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 27 April 2018
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.
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.
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.
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.
Tuesday 10 April 2018
Uber: unter
We learn this week, courtesy of a failed class action lawsuit, that Uber drivers in Toronto wanting to pick a legal fight with the company have to do so in...The Netherlands, because their arrangement with the company is actually with one of its subs in that country. It's just another way that Uber tries to make it difficult for the authorities in the cities where it operates to enforce their employment laws against it. Five gets you fifty that if Uber drivers in Rotterdam check their own contracts, they'll find that their dealings have to be with an Uber sub in Iqaluit or Tuktoyaktuk.
What a wonderful corporate citizen Uber is, to be sure.
If this is the "sharing economy", count me out. And don't even get me started on Airbnb.
What a wonderful corporate citizen Uber is, to be sure.
- It muscles in on new markets and basically defies local authorities to try to regulate it. In the process licensed cabbies, who have generally been subjected to background checks and at least a modicum of training, lose their livelihoods.
- Studies are increasingly showing that the arrival of Uber in a city leads to an uptick in traffic congestion, thanks to all those drivers cruising around hoping to pick up a ride. Uber's business model effectively depends on it signing up far more drivers than it can ever expect to need at any given time.
- Precisely because there are so many drivers, studies are starting to suggest that earnings are very low -- less than $4 an hour. In the case of Toronto, this compares to the new minimum wage of $14 per hour -- but of course, Uber argues that its drivers are freelancers rather than employees, so the minimum wage doesn't apply anyway.
- When passengers really do need to use Uber -- after a ball game, in a rainstorm, when the subway is broken -- they fall prey to the company's predatory "surge pricing" model. There are horror stories of customers facing astonishing bills for short journeys when the surge pricing algorithm kicks in.
If this is the "sharing economy", count me out. And don't even get me started on Airbnb.
Thursday 5 April 2018
You can't say you weren't warned
It was always just a matter of time before we started seeing stories like this one. A group of homeowners have managed to get on the front page of the Toronto Star with their tale of woe about getting sideswiped by the measures taken by the Ontario government and the Bank of Canada last year to cool the housing market.
Briefly: these people already owned $1 million-plus homes and were mortgaged to the hilt. For a variety of reasons they decided to buy new but unbuilt homes off-plan in a new development. They were counting on being able to sell their existing homes at the then-current market price in order to make the transactions work. However, the Ontario government's calming measures, introduced last April, put the market sharply into reverse. Their existing homes are now worth much less than they were when they signed up for the new ones. Now that it's time to close on the deals, they find themselves scrambling for cash to make up the shortfall.
The homeowners are using the word "reckless" to describe the actions of the Ontario government, which sounds as though they may be considering lawyering up and taking the matter to court. Think about it for a second: you have a nice home already; everyone with a pulse and a brain* is warning that the housing market is way overvalued and headed for trouble; the Provincial government is musing aloud about following in the footsteps of the British Columbia government and taking steps to rein the market in.....and you see fit to make an unconditional deal to buy a new home that only exists on paper, which means that the transaction can't close for a very long time. And it's the government that's reckless?
What would have been reckless on the part of the Ontario government would have been to allow things to continue they way they were a year ago. I don't give Kathleen Wynne credit for much, but she got this exactly right. Absent the steps announced last April, we might now be looking at a market in which the price bubble had collapsed very messily. In that case we would be looking at a whole lot more people in a whole lot more distress than the folks in today's paper.
Do I sound heartless here? Well, I've been in the same position as these folks. Many years ago I bought a new house only to find I couldn't unload the existing one at the price I'd been counting on. For a couple of months I was carrying a lot of mortgage debt. In the end we had to swallow our pride, cut our losses and sell up for whatever we could get. It was a painful lesson, but we got through it, and so, I'm sure, will the people in today's headlines.
And if you still think I'm heartless, well, it's not just me. Check the online poll embedded in the linked article. Seems as though more than 80 percent of respondents think that if you choose to buy a home in a hot market, the risk is yours and yours alone.
* Obviously this excludes realtors, who only have one of those things.
Briefly: these people already owned $1 million-plus homes and were mortgaged to the hilt. For a variety of reasons they decided to buy new but unbuilt homes off-plan in a new development. They were counting on being able to sell their existing homes at the then-current market price in order to make the transactions work. However, the Ontario government's calming measures, introduced last April, put the market sharply into reverse. Their existing homes are now worth much less than they were when they signed up for the new ones. Now that it's time to close on the deals, they find themselves scrambling for cash to make up the shortfall.
The homeowners are using the word "reckless" to describe the actions of the Ontario government, which sounds as though they may be considering lawyering up and taking the matter to court. Think about it for a second: you have a nice home already; everyone with a pulse and a brain* is warning that the housing market is way overvalued and headed for trouble; the Provincial government is musing aloud about following in the footsteps of the British Columbia government and taking steps to rein the market in.....and you see fit to make an unconditional deal to buy a new home that only exists on paper, which means that the transaction can't close for a very long time. And it's the government that's reckless?
What would have been reckless on the part of the Ontario government would have been to allow things to continue they way they were a year ago. I don't give Kathleen Wynne credit for much, but she got this exactly right. Absent the steps announced last April, we might now be looking at a market in which the price bubble had collapsed very messily. In that case we would be looking at a whole lot more people in a whole lot more distress than the folks in today's paper.
Do I sound heartless here? Well, I've been in the same position as these folks. Many years ago I bought a new house only to find I couldn't unload the existing one at the price I'd been counting on. For a couple of months I was carrying a lot of mortgage debt. In the end we had to swallow our pride, cut our losses and sell up for whatever we could get. It was a painful lesson, but we got through it, and so, I'm sure, will the people in today's headlines.
And if you still think I'm heartless, well, it's not just me. Check the online poll embedded in the linked article. Seems as though more than 80 percent of respondents think that if you choose to buy a home in a hot market, the risk is yours and yours alone.
* Obviously this excludes realtors, who only have one of those things.
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