawa is projecting deficits as far as the eye can see.  In Ontario, the world's largest non-sovereign debtor, the Auditor-General is again arguing that the Provincial deficit is far larger than the government wishes to admit -- indeed the A-G denies that the government ever got the budget back into balance, as it claims to have done. It remains to be seen whether Doug Ford's PC party, which looks likely to be the winner of the election in early June, will be able to do much better on the fiscal front.

In short, it looks as if good old supply and demand offer the best explanation for the upward trend in bond yields.  After the financial crisis, when private corporate borrowing shrank very sharply, markets were easily able to absorb government debt, particularly with the Fed helping out via Quantitative Easing.  QE is being scaled back and private sector financing needs are getting back to normal.  If you're a Keynesian you'll know that this is not the stage of the business cycle for governments to be stepping up their own borrowings, but that's what's happening, and that's why rates are likely to keep heading higher. 

Friday, 20 April 2018

Confusion abounds

I hope no-one ever told Bank of Canada Governor Stephen Poloz that the job would be easy, because with the data flow we are seeing these days, it surely isn't.  Take the three reports we saw from Statistics Canada this morning....

First, headline CPI jumped 2.3 percent in the year to March, the biggest year-on-year increase since October 2014.  In this week's monetary policy press release, the Bank indicated that it believes temporary factors, notably gasoline prices, are behind the current spike, and the StatsCan data offer some support for that: excluding gasoline, the increase in CPI for March was 1.8 percent, the same as in February.  The Bank's arcane "preferred definitions" of CPI showed little movement in March, remaining tightly spaced around the 2 percent target rate.  There is little reason to expect gasoline prices to ease any time soon -- rather the opposite, in fact -- so it remains to be seen how long the Bank will be able to justify "looking through" that factor in its policy decisions.

Separately, StatsCan reported today that the number of (un)employment insurance beneficiaries fell in February to the lowest level seen since at least 1997.  This is a remarkable statistic, given the steady growth in the labour force over the past two decades. The number of beneficiaries has fallen by 13 percent in the last year.  The fall in the number of people receiving these benefits is a clear indication of the tightness in the labour market, and can only heighten the Bank's wariness over the possible direction of wages.

Last, and most puzzling, retail trade. StatsCan reported today that retail sales rose 0.4 percent in February (0.3 percent in real terms), led by auto sales. However, the agency also made significant downward revisions to data for the preceding three months.  Given the importance of retail spending to the Canadian economy as a whole, the revisions underscore the extent to which growth slowed at the end of last year.

The Bank this week restated its intention to continue tightening its policy settings in the months ahead, citing an expectation that growth would regain momentum in the current quarter and beyond.  Today's data, which look uncomfortably like a mild version of that old bugaboo "stagflation", may put that resolve to the test.

Wednesday, 18 April 2018

Bank of Canada: not just yet

The Bank of Canada left its reference rate unchanged at 1.25 percent today, in line with market expectations.  The Bank's Governing Council continues to believe that "higher interest rates will be warranted over time".  However, it stresses that the sensitivity of the economy to interest rate movements means that it will "remain cautious with respect to future policy adjustments, guided by incoming data". This language has been interpreted as slightly dovish by the markets, with the result that the Canadian dollar has weakened marginally. 

Recent data have tended to cloud the policy outlook somewhat.  After a strong performance during 2017, real growth slowed markedly during the first quarter of this year.  In the meantime, inflation at the consumer level has been edging higher for many months, with the Bank's favoured core measures at or above the 2 percent inflation target.

Looking ahead, the Bank expects that GDP growth will rebound in the current quarter, resulting in an average pace of 2 percent for the first half of the year. This pace is expected to continue through 2019, before a very slight slowdown in 2020.  The Bank characterizes this growth rate as "slightly above potential". However, it is worth noting that the Bank has upwardly revised its estimate of potential growth, which implies that it is somewhat less concerned about the risks of the economy overheating in the near term. 

As for the inflation outlook, the Bank foresees CPI running slightly above the 2 percent target this year, before edging back down to the desired level for the next two years.  This view reflects a belief that the impact of one-off factors, such as higher gasoline prices, will soon fade.  A key consideration in terms of the inflation outlook is the direction of earnings.  With unemployment hovering at multi-decade lows, wage pressures have been increasing, but the Bank seems relatively unconcerned at this stage, calling the recent data "encouraging".

So, what's next?  Introducing the Bank's quarterly Monetary Policy Report, Governor Stephen Poloz noted that the Bank's estimate of the neutral policy rate, given inflation of 2 percent, lies between 2.5 and 3.5 percent.  He also pointed out that the current rate is negative in real terms. This implies that the tightening cycle has a long way to go.  However, the Bank continues to believe that monetary policy will have to remain accommodative because of structural issues, notably the bloated level of household indebtedness.

It remains likely that a further 25 basis point rate hike will come at one of the next two policy meetings (May and July), not least because the Bank cannot afford to be seen sitting idly by as inflation edges further above its target.  The cautious tone of today's statements suggests there will be no more than one further rate hike in the second half of the year, and possibly not even that.  With the Fed set to raise rates at a somewhat faster pace, this means that the exchange rate is likely to trend gently lower. 

Friday, 13 April 2018

Rebound? What rebound??

The Canadian housing market has been weakening since this time last year.  After reaching dizzying heights early in 2017, the market was pushed lower first by the imposition in April of new controls by the Province of Ontario, then by the start in July of the long-awaited Bank of Canada policy tightening cycle, and finally, since the start of this year, by new rules designed to limit mortgage availability for highly-indebted buyers.

Realtors, as is their wont, have remained confident that once these one-time factors have been taken on board by buyers and sellers, prices and activity will stabilize and then start to move higher again, likely by the middle of this year.  Market data for March, just released by the Canadian Real Estate Association, cast a long shadow over that rosy scenario.  Home sales agreed in March fell 22.7 percent from a year ago, with Montreal and Ottawa the only major cities posting gains. Sales for the first quarter as a whole were the lowest for any quarter since 2014. 

In terms of prices, the national average fell 10.4 percent, led by the Toronto and Vancouver markets.  Unsurprisingly these are the cities that led the prior unsustainable run-up in prices, and both have been targeted by their Provincial governments with measures aimed at cooling the market.  Excluding those cities, the national average home price is down by a much more modest 2 percent year-on-year.

Before we draw too many conclusions about the outlook for the rest of the year, it is worth recalling that the winter months are traditionally by far the slowest all across Canada for the housing market, for obvious reasons.  Sales generally pick up once the snow melts.  However, the normal seasonal  rebound may be late in arriving this year, as temperatures from the Rockies to the St Lawrence have been far colder than usual for the last several weeks. 

Even when warmer temperatures finally arrive, it may take some time before prospective buyers forget the key lessons that the past year's market action should have imparted: prices can go down as well as up, and sometimes you can score a better deal just by waiting a while.  Remarkably, and in defiance of precedent, it looks as if the authorities may have found a way to prick a housing bubble without triggering an outright collapse.