30 Oct

BOC Rate Steady

General

Posted by: Bill Yeung

Bank of Canada Holds Policy Rate Steady Amid Global Uncertainty
It is rare for the Bank of Canada and the US Federal Reserve to announce rate decisions on the same day, but today’s announcements highlight the stark differences in policy in the two countries. The Bank this morning announced they would maintain their target for the overnight rate at 1.75% for the eighth straight meeting. The Fed is widely expected to cut its target for the fed funds rate by another 25 basis points, taking it below the key rate in Canada for the first time since 2016. More than 30 central banks have cut interest rates in the past year and the Bank of Canada in today’s Policy Statement highlighted the weakening in the global economic outlook since the release of its July Monetary Policy Report (MPR).

In today’s MPR, the Bank revised down its forecast for global economic growth this year to below 3.0%, reflecting a downward revision in growth in the United States to 2.3% (from 2.5%), the Euro area (to 1.1% from 1.2%), oil-importing emerging market economies and the rest of the world. China’s growth pace remains at a 30-year low of 6.1%.

Trade conflicts and uncertainty are weakening the world economy to its slowest pace since the 2007-09 economic and financial crisis. The slowdown has been most pronounced in business investment and the manufacturing sector and has coincided with a contraction in global trade (Chart 1). Despite the manufacturing slowdown, unemployment rates continue to be near historic lows in many advanced economies, as growth in employment in service sectors has remained resilient.

Growth is projected to strengthen modestly to around 3.25% by 2021, with a pickup in some emerging-market economies (EMEs) more than offsetting slower growth in the United States and China.
Canada has not been immune to these developments. Commodity prices have fallen amid concerns about global demand. Despite this, the Canada-US exchange rate is still near its July level, and the Canadian dollar has strengthened against other currencies.
Growth in Canada is expected to slow in the second half of this year to a rate below its potential. This reflects the uncertainty associated with trade conflicts, the continuing adjustment in the energy sector, and the unwinding of temporary factors that boosted growth in the second quarter. Business investment and exports are likely to contract before expanding again in 2020 and 2021. At the same time, government spending and lower borrowing rates are supporting domestic demand, and activity in the services sector remains robust. Employment is showing continuing strength and wage growth is picking up, although with some variation among regions. Consumer spending has been choppy but will be supported by solid income growth. Meanwhile, housing activity is picking up in most markets. The Bank continues to monitor the evolution of financial vulnerabilities in light of lower mortgage rates and past changes to housing market policies.

Canadian Economy Boosted By Housing

The Canadian economy grew at a moderate pace over the past year, supported by a healthy labour market and the recent turnaround in housing. However, global trade conflicts and related uncertainty dampened business investment and export activities, and investment in the energy sector continued to decline. The impact on growth of both global headwinds and energy transportation constraints is expected to diminish, and the pace of economic expansion should gradually pick up in 2020 and 2021.

In 2020 and 2021, Canada’s economy is anticipated to grow near potential. Consumer spending is projected to increase at a steady pace, and housing activity to continue its ongoing recovery. Overall, investment and exports are anticipated to grow moderately. In the energy sector, investment is forecast to stabilize, and oil exports should improve as pipeline and rail capacity gradually expands.

In today’s MPR, the Bank states that housing resales have been catching up to underlying demand (see chart 7 from the MPR). Housing markets generally reflect regional economic conditions. Housing starts and resales have been particularly robust in Quebec and Ontario, where labour markets have been strong. These provinces will likely continue to be the main drivers of the growth in residential investment. In Alberta, where the oil industry is expected to stabilize, modest improvements in housing are expected. In British Columbia, residential investment has recovered in recent months and should remain near current levels, reflecting the creation of new households.
Bottom Line

The dovish tone of today’s policy statement suggests that the Bank of Canada has become more cautious in its holding pattern amid a weakening global economy. The central bank “is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist,” policymakers led by Governor Stephen Poloz said in the statement. “In considering the appropriate path for monetary policy, the Bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment.”

The statement and the fresh batch of more pessimistic growth forecasts will raise questions about the central bank’s commitment to a neutral stance on rates, particularly in the face of global easing in many other countries that has made the Bank of Canada an outlier. If the Federal Reserve lowers its interest rates later today, as expected, the Bank of Canada would have the highest policy rate in the industrialized world.

It may well be that the Bank of Canada cuts rates early next year. Mitigating this prospect is that the Bank was more bullish on consumption and housing–fueled by the robust labour market. Another source of future growth is additional fiscal stimulus from Prime Minister Justin Trudeau’s newly elected Liberal government, which has promised to implement new spending and tax cuts next year. For now, the Bank is maintaining a neutral stance.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
It is rare for the Bank of Canada and the US Federal Reserve to announce rate decisions on the same day, but today’s announcements highlight the stark differences in policy in the two countries. The Bank this morning announced they would maintain their target for the overnight rate at 1.75% for the eighth straight meeting. The Fed is widely expected to cut its target for the fed funds rate by another 25 basis points, taking it below the key rate in Canada for the first time since 2016. More than 30 central banks have cut interest rates in the past year and the Bank of Canada in today’s Policy Statement highlighted the weakening in the global economic outlook since the release of its July Monetary Policy Report (MPR).

In today’s MPR, the Bank revised down its forecast for global economic growth this year to below 3.0%, reflecting a downward revision in growth in the United States to 2.3% (from 2.5%), the Euro area (to 1.1% from 1.2%), oil-importing emerging market economies and the rest of the world. China’s growth pace remains at a 30-year low of 6.1%.

Trade conflicts and uncertainty are weakening the world economy to its slowest pace since the 2007-09 economic and financial crisis. The slowdown has been most pronounced in business investment and the manufacturing sector and has coincided with a contraction in global trade (Chart 1). Despite the manufacturing slowdown, unemployment rates continue to be near historic lows in many advanced economies, as growth in employment in service sectors has remained resilient.

Growth is projected to strengthen modestly to around 3.25% by 2021, with a pickup in some emerging-market economies (EMEs) more than offsetting slower growth in the United States and China.
Canada has not been immune to these developments. Commodity prices have fallen amid concerns about global demand. Despite this, the Canada-US exchange rate is still near its July level, and the Canadian dollar has strengthened against other currencies.
Growth in Canada is expected to slow in the second half of this year to a rate below its potential. This reflects the uncertainty associated with trade conflicts, the continuing adjustment in the energy sector, and the unwinding of temporary factors that boosted growth in the second quarter. Business investment and exports are likely to contract before expanding again in 2020 and 2021. At the same time, government spending and lower borrowing rates are supporting domestic demand, and activity in the services sector remains robust. Employment is showing continuing strength and wage growth is picking up, although with some variation among regions. Consumer spending has been choppy but will be supported by solid income growth. Meanwhile, housing activity is picking up in most markets. The Bank continues to monitor the evolution of financial vulnerabilities in light of lower mortgage rates and past changes to housing market policies.

Canadian Economy Boosted By Housing

The Canadian economy grew at a moderate pace over the past year, supported by a healthy labour market and the recent turnaround in housing. However, global trade conflicts and related uncertainty dampened business investment and export activities, and investment in the energy sector continued to decline. The impact on growth of both global headwinds and energy transportation constraints is expected to diminish, and the pace of economic expansion should gradually pick up in 2020 and 2021.

In 2020 and 2021, Canada’s economy is anticipated to grow near potential. Consumer spending is projected to increase at a steady pace, and housing activity to continue its ongoing recovery. Overall, investment and exports are anticipated to grow moderately. In the energy sector, investment is forecast to stabilize, and oil exports should improve as pipeline and rail capacity gradually expands.

In today’s MPR, the Bank states that housing resales have been catching up to underlying demand (see chart 7 from the MPR). Housing markets generally reflect regional economic conditions. Housing starts and resales have been particularly robust in Quebec and Ontario, where labour markets have been strong. These provinces will likely continue to be the main drivers of the growth in residential investment. In Alberta, where the oil industry is expected to stabilize, modest improvements in housing are expected. In British Columbia, residential investment has recovered in recent months and should remain near current levels, reflecting the creation of new households.
Bottom Line

The dovish tone of today’s policy statement suggests that the Bank of Canada has become more cautious in its holding pattern amid a weakening global economy. The central bank “is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist,” policymakers led by Governor Stephen Poloz said in the statement. “In considering the appropriate path for monetary policy, the Bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment.”

The statement and the fresh batch of more pessimistic growth forecasts will raise questions about the central bank’s commitment to a neutral stance on rates, particularly in the face of global easing in many other countries that has made the Bank of Canada an outlier. If the Federal Reserve lowers its interest rates later today, as expected, the Bank of Canada would have the highest policy rate in the industrialized world.

It may well be that the Bank of Canada cuts rates early next year. Mitigating this prospect is that the Bank was more bullish on consumption and housing–fueled by the robust labour market. Another source of future growth is additional fiscal stimulus from Prime Minister Justin Trudeau’s newly elected Liberal government, which has promised to implement new spending and tax cuts next year. For now, the Bank is maintaining a neutral stance.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
28 Oct

Lending conditions eased in Q3

General

Posted by: Bill Yeung

Lending conditions eased in the Q3, loan officers say

Lending conditions eased in the Q3, loan officers sayMortgage lending conditions continued to ease in the third quarter of 2019, while non-mortgage lending conditions tightened, according to the latest senior loan officer survey conducted by the Bank of Canada.

Household lending
Household lending conditions have been easing overall since the first quarter of 2018. Easing in mortgage lending conditions in the third quarter of 2019 took the form of price easing, as competition drove lenders to pass on more of their decreased funding costs to customers. Non-price conditions were unchanged. Lending conditions for low-ratio mortgages and home equity lines of credit (HELOCs) are also expected to remain unchanged, although high-ratio mortgage lending conditions are expected to ease in the fourth quarter, reflecting the Canada Mortgage and Housing Corporation’s (CMHC) First-Time Home Buyer Incentive.

Lower interest rates drove an increased demand for mortgage loans. Demand is expected to continue to increase next quarter for mortgage lending because of strong fundamentals as well as CMHC’s First-Time Home Buyer Incentive.

Price conditions tightened, while non-price lending conditions were mostly unchanged for non-mortgage lending. Tighter conditions for auto loans occurred across all regions, but tighter conditions for other consumer lending were limited to Quebec—due to the province’s new requirement that banks charge borrowers at least 2% of their outstanding credit card balance as part of the minimum payment.

Non-mortgage demand increased in the third quarter of 2019, driven by other consumer lending.

Business lending conditions
Business lending has been either easing or unchanged since mid-2016, based on results from the BoC senior loan officer surveys. Overall business lending conditions were unchanged in the second quarter of 2019, with a slight tightening in non-price conditions and unchanged price conditions.

For corporate borrowers, a slight easing in price conditions was offset by a tightening in non-price conditions for firms in the energy sector. This ends the extended period of overall corporate easing that began in the fourth quarter of 2017 and peaked in the fourth quarter of 2018.

Concerns about the economic outlook and energy sector in the Prairies continued to result in a tightening of both price and non-price lending conditions for small and commercial borrowers in that region. Outside the Prairies, lending conditions were unchanged apart from some price easing for commercial borrowers.

Overall, demand was unchanged for all business borrowers.

Access to capital markets decreased for all risk grades of corporate borrower, particularly non-investment grade. Several respondents mentioned that firms in the energy sector had less access to capital markets.

The Senior Loan Officer Survey collects information on the business-lending practices of Canadian financial institutions. In particular, the Survey gathers the perspectives of respondents on price and non-price terms of business lending and on topical issues of interest to the Bank of Canada.

25 Oct

Housing outlook Positive

General

Posted by: Bill Yeung

CMHC forecasts growth in latest housing outlook

CMHC forecasts growth in latest housing outlookAfter seeing housing activity decline in 2018 and 2019, Canada’s housing markets are expected to recover in 2020 and into 2021, according the latest Housing Market Outlook report from Canada Mortgage and Housing Corporation (CMHC).

Bob Dugan, CMHC’s chief economist, said that all indications pointed toward modest GDP growth in 2020 and 2021 that, along with rising interest rates, are supportive of housing activity.

In recent years, the measures taken to cool overvaluation in markets such as Toronto and Vancouver have worked, as prices have been aligning more with fundamentals. However, in those areas and others where land is expensive and the housing supply is relatively unresponsive to price changes Dugan indicated that it might be appropriate to employ other measures.

“One of the things we think that needs to happen to improve supply is more density in these cities but more of the right kind of density,” Dugan said on a conference call. “We see a lot of condo construction of bachelor apartments and one-bedrooms. We need to see more two- and three-bedroom apartments to make it feasible for families to take advantage of higher density living in metropolitan centres where supply constraints are more binding.”

CMHC’s current outlook for renewed home price growth doesn’t mean that the situation will

necessarily worsen because those growth fundamentals do exist, and can be supportive to stronger resale market activity as well as price growth.

No one from CMHC commented on election results or policy matters, and Dugan said that CMHC’s main concern is to be aware of potential external shocks to the housing sector. Household debt, for example, is high, and it remains a vulnerability because it increases the risk of economic and housing market instability. A widespread shock of some kind—if interest rates were to rise more than expected or if unemployment increased dramatically—households carrying heavy debt loads could face greater belt-tightening. This could lead to an increase in arrears, leading to downward pressure on the economy and housing activity.

“Arrears rates are very low on mortgages and that’s a very positive thing,” Dugan said. “But the level of debt in Canada is high and should there be some sort of a shock that causes unemployment to rise or the level of employment to drop, that can really have an impact on the performance of loans.”

International trade tensions could result in another potential external shock. Uncertainty has persisted, impacting business and investor confidence, tempering economic conditions and increasing the risk of slower economic and housing market activity.

Housing starts
CMHC expects that housing starts for both single-detached and multi-unit housing will decline for the second year in a row before stabilizing in 2020 and 2021 somewhere between 194,000 and 204,300, which is close to levels between 1985 and 2018, but well below the 10-year high recorded in 2017. Between 2020 and 2021, GDP growth is expected to recover from a softening in 2019, but the boost that will give housing via improved economic activity and incomes will be offset by a slowing in household formation. Mortgage rates are expected to rise but to a significant degree, and so will have little impact on the housing outlook.

Home sales and prices
Home sales prices are expected to remain stable in 2019, below the 2016 peak. They will increase in 2020 and 2021, however, reflecting the expectations of household disposable income growth. Price growth is expected to move along a similar path as housing starts, declining in 2019 before resuming in 2020 and 2021. By the end of the forecast horizon, the average MLS home price is expected to be above its 2017 level. Ontario is expected to lead the price growth during this period, with Quebec also showing decent price gains. British Columbia will see modest price growth recovery in 2020 but then follow Ontario’s lead in 2021.

In spite of outside uncertainties, economic and demographic conditions such as job growth and immigration will continue to support housing activity, reversing the trend of declines in starts, sales, and average home prices over the past couple of years.

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11 Oct

Canadian Job Market Improves

General

Posted by: Bill Yeung

Robust Canadian Jobs Report in September
The Canadian jobs market continued to surprise on the high-side–on track for one of its best years on record. This provides further confirmation to the Bank of Canada that additional easing in monetary policy is not necessary. The economy added 53,700 jobs in September, well above expectation, taking the year-to-date jobs gain to just over 358,000, the most in the first nine months of a year since 2002. The economy added 70,000 full-time jobs in September, with part-time employment down 16,300. Canada has added almost 300,000 new full-time jobs this year.

In September, employment increased in Ontario and Nova Scotia, while it held steady in other provinces.
More people were working in health care and social assistance, as well as in accommodation and food services. At the same time, there were declines in information, culture and recreation, and natural resources.

The number of self-employed workers increased, as did the number of employees in the public sector. The number of private-sector employees was virtually unchanged, although it was up 2.3% year-over-year.

The outsized jobs gain reduced the unemployment rate to 5.5% from 5.7% in August, near its lowest level in the past forty years. One difference in the September report from recent trends is that most of the job gains reflected mostly lower unemployment levels rather than rising labour force participation. The number of unemployed Canadians fell by 46,900 in September, while the labour force increased by just 6,800.
Wage Gains Rose Last Month

Another positive underpinning for the Canadian economy was the sustained rise in household incomes. The total hours worked last month were up 1.3% from a year earlier. Hourly pay rose 4.3% year-over-year in September, accelerating from a 3.7% pace in August. The last few months have posted the sharpest year-over-year increases in wage rates in a decade.

Bottom Line: This report lends ammo to the Bank of Canada to buck the tide of global monetary easing, at least for now. Few economists and investors believe, however, the country will be immune to a slowing global economy. Many expect the Bank of Canada will eventually be forced to cut interest rates. Swaps trading suggests one cut is still priced in over the next year.

The Bank of Canada’s next rate decision is October 30. There is so much geopolitical uncertainty in the world, emanating mostly from the US that no one can rule out a BoC rate cut sometime in the next year. The Canadian election results on October 21 will at least eliminate one uncertain issue, but a minority government were it to result, would only add to the uncertain stew.
Dr. Sherry Cooper