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Dear Clients,
You have not missed much. Below is a very detailed convoluted discussion between two top economists about recession or slow down. If you read the bottom note it explains liquidity which we have been hearing quite a bit. I would suggest you read the foot note before you read the article and it will make more sense as you wade through. Really it boils down to when and where a recovery might be and how severe will the conditions be in the 2011 marketplace.
For what is concerning us this market is not going to improve and this will keep the interest rates down. We have now had two moves upward of .25% each and there is still debate on the final planned move later this year of one more .25%. I am not in any way suggesting any one to lock in at this time. The Bank of Canada is bolstering its base rate to give it some space to drop if we do go into another recession next year, and as a response to that they are predicting prime will move back down. The Bank of Canada will not be forced to go to 0% or even under which would mean disaster.
Current rates that you can lock into are below. Current Prime rate is now 2.75%.
3 Year 3.75
4 Year 4.19
5 Year 4.29
Thanks for all your votes for the Spectator's Reader's Choice nominations. We still have to find out what categories we are nominated in. My clients are the best!
Enjoy the last 3 weeks of summer and be safe!
Cheers!
Suzanne Boyce
A US Double Dip: Tracking the Odds
Avery Shenfeld and Benjamin Tal
A double dip is to be avoided at all costs when holding a potato chip at the buffet line, and less trivially, when steering economic policy. Even before the NBER has actually confirmed the last recession ended, some are already starting to see the next one on the horizon. Renewed recession risks are drawing rising attention in the media, hitting consumer sentiment, and Google searches for "double dip" references are on the rise, just as searches for "recession" climbed late in 2007. Investors are similarly starting to fret. Although the equity market's correction is still well within the norms seen during expansions, the AAII bull/bear indicator is back to the levels seen during the recession, and it's much the same for other sentiment readings from Market Vane and the NAAIM.
But in the modern era, double dips are more often feared than felt. Indeed, if one defines a double dip as a downturn after an expansion lasting less than two years, the only post-WWII US twin dives were the recessions of 1980 and 1981-82. Double dips have also been rare in other major economies of late, although Japan fell into recession in 2000 only a year after it emerged from the "Asian crisis" recession. Prior to the 1940s, however, a more volatile world showed several cases of short-lived expansions that petered out. Few remember that the 1929 start of the Great Depression, for example, followed less than two years on the heels of a US recession that ended in Q4 1927.
So what are the tea leaves now telling us? Certainly, there are reasons for concern. The economy has been propped up by fiscal stimulus that is now winding down. Job growth has lacked its typical post-recession vigour, leaving a household sector swamped with bad mortgages having few reasons to accelerate spending. The ECRI leading indicator has turned markedly lower.
But there is still a base of ongoing support coming from healthy corporate profits, which typically presage both hiring and capital spending, and a wide-open tap on monetary stimulus. That has us projecting a sharp deceleration in US growth, but not an outright recession, with a similar fate in store for Canada. And thus far, the highest frequency data, taken individually and collectively in a model that tracks recession probabilities historically, comes down on the same side.
The Curve's Nobel in Forecasting
Markets often have a better nose for recessions than economists. The stock market is too jittery to be a reliable bellwether, with major declines having only a 50% success rate in predicting recessions, and giving five false positives since 1960. A recent study in the Journal of Finance1 found that an equity market liquidity measure has worked better, with a drying up in market liquidity often a telling sign of economic trouble ahead. Indeed, we saw liquidity plummeting at a pace not seen in more than 20 years ahead of the recent downturn. At present, market liquidity isn't sending out the same sort of warning signal.
The bond market also has an enviable track record as a recession indicator. Curve inversions-higher long rates than short yields-often foreshadow a slump, although that too has sometimes signaled downturns that failed to materialize.
Today's curve sounds no alarm bells. Even after the recent rally in US 10s and 30s, the Treasuries curve is much
steeper today than it typically is when a recession is coming up in the next few quarters. The Fed's recession probability model, which combines the yield curve and the funds rate, would clearly be very bullish on growth.
That said, we can't really replicate the inversions seen ahead of past slumps. Typically, part of the lead up to recession is a policy tightening that pushes up short rates. The long end of the curve can then invert as investors see a slowdown ahead, and doubt the longevity of the elevated short-term yields. That can't happen now, since short rates are near zero, essentially ruling out a curve inversion. The most the curve can price in is a long wait for an initial tightening, and it's impossible to differentiate whether that is due to expectations of slow growth, or outright recession. As well, the explanatory power of the yield curve has diminished in recent cycles relative to its longer term performance.
But corporate spreads are another fixed income indicator of where the market's head lies, and here, it's clear that investors are far from pricing in a recession. Ahead of a recession, spreads tend to widen sharply as investors anticipate credit defaults. On that score, while we saw some upward drift as markets eyed the risks emanating from Europe's sovereign debt crisis, spreads remain quite tight by the standards leading up to recent recessions, and don't show the sharp upward trend typically seen ahead of a downturn.
Economic Current/Leading Indicators
Since financial market indicators are perhaps less useful in a near-zero rate environment, it's worth keeping a close watch on what the high frequency economic data themselves are saying. Research by J. Stock and M. Watson2 showed that indicators that use larger numbers of economic series performed better than more narrowly based leading indicators in widespread use. The Chicago Fed's National Activity Index of 85 separate indicators was developed along those lines. Its three-month average, used as a cyclical indicator, continues to show an economy that is advancing at less than trend, but not on the brink of recession.
A possible shortcoming of that index in present circumstances is that some of its components are now a few months old, and so its latest reading would underweight the most recent, and generally disappointing, evidence. The Philadelphia Fed's ADS index, while not nearly as rich an indicator in terms of the number of series it incorporates (only six), has the advantage that it is updated weekly for a change in any of its components, which include weekly claims for unemployment benefits, one of the highest frequency series available. It too, while off its highs, is still above the levels seen at the start of the last two recessions (Chart 6). Note that its recent drop was exaggerated in that it included the rise and subsequent fall in employment associated with the US census.
CIBC Recession Probability Index
Still, that downturn in the ADS index suggests that recession risks stateside bear close watching. To help in that task, we have developed a probit model that looks historically at the status of four financial market and economic indicators relative to whether a recession had commenced within two quarters. The Fed's bare-bones model used only the funds rate and the yield curve slope, but given our concerns about the utility of the latter indicator, we enriched the model by adding credit spreads and the Philly Fed's ADS Index.
While the long-time scale of the chart makes small leads difficult to see, the model has a strong track record in anticipating recessions, although in the last downturn it was less of a leading signal than a coincident indicator. At present, the CIBC RPI predicts slim odds of a US recession commencing in the next two quarters. While we recognize that the probability estimate is likely understated due to the concerns about the yield curve slope measure noted above, it would still appear to be more consistent with a slowdown rather than a true double-dip recession.
Add it all up, and Seinfeld fans can be comforted in concluding that George Constanza does not yet hold the US economic potato chip in his hands. We're not in material danger of a rude double dip in the next two quarters. But, given the uncertainties, fiscal tightening ahead, and the potential for a slow economy to be vulnerable to shocks, we will keep an eye on our new indicator nevertheless.
Note 1. "Stock Market Liquidity and The Business Cycle" Journal of Finance, March 2010. Liquidity here is defined as a measure of how much stock prices move in response to each volume unit of trade. A high estimate indicates high liquidity (low price impact of trade) and low estimate indicates low liquidity (high price impact of trades).
BLOG
Dear Clients,
Now summer is here! This is when you have to make sure you wear your shoes down to the beach or you will never make it down to the water.
I thought the Bank of Canada was going to move another .25% this month but not a word! I guess it could be from the definite drop in production now that the stimulus of "beat the HST" and south of the border the housing stimulus packages dried up back in May. I guess now we are on our own. The Update below still confirms that the recent extreme drop in production is either signaling a returning recession OR indicates an extremely slow recovery. As some of my very astute clients have been saying for a year or so - interest rates aren't going anywhere for another 5 to 10 years. I must say those comments were a little gutsy at the time but it looks like you may be right!
So make sure, those even contemplating changing your below prime mortgage to a high fixed rate (rates quoted below) can go back to your back yards and relax. Do not change a thing.
To make it quite clear we do not advise locking into a fixed rate mortgage. Again if you are OVER prime on your mortgage please contact us and we should change you to a below prime mortgage right away.
Prime is now 2.5%
Some great news - this year The Personal Mortgage Group has finally hit the big leagues! We are neck and neck with two other top brokers in Canada, not just the top 25 brokers anymore. It has been a record breaking year and we are striving to continue to improve our #s. Michelle Baas, my assistant, is key to our production. We are so efficient that two of us are competing with teams of 5 to 8 people. Of course your loyalty, both by returning for your mortgage business and referring your friends and family to us is the biggest key.
The Spec Reader's Choice is coming up this month. This award really makes a difference in our advertizing and the general public recognizes it as a vote from existing clients. We set up your access to work as fast as we can get you in and out of the voting site. I can not put a price tag on the value of your votes - your confidence in supporting us is our biggest thank you.
Fixed Rates available Prime still 2.5%
3 yr 3.85%
4 yr 4.29%
5 yr 4.39%
Have a great week - remember only 7 weeks of summer to go so make sure you make the most of it with your families.
Regards,
Suzanne Boyce
Broker\ Owner
Weekly Market Insight
NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS Turn for the Worse, or for the Worst?
By Avery Shenfeld
Economics gets interesting for markets at inflection points, and that's exactly where the global economy sits as spring turns to summer. But are we seeing a turn for the worse - a period of slower, or slow growth - or a turn for the worst, towards renewed recession?
After their recent pull-back, equities might be able to muddle through the former, but would have a lot of additional downside if it's the latter. Two-year Treasuries are back at the lowest levels since the depths of the recession, reflecting the consensus view that whatever fate awaits the US economy, the Fed is a long way away from a tightening. But equities are, of course, still miles from their March 2009 lows, and are counting on earnings gains, not a recessionary dive in profitability. Trouble is, a turn to a slowdown looks much like a turn towards outright recession in its early stages. That's particularly the case when the prior period saw very robust growth. China put in 12% growth in the year to Q1 2010. In Canada, we are coming off two quarters averaging 5½% growth. The US wasn't quite so heated, but averaged better than a 4% pace in the two quarters ending in March.
Our own long-held view is that the global economy will see much slower growth ahead, with a trough at only 1½% growth in both Canada and the US by Q4. If so, we shouldn't be shocked, shocked, to see purchasing managers indexes for both the US and China move lower, as they did this month, but to levels still consistent with growth. Today's anemic US private sector hiring wasn't the deeply negative figure associated with recession onsets, but was in line with the deceleration to below trend GDP growth we expect in the quarters ahead. Housing data were boosted by tax incentives, so again, a big drop in the month after their expiry is not a surprise. Our two favourite aggregate US measures, the comprehensive Chicago Fed National Activity Index, and the leaner but more contemporaneous ADS index from the Philadelphia Fed (Chart), are still both saying green for growth, if a bit less vociferously in the latter.
Closer to home, Canada's flat GDP for April, was consistent with a deceleration in growth, rather than a turn to recession, given that it came off of a bloated 0.6% March advance. May GDP looks to be much better, as we already know it was a decent month for hiring. But don't be surprised to see the week ahead's Canadian jobs data for June show a deceleration. That's the stuff that slowdowns are made of.
Blog
Dear Clients,
Excellent weekend coming up for Father's Day. I lost mine a few weeks ago so make sure you appreciate everything that makes your father special or laugh about what gets your blood pressure up. It does not last forever.
Basically this update is saying the economy south of the boarder is already starting to falter due to the government stimulus drying up.
In Canada the housing market is slowing which is what they wanted by increasing drastically qualifying requirements. From the report attached below, in Canada the at risk group are the families making 50,000 or less and they are already at too high debt servicing so maybe they should not have been into a purchase from the beginning or their income has decreased due to job loss, divorce, retirement etc. with insufficient pension and investment income (going to get worse).
This is why at The Personal Mortgage Group when you are up for renewal or making ANY changes on your mortgage we look at the total picture so when you do reach retirement you are not in the "retired into poverty" statistic. Sometimes it just takes an hour of time to prevent this very unfortunate situation. You do not want to wait until retirement as the mistakes have been made and it is too late to rectify.
I would say almost all of my clients are moving well into the right direction of having total freedom during your retirement but you know a lot of friends and family who are not getting the proper direction. So just another reason for you to refer them to us!
Happy Father's Day to all
Fixed Rates
3 yr 3.95%
4 yr 4.39%
5 yr 4.49%
Suzanne Boyce
Broker\ Owner
NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
There are already early signs that point to the non-linear nature of the current recovery in both Canada and the US.
- Excluding the one-off impact of census related hiring, overall employment growth in the US during May was very weak.
- Retail sales fell by 1.2% in May. Sales tumbled at building supply stores, reversing more than half the surge of the prior two months. As well, auto sales show a notable softening.
- Overall mortgage application volume, which includes loans for purchases and refinancing, dropped by more than 12% during the week ending June 4, compared with the previous week. Refinance volume tumbled 14.3%. This is the lowest level in more than 13 years-a clear sign that the housing market is struggling without government incentives.
These observations are consistent with our call that overall US growth in the second half of the year and early 2011 will be on the soft side. This suggests that the Fed will not touch rates until probably the second quarter of 2011.
Note that the temporary lift from the government has led to a reversal of the deleveraging process by American households in recent months. For example, the saving rate is now at 3.4%-down from 5.4% in the second quarter of 2009. Even more interesting is the difference in savings among income groups. The savings rate of Americans with income of more than $100,000 fell to the level seen before the recession. At the same time, those who earn less than $100,000 managed to increase their saving to a 20-year high. As well, credit is starting to rise, but even here we have to take a closer look. Total revolving credit (credit cards) was down by $8.5 billion while non-revolving loans (car and mobile homes) were up by $9.5 billion. This suggests that banks are very selective in their lending practices which, in turn, lead to some improvement in the quality of credit.
In Canada there are clear signs that the housing market is softening. Housing starts are slowing, while supply of existing houses is outpacing demand. This raises the issue of the quality of mortgage credit in Canada, and how significant will higher rates will be impacting the market as a whole.
Note that the vast majority of home owners in Canada regardless of their age have not experienced any worsening in affordability despite the rapid increase in prices. The only sub-group of households that have seen some deterioration in their affordability position is older Canadians with average income of less than $50,000. Zooming in on this group we find that on average they spend close to 60% of their gross income on mortgage payments, property taxes and electricity costs. This is three times the average ratio seen among households at the same age groups but with income of over $50,000. Note, however, that as opposed to the situation in the US and to a common misconception, the share of this vulnerable group in total mortgage holders in Canada is on the decline-currently accounting for Just over 13% of all mortgages in Canada, down from 19% five years ago. Also note that the share of the least vulnerable group (older/higher income) is on a clear upward trajectory. The practical implication of this finding is that the composition of the mortgage market in Canada has, in fact, improved over the past few years.
Interestingly, there is no significant difference in affordability between households with fixed rate mortgages and those with variable rate mortgages. While variable mortgage holders enjoy lower interest rates, the average mortgage they carry is 7% larger.
While one cannot ignore the risk of an outright decline in home prices in the coming 12-18 months, nothing in the data supports a market crash. As opposed to the US, the share of mortgage holders in Canada has in fact declined in recent years, while the increase in the average size of mortgage has not coincided with a significant worsening in affordability. While higher interest rates will clearly erode affordability, our detailed look at the distribution of mortgage payments as a share of income does not reveal major pockets of vulnerability. Accordingly, the most likely scenario is that higher interest rates will lead to a modest decline in prices (probably in the magnitude of 5%-10%) in the coming year or two. But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years-paving the way for a healthier housing market by mid decade.
Benjamin Tal
BLOG
Hello Everyone,
This week's Variable Rate news is brought to you by my collegue Julie Shea. Essentially, there is no "new news" because we anticipated that rates would go up, however we remain confident that this will not be the beginning of upward trend. Rates are not going to start escalating any time soon. So do NOT lock in.
The Bank of Canada: "Should they stay or should they go now?...."
Most of you will recall that famous song from The Clash. (One of the few cultural gems to come out of that wasteland made up of big hair, neon clothes and Miami Vice jackets.) Well this is kind of where the feds are with interest rates. If they go "there could be trouble". If they stay "there will be double". This comment was actually made this morning by Douglas Porter chief economist of BMO Nesbitt Burns in reaction to the rate hike announced this morning. He followed this statement however, by stating that the bank was almost bending over backwards to indicated that the rate increase is not necessarily the start of a relentless campaign to crank rates higher.
While the bank has taken the first step to tighten policy, it is a very tentative step. Almost every expert agrees that although rates are going to increase, they will increase slowly. Canada is not an island and there was a clear emphasis today on global conditions. As Grant Bishop, economist at TD Bank noted, mention of the global situation was "no accident".
Ongoing uncertainties and an easing pace of growth mean that tightening of rates will be paced very carefully. Interpretation of Mr. Carney's announcement today was that there won't necessarily be rapid-fire increases in rates and that Mr. Carney is ultra cautious in his comments and outlook. Mark Chandler, chief of Canada Fixed Income at RBC agreed stating, " today's statement...did seem to lay out a very cautious plan to continue raising rates". Experts agree that the bank may not hike at each meeting and may even pause on increases if near-term financial conditions warrant.
Canada is indeed the first of the G7 countries to raise rates and our economy has been more robust than most, but we are not an island and with Europe struggling and whispers of China's economy slowing down, the international environment could significantly interfere with future Bank of Canada tightening. Derek Holt of Scotiabank supported this idea, " any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic development". This movement would not have raised eyebrows a few weeks ago, before things went array in Europe. But the banking crisis in Europe has shaken the foundations of the global outlook.
What does this mean for Canadians? Well, this means that your variable rate mortgages will go up by around .25% and lines of credit could be increased. It is important to remember that lines of credit move not only when Prime moves, but banks can, at any time raise their rates on Lines of Credit by simply changing the conditions. You could be paying Prime + 1% today, but get a call in a month that you will now be paying Prime + 1.5% or Prime + 2% . That is why it is important to consider clearing out those lines and moving them into the lower rate mortgage of 2.00%. This will not only provide you with more savings, but will also provide insurance against the possibility of rates rising in the future.
So, the predictions that we have been making are coming true and all the experts agree that although this hike was warranted, things should move slowly going forward .Our recommendation...stay the course. We are staying on that "variable rate train" and you will save thousands.
Please do not hesitate to call us anytime should you have questions or concerns.
Suzanne
Broker/Owner
Blog
May 7, 2010 NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
At this time it is important to put the Greek situation in perspective. Will we be talking about Greece 12 months from now? Clearly, no one can predict how the stock and bond markets will react in the coming weeks to developments in Europe. After all, as we all know, in this kind of situation the market is driven by emotions (panic?), not fundamentals. It is not enough to say that the impact of the crisis will be limited due to the fact that Greece is an insignificant player in the global economic arena. After all, Thailand which originated the Asian debt crisis of 1997 is not exactly an economic giant. The more important focus should be on the shape of the global economy at the eve of the crisis. And in this context note that the crisis is occurring in an environment of a recovering global economy while the EU's bailout of Greece implicitly guaranteeing the debt of larger economies such as Spain and Italy. The drivers of global growth now include China and India, which are less vulnerable to Europe's downturns. At the same time, Latin America and Southeast Asia enjoy much stronger government finances and more moderate exchange rate. These factors reduce their sensitivity to economic shocks. Furthermore, Greece, Portugal and Ireland don't have the trade or capital market gravity of their larger European neighbors.
The Greek crisis will end up being an important event in the history of sovereign debt, but its impact on the global economy will be minimal. More important focus should be on the fact that the crisis is an exaggerated preview of what we should expect to see down the road from other countries. After all, Greece is not the only country that is facing a mountain of debt. Yes, the magnitude is different but the direction is the same. In Greece, they call it austerity measures, in North America it will be called reduced spending and higher taxes.
The point is that fiscal policy will work as a clear negative for overall economic growth. In Canada, for example, a government that was responsible for no less than 40% of overall economic growth during the past decade will start acting as a negative for economic growth in the second half of 2010 and beyond. The fiscal drag in the US will be much more significant.
Accordingly, while the Bank of Canada will probably proceed with its plans to raise rates come June or July, the upcoming fiscal challenge suggests a very gradual approach. As for the stock market, any significant sell-off in the coming weeks should be seen as a buying opportunity.
Benjamin Tal
Senior Economist
