14 Aug

Canada’s Jobless Rate Returned to a Four-Decade Low in July

General

Posted by: John Dunford

Statistics Canada announced this morning that employment increased in July and the jobless rate fell .2 percentage points to 5.8%–returning to its lowest level since the 1970s posted earlier this year.

The economy added a stronger-than-expected 54,100 net new jobs last month–its most significant advance this year. This gain, however, was driven by increases in part-time work. July’s jobs surge followed the 31,800 rise in June. Both months enjoyed advances well above the 20,000 average monthly gains of the past year.

In the 12 months to July, employment grew by 246,000 (+1.3%), largely reflecting growth in full-time work (+211,000 or +1.4%). Over this period, the total number of hours worked rose by 1.3%.

The job growth last month was primarily in public sector jobs, especially in educational services mainly in Ontario and Quebec. At the national level, the rise was primarily in employment in post-secondary institutions, particularly universities, and was mostly in part-time work. The number of people working in health care and social assistance also rose, mainly in Ontario. In British Columbia, the number of people working increased by 11,000 and the jobless rate was 5.0% (see table below). Job gains were also noted in Newfoundland and Labrador, the first increase since October 2017. The number of workers declined in Saskatchewan and Manitoba, while it was little changed in other provinces.

Manufacturing jobs declined by 18,400 in contrast to the record-high jump of 90,500 in the service sector. The surge in service sector employment, however, likely reflected a technical distortion. The timing of hiring in the education sector has been volatile over the summer months in recent years causing a seasonal adjustment problem. The July spike education jobs will likely be unwound in the next two months.

Wags gains slowed during the month, with average hourly wages up 3.2% y/y compared to 3.6% y/y in June. Wage gains for permanent workers were 3%, the slowest this year.

The Canadian economy continues to run at a stronger pace than long-run potential as the labour markets continue to tighten. The jobless rate of 5.8% is below the full-employment level of 6.0%-to-6.5%. A more robust pace of hiring runs the risk of further increasing excess demand, putting upward pressure on inflation. In consequence, the Bank of Canada will continue to withdraw stimulus by gradually hiking overnight rates.

This report has raised the likelihood of another increase in the benchmark overnight rate of 25 basis points, possibly as soon as the next policy meeting in September. Inflation, however, remains at the Bank of Canada’s target of 2.0%, allowing the Bank to wait until the subsequent meeting in October.

3 Aug

CMHC Wants More Robust Income Verification

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Posted by: John Dunford

The CMHC wants the Canadian Revenue Agency to provide more robust verification of incomes stated on mortgage applications.

The call comes following an investigation by the CMHC into the correlation between incomes stated on mortgage applications and those reported to the CRA.

It now wants the tax agency to take a “more direct and formal role” in verifying incomes according to documents obtained by Reuters.

Some other countries including the US and UK have systems where the tax agency does provide lenders with verification of mortgage applicants’ incomes and the CMHC believes this would cut potential incidents of mortgage fraud, which can have a serious impact on the economy, especially if there is another financial crisis.

The CRA told Reuters that it is looking into ways that it can respond to CMHC’s concerns and provide lenders with income verification.

While the majority of Canadians are honest on their applications, a recent study by Equifax found that 13% think it’s ok to lie on a mortgage application and 16% believe mortgage fraud to be a “victimless crime”.

The study of mortgages originated between 2013 and 2016 found a 52% spike in suspicious mortgages, mostly in the highest priced housing markets.

17 Jul

Bank of Canada Hikes Key Interest Rate to 1.5%

General

Posted by: John Dunford

OTTAWA _ The Bank of Canada raised its benchmark interest rate Wednesday in an economy that it predicts will remain resilient even as it faces an even bigger bite from deepening trade tensions.

The rate hike was the central bank’s first interest rate move in six months and lifted the trend-setting rate to 1.5 per cent, up from 1.25 per cent. It was the bank’s fourth rate increase over the last 12 months.

The decision, a move that will likely prompt Canada’s big banks to raise their prime rates, arrived in the middle of a trade dispute between Canada and the United States that’s expected to hurt both economies.

The bank took the step even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa’s retaliatory measures. The tariff fight, the bank estimated, will shave nearly 0.7 per cent from Canada’s economic growth by the end of 2020.

However, the bank expects the negative blow of the trade policies recently put in place to be largely offset by the positives for Canada from higher oil prices and the stronger U.S. economy.

“Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest,” the bank said in a statement.

But in addition to steel and aluminum tariffs, Canada is facing a significant trade-related unknown that many believe would inflict far more damage on the economy: U.S. duties on the automotive sector

U.S. tariffs on the auto sector’s integrated cross-border supply chains would have “large impacts on investment and employment,” the Bank of Canada warned Wednesday in its accompanying monetary policy report.

The bank, however, didn’t quantify the possible effects of auto tariffs on Wednesday. Governor Stephen Poloz has signalled in the past that he’s focused on data he can measure rather than the impacts of trade policies that have yet to materialize.

Canadian businesses must also contend with the uncertainty surrounding the difficult renegotiation of the North American Free Trade Agreement, for which talks have stalled.

The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the U.S. and China, will affect the world’s economy. It warns that “escalating trade tensions pose considerable risks to the outlook” at the global level.

Even with the trade issues, the Bank of Canada is now predicting slightly stronger growth for Canada over the next couple of years, according to updated projections it released Wednesday in its quarterly monetary policy report.

It expects real gross domestic product to grow 2.2 per cent in 2019, up from its April call of 2.1 per cent, and by 1.9 per cent in 2020, compared with its previous prediction of 1.8 per cent. The economy’s growth projection for this year remains at two per cent, the bank said.

Looking ahead, the bank predicts Canadian growth will continue to see bigger contributions from exports and business investment, which were both stronger than expected in the first three months of the year.

At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said.

Leading up to the announcement Wednesday, Poloz was widely expected to raise the interest rate following a run of healthy economic numbers, including the Bank of Canada’s own survey on business sentiment, tightened job markets and growth in wages.

Moving forward, the bank said it expects higher interest rates will be necessary over time to keep inflation near its target, however, it intends to continue along a gradual, data-dependent approach.

The country’s inflation rate is expected to rise to 2.5 per cent _ above the two per cent mid-point of the bank’s target range _ due to temporary factors such as higher gasoline prices before settling back down to two per cent in the second half of 2019.

4 Jul

Affordability Likely To Get Worse Says RBC Economics

General

Posted by: John Dunford

There appears to be little relief in sight for Canadian homebuyers, especially first-time buyers, as affordability is likely to worsen.

A report published Tuesday by RBC Economics says that rising interest rates took a bite out of housing affordability in the first quarter of 2018 and things are not looking brighter for the near future.

Average Canadian households had to allocate 48.4% of their income to housing costs in the first quarter, a rise of 0.4 percentage points from Q4 2017 and a new multi-decade high.

“Higher mortgage rates were the main contributor to the rise in ownership costs,” said Craig Wright, Senior Vice-President and Chief Economist at RBC. “With the prospect of more interest rate hikes in the period ahead, there’s a definite risk that affordability will erode further in the coming year. The odds of this occurring will also depend on the degree to which household income increases.”

RBC Economics’ Housing Trends and Affordability Report reveals that things had improved in the fourth quarter of 2017 as easing home prices helped offset rising interest rates. But nationwide prices were flat at the start of 2018.

Affordability improved in Toronto, slightly
Toronto did see some improvement with prices declining in Q1 2018. However, the 0.1 percentage point improvement in the housing affordability measure still means households needed 74.2% of their income for housing costs.

There was also an improvement in affordability in Winnipeg, while the quarterly increase in RBC’s aggregate measure in Saskatoon, Ottawa, Halifax and St. John’s was the largest in more than a year.

Montreal faced a third-straight rise in its measure, reaching its highest point since 2011.

Vancouver continues to push household budgets to the limit with homeowners needing to allocate an eyewatering 87.8% of their income to housing costs following a rise of 1.5 percentage points.

Interest rates to hit 2.25%
“Interest rates will be crucial to the outlook for housing affordability in the year ahead,” continued Craig Wright. “Our view is that the Bank of Canada will proceed with a series of rate hikes that will raise its overnight rate from 1.25% currently to 2.25% in the first half of 2019. This would have the potential to stress housing affordability significantly.”

4 Jul

BoC Hike This Month A Dead Certainty – Observer

General

Posted by: John Dunford

Fresh economic numbers from Statistics Canada pointed to a sustained acceleration to beyond 2% growth in Q2 2018 – a necessary condition for the Bank of Canada to proceed with interest rate hikes in the second half of this year, according to a markets observer.

“We’ve passed the first of three hurdles remaining for the Bank of Canada decision on July 11,” Manulife Asset Management senior economist Frances Donald told BNN Bloomberg. “GDP has come in – that’s certainly enough to check the box for the Bank of Canada and a July rate hike.”

The Statistics Canada report released late last week showed that the Canadian economy enjoyed surprisingly strong output, mainly due to the stabilizing real estate and manufacturing segments.

GDP saw 0.1% month-over-month gains in April, defying expert predictions of flat performance. This marked the third straight month of growth after the 0.3% in March and the 0.4% in February.

“All in all, these numbers that you’re telling me right now say it’s a go for a July rate hike,” Donald stated.

Read more: Economy shows the time is right for interest rate hikes – BoC’s Poloz

The Bank of Montreal agreed that the April numbers are promising, although it didn’t directly comment on the possibility of a rate hike.

“While readily acknowledging that a 0.1% rise in headline GDP is not going to send many hearts racing, this actually was a decent result in a challenging month for the economy,” chief economist Doug Porter wrote in a note to investors. “Importantly, it suggests that growth was pretty much in line with the Bank of Canada’s underlying expectations through the spring.”

Real estate agent and broker activity rose by 0.5% in April, the largest jump recorded ever since the implementation of B-20 at the beginning of 2018. Meanwhile, manufacturing went up by 0.8%.

4 Jul

Rate Hike Likely This Month But Then A Pause?

General

Posted by: John Dunford

The Bank of Canada will meet to decide on its latest move on interest rates next week and many are expecting an increase.

But once July’s hike is done, things become less clear as the economy is showing some mixed signals.

Two economists from Canada’s big banks have given their assessment of the likelihood of rate rises and both are confident that homeowners are facing higher mortgage costs from this month.

CIBC’s Avery Shenfeld says that the recent GDP and outlook survey were positive and a strong labour force survey for June is also expected.

“That will be the last piece of the puzzle for a Bank of Canada rate hike in July, but we’re also of the view that economic growth will moderate enough after Q2 to force another extended pause on rates,” he says.

Meanwhile, TD Economic’s James Marple is also expecting June’s labour figures to support a July interest rate rise; and concurs with Shenfeld’s call for a pause afterwards.

“Given a more cautious outlook and ongoing threat of escalating trade wars, we suspect it will be some time before we see another hike,” he says.

Marple notes that the housing market has shown some signs of stabilization with  some markets, Ottawa and Montreal for example, showing “decent positive momentum.”

27 Jun

Rate Hike In July? It’s All Down To The Data

General

Posted by: John Dunford

The prospect of a rise in interest rates by the Bank of Canada in July remains but recent data releases suggest Governor Poloz may not be in a hurry to act.

An assessment by TD Economics senior economist Brian DePratto points to some disappointing data releases from last week and the potential for more uneasy reading ahead.

Wholesale trade was flat in the second quarter of 2018 and retail figures declined by more than economists had expected.

Then there was inflation data which showed no change from a year ago at 2.2% in May, again not what the market was expecting.

These figures come ahead of the latest GDP data this week and BoC governor Stephen Poloz’s speech Wednesday which will focus on monetary policy and is expected to be widely studied.

There will also be reports this week on household credit data and the Business Outlook Survey; plus of course the potential for further trade tensions to add risk to the economy.

So, will the BoC increase rates?

“Unless these risks are sufficiently reduced or Canada’s economy accelerates markedly, we expect the Bank to move its policy rate by only 50bps (i.e. two hikes) per year,” writes DePratto in his ‘Weekly Bottom Line’. “As it stands, July remains most opportune time to hike, but with inflation remaining tame it is hard to expect much urgency.

26 Jun

Unexpectedly Weak Data On Inflation, Retail Sales Cloud Central Bank’s Next Step

General

Posted by: John Dunford

OTTAWA _ A pair of unexpectedly soft economic reports are creating fresh doubts about the timing of the Bank of Canada’s next interest rate hike.

For months, experts have been predicting Bank of Canada governor Stephen Poloz to raise his benchmark rate at next month’s meeting. But broadening economic unknowns _ mostly linked to trade concerns around U.S. President Donald Trump’s protectionist agenda _ have begun to lead some analysts to wonder if Poloz will stand pat on July 11.

And on Friday two reports from Statistics Canada added more uncertainty to the interest rate outlook.

One release by the agency found Canada’s annual inflation rose at a pace of 2.2 per cent in May for the second straight month. The number, however, was cooler than market expectations of 2.6 per cent.

In the second report, Statistics Canada found that retail sales contracted in April by 1.2 per cent for the reading’s first month-to-month decline since December.

“These reports kind of highlight an economy that has slowed pretty significantly from the last year or two,” Robert Kavcic, senior economist for BMO Capital Markets, said in an interview.

“Given a lot of the uncertainty out there, and a little bit of a softer tone to this data, I think expectations for a July rate hike have probably come down a little bit.”

Royce Mendes of CIBC Capital Markets wrote in a report that Friday’s “bad data” make it even more difficult for the Bank of Canada to hike rates in July. Mendes noted, however, that things could improve before Poloz’s July 11 meeting because more important numbers on gross domestic product and employment are still on the way.

Nathan Janzen, RBC senior economist, said the combination of Friday’s figures, somewhat slower economic growth and a deteriorating tone in trade discussions with the U.S. “aren’t all that encouraging” and will make the Bank of Canada’s rate decision closer than previously thought.

Ranko Berich, head analyst at Monex Canada and Monex Europe, said the central bank’s July rate decision is “now an unknown factor.”

The hunt for clues into Poloz’s thinking will continue next Wednesday when he gives a speech to the chamber of commerce in Victoria, B.C.

The May annual inflation number in Friday’s report followed the 2.2 per cent reading for April and 2.3 per cent for March.

The main contributors to inflation last month were led by gasoline prices. Compared to a year earlier, they climbed 22.9 per cent in May and helped drive overall energy prices for the month 11.6 per cent higher.

Inflation also received a lift because Canadians paid more last month for restaurants, airline tickets and mortgage interest costs.

Consumers, however, paid less in May for telephone services, natural gas and digital devices and computers.

The report also found the average of the Bank of Canada’s three measures of core inflation, which leave out more-volatile numbers like pump prices, slowed to 1.9 per cent last month.

The core readings, which are closely monitored by the central bank, averaged 2.03 per cent in April, which was the strongest pace in six years.

On retail trade, the April contraction of 1.2 per cent pulled total sales down to $49.5 billion.

The April decrease was mostly due to a 4.3 per cent decline in sales by motor vehicle and parts dealers _ with new car dealerships reporting a 5.1 per cent drop and used car lots seeing a contraction of 4.1 per cent.

Statistics Canada said April’s unusually cool temperatures and bad weather in many parts of the country may have been to blame for the overall decline.

The decrease was concentrated in the largest provinces. Sales fell 2.3 per cent in Ontario, while Quebec saw a 2.7 per cent drop.

Statistics Canada, however, did release an upward revision to its retail sales data for March. The updated reading shows a 0.8 per cent increase, compared to its preliminary 0.6 per cent estimate.

Friday’s reports will help feed the Bank of Canada’s deliberations as its governing council considers its next interest rate decision.

For inflation, the bank can use interest rate hikes as a tool to help prevent it from climbing too high. The Bank of Canada tries to keep inflation from moving outside a range of between one and three per cent.

Recent inflation readings _ including Friday’s _ have been hovering just above the two per cent mid-point of the bank’s target range.

It’s unlikely, however, to have a significant impact on upcoming rate decisions because governor Poloz has predicted inflation to stay above two per cent for all of 2018. He’s predicted inflation to average 2.3 per cent this year before settling back down to 2.1 per cent in 2019 _ in large part due to the temporary effects of higher gas prices and the introduction of minimum wage increases in some provinces.

He’s raised the trend-setting interest rate three times since last July, but he hasn’t touched the rate since January. It’s been at 1.25 per cent ever since.

18 Jun

IMF Warns of Multiple Risks to Canadian Real Estate Prices

General

Posted by: John Dunford

While the Canadian real estate market remains vigorous in large part due to robust market activity (especially in the higher-end segments), the International Monetary Fund has warned of potential headwinds that could affect housing values – and might even trigger a domino effect that would ultimately harm the national economy.

Noting that real estate prices are a “key domestic risk”, the IMF specifically cited mortgage rates, price expectations, and unemployment as crucial metrics to watch out for. In a new analysis, real estate information portal Better Dwelling stressed that together, these factors are indeed a dangerous cocktail of instability.

The clear upward trend in mortgage rates is probably the main cause for concern, Better Dwelling stated. Probably the most notable example of recent such increases is the Bank of Canada’s decision to hike its average 5-year fixed rate to 5.34%, representing 15.08% year-over-year growth.

“That hike by itself reduces the maximum mortgages that can be borrowed by just over 7%. Not to mention the impact to the wallet of the nearly 50% of homeowners expected to renew their mortgages this year,” Better Dwelling stated.

Read more: Canadian households increasingly relying on debt to stay afloat – study

A sudden, shocking adjustment in real estate prices also remains an ever-present possibility, according to the analysis. This is not helped by the fact that home prices nationwide have moved wildly (both upwards and downwards) since 2003, a clear departure from the previous decades.

“According to the US Reserve Bank of Dallas, real home prices in Canada are down 5.72% from the second quarter of 2017. People haven’t been paying too much attention to it due to the fact that prices were up 4.45% from the previous year. However, price declines stall demand, which feeds lower prices.”

And while unemployment levels are still hovering close to record lows, the situation might have planted the seeds of future weakness.

“Higher wages sound great, but at the phase of full-employment, it accelerates inflation. The acceleration of inflation has the counterintuitive effect of devaluing all wages. You make more, but you can buy less,” Better Dwelling cautioned. “Full employment is generally considered below 6% in Canada, and we’re at 5.8%. You should expect wages to pop, inflation to soar, and/or employment to jump higher. The move results in decreased profitability for businesses, often forcing them to look for ‘efficiencies’.”

11 Jun

Household debt, housing remain key risks for financial system: Bank of Canada

General

Posted by: John Dunford

OTTAWA — Canada’s housing market and high levels of consumer indebtedness remain the top vulnerabilities for the financial system but both have shown signs of easing, according to the Bank of Canada.

The central bank said in a report that worries about the amount Canadians owe have begun to pull back, but it remains a concern.

“Because the total amount of debt carried by Canadian households is so large, we know that it will be with us for a long time,” Bank of Canada governor Stephen Poloz told a news conference.

The assessment came in the Bank of Canada’s latest financial system review, which assesses key vulnerabilities that could amplify or propagate economic shocks.

Key risks associated with the vulnerabilities include a severe recession, a house price correction in overheated markets, and a sharp spike in long-term interest rates.

Federal mortgage lending rules have been tightening in recent years with the application of stress tests on borrowers. New rules implemented at the start of this year introduced a test for borrowers who do not require mortgage insurance and had not previously been subject to stress testing.

The central bank said it will monitor the extent to which borrowers seek out alternative lenders, such as credit unions and private lenders, who are not always subject to the federal rules.

“It’s still too soon to fully assess the impact of the newest changes to mortgage lending guidelines,” said Poloz, who added the bank is scrutinizing the housing and mortgage data as it becomes available.

The tighter lending rules, and higher mortgage rates from lenders, have helped to cool the housing market in recent months from the red-hot pace it set at the start of last year.

The central bank has raised its key interest rate three times since last summer and is expected to raise it again later this year, perhaps as soon as July. The increases have prompted the big Canadian banks to raise their prime rates, which are used to set the rates charged for variable-rate mortgages and other floating-rate loans. The cost of new fixed-rate mortgages has also climbed in recent months as bond yields have risen.

In assessing the housing market risk, the report noted that housing price growth has slowed, led by a drop in the Greater Toronto Area. However, it said the condominium markets in Toronto and Vancouver remain strong with some evidence of speculative activity.

In addition to household debt and the housing market, the report also identified cyberattacks as a key area of concern.

“Even as defensive capacity improves across the financial system, some attacks will inevitability succeed,” the report said. “Having strong recovery plans can help to quickly restore financial system functioning and prevent a loss in confidence.”

Last week, two of Canada’s biggest banks warned that personal and financial information of up to 90,000 customers may have been accessed by “fraudsters.”

The Bank of Canada report comes as fears of a trade war have increased with the U.S. implementing new tariffs on steel and aluminum imports and Canada replying with its own tariffs on U.S. goods.

Poloz said the impact of the tariffs will be part of the Bank of Canada’s next monetary policy report, but added that the overall economic backdrop has improved over the past six months and that’s good for financial stability.

The Bank of Canada announced Thursday that it will no longer publish its financial system review report twice a year.

The report will become an annual review published in June, and a member of the bank’s governing council will make a speech in the fall to update its assessment of the vulnerabilities and risks to the financial system.

It will also create a new financial system hub on its website that will publish research and analyses throughout the year.

The Bank of Canada’s quarterly monetary policy report will also include a more in-depth discussion of the relevant issues as warranted.