22 Jan

Economist To Brokers: The Boom Is Over


Posted by: John Dunford

A leading economist believes last year’s prosperous market won’t carry on through 2016.

“I think mortgage brokers should recognize the mortgage market will slow; there is no way we’ll see a repeat of 2015 performance in Toronto and Vancouver,” Dr. Sherry Cooper, chief economist with Dominion Lending Centres, told MortgageBrokerNews.ca. “The government is certainly doing what it can to encourage the slowdown.”

Cooper spoke to MortgageBrokerNews.ca in reaction to Wednesday’s Bank of Canada rate decision.

The central bank maintained its target for the overnight rate at 1/2%.

“Inflation in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods,” the Bank of Canada said at the time. “As all of these factors dissipate, the Bank expects inflation will rise to about 2% by early 2017. Measures of core inflation should remain close to 2%.”

The bank did acknowledge that commodities and oil prices continue to take a hit and negatively impact the economy. It suspects the economy stalled in Q4 2015. It also expects growth to be delayed.

For her part, Cooper believes the move – or, indeed lack thereof – was solid, but that the economic policy report, released alongside the rate decision, was too optimistic.

“I don’t object to keeping the rate as they did. I wouldn’t have objected if they reduced the rate either; I thought it could have gone either way. What I do object to is the tone of the statement and the monetary policy report,” Cooper said. “The government maintains the economy will rebound soon without stimulus and I don’t see that happening.”

Cooper argues the factors that dampened the economy aren’t temporary and that the turmoil in the energy segment will be long-term.

20 Jan

Bank Of Canada Does Not Cut Rates


Posted by: John Dunford

In an evenly divided call by market analysts, the Bank of Canada maintained its target for the overnight rate at 1/2 percent. The Bank said that inflation prospects are largely as expected and that “the dynamics of the global economy are broadly as anticipated in the Bank’s October Monetary Policy Report (MPR).”

Really?  Oil prices have plummeted to unexpected lows. Stock markets are declining sharply and the Canadian dollar has fallen more than expected and certainly, the output gap will remain wider for longer than suggested in the October MPR.

The Bank called the setback for the Canadian economy from the further decline is oil prices temporary. The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016. The Bank projects Canada’s economy will grow by about 1-1/2 percent in 2016 and 2-1/2 per cent in 2017, with the output gap closing around the end of 2017. This is the Bank’s forecast without including the positive impact of fiscal measures expected in the next federal budget. 

Really? I feel like the economic forecasters at the Bank of Canada are living in an parallel universe–where things are a lot rosier than here on planet earth. 

Don’t get me wrong, there are a lot of good reasons for the Bank of Canada to have refrained from cutting rates.  The Canadian dollar has already fallen sharply and a rate cut could have imprudently triggered a currency rout. With so much concern about household debt, another rate cut would run the risk of encouraging excessive borrowing. As well, with interest rates already so low, another cut is likely to have very little macroeconomic benefit and the Bank should keep some powder dry in case things deteriorate further in coming months. Moreover, the feds are going to goose the economy with infrastructure spending, so taking a wait-and-see attitude makes sense. 

But to suggest that the current weakness is due to temporary factors and a rebound is in train without the fiscal stimulus lacks credibility and appears sanguine at best and irresponsible at worst. Oil prices are not falling due to temporary factors. The world is adjusting to an alternate reality where oil supply is well in excess of sustainable demand and more supply is coming on stream from Iran. Canadian oil is among the most expensive in the world to produce and prices received by Canadian oil producers (Western Canada Select (WCS) in the chart below) are well below prices elsewhere. This inevitably continues the painful restructuring in the oil patch. These are not temporary factors.

Norway–another oil giant with expensive production–recognizes its need to accelerate its economic transformation. In its October 2015 budget, the Norwegian government declared that “the economic outlook is different than we have been accustomed to over the past 10-15 years…Oil is no longer the growth engine of the economy.”  Faced with the need to restructure, the government is keen to shift Norway from its dependence on oil towards other industries. Norges Bank, the central bank of Norway, has given forward guidance that interest rates may be cut further in 2016 from record lows despite worries of a house price bubble in Oslo and elsewhere due to increasingly low rates. Norges Bank has warned that house price inflation was higher than expected and that household debt–already at record highs–would continue to outpace income growth.

The Bank of Canada has been behind the curve ever since the decline in oil prices began in 2014, revising down its forecast for the Canadian economy in each quarterly Monetary Policy Report. How long can unanticipated temporary factors be blamed? 

20 Jan

The Bank Of Canada Will Maintain Its Target For The Overnight Rate At 1/2%


Posted by: John Dunford

“Inflation in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods,” the Bank of Canada said in a release. “As all of these factors dissipate, the Bank expects inflation will rise to about 2 per cent by early 2017. Measures of core inflation should remain close to 2 per cent.”

The bank did acknowledge that commodities and oil prices continue to take a hit and negatively impact the economy. It suspects the economy stalled in Q4 2015. It also expects growth to be delayed.

“The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016,” the BoC said. “The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.”

On a bright now, however, employment and household spending remains strong.

“The Bank projects Canada’s economy will grow by about 1 1/2 per cent in 2016 and 2 1/2 per cent in 2017. The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain,” the bank said. “The Bank’s current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017. However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget.”

19 Jan

Bank of Canada to Cut Key Rate to Zero in 2016, Barclays Says


Posted by: John Dunford

The Bank of Canada will cut its key interest rate to at least zero this year and could move toward negative rates to offset the crude oil price slump, according to Barclays Plc.

The London-based bank expects the Bank of Canada to cut its overnight target rate 25-basis points to 0.25 percent at its announcement on Wednesday, and a total of at least 50 basis points in 2016, Juan Prada and Andres Jaime Martinez wrote in a research note.

“In our view, risks are tilted toward further easing, which would imply negative rates,” the strategists said. “The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound.”

Persistent weakness in the price of crude oil, softer than expected economic data and concerns about the Chinese economy are weighing on the Canadian economy, the strategists wrote. Western Canadian Select, an Alberta oil-sands benchmark, has declined by half since the central bank’s October policy update while the Canadian dollar has depreciated by about 10 percent.

The Bank of Canada last cut interest rates in July to 0.5 percent. Swaps traders are currently pricing in a 56 percent chance that the central bank will cut interest rates this week. In his October update, bank governor Stephen Poloz said the effective lower bound for Canada was about minus 0.5 percent, raising the possibility of negative interest rates.

18 Jan

Will the Bank of Canada Cut Rates Next Week?


Posted by: John Dunford

Expectations of a Bank of Canada rate cut next week are mounting and for good reason. The Canadian economy is showing signs of considerable weakness and business investment plans have been cut. Oil prices continue to decline sharply and Iranian oil supply will be coming on stream shortly. Energy companies continue to slash payrolls and dividends. Alberta’s economy will contract sharply this quarter and although the Canadian trade deficit has improved, the decline is nowhere near sufficient to offset the dampening effects of the oil rout, despite the sharp decline in the loonie.

The loonie has just posted its worst 10-day performance since it was allowed to trade freely against the U.S. dollar in 1971. Part of the reason the Canadian dollar has fallen so much is the widening prospect of a Bank of Canada rate cut on January 20–a quarter-point cut to 25 basis points, its lowest level since the 2009 financial crisis. Is this warranted? I think so. The Bank cut rates in a surprise move this time last year when the economy was newly hit by the oil price decline. Since that time, oil prices have  declined dramatically further, especially for Canadian oil.

Some have argued that oil prices will remain low for an extended period and see the prospect of an initial public offering (IPO) of Saudi Arabia’s oil company, Aramco, as a sign of the end of the oil age, triggered by excess supply and  international efforts to combat global warming. Saudi Arabia sees the need to diversify its economy away from oil and so should Canada.

It is not that another rate cut will have a dramatic effect on the economy–with interest rates already so low, the Bank has little ammunition left, even if they take rates into negative territory, as they suggest is possible. They might be reticent to encourage household borrowing at a time when debt levels are at record highs and the government has taken actions to slow the growth in housing. Nevertheless, some Canadian banks nudged up mortgage rates recently, and a BoC rate cut might discourage further increases and could even trigger a rollback.

Fiscal stimulus is certainly coming, but when and how is still uncertain and the economy needs all the help it can get. Market interest rates are at record lows, the stock market has fallen sharply this year, and consumers are worried as food prices continue to rise, which hurst lower-income Canadians proportionately more than others.

In addition, the Federal government has gone ahead with its high-income tax increases (as well as middle class tax cuts), which could well discourage entrepreneurs, business investment and job creation. The tax increases to levels well above those in many other countries also make  it more difficult for Canadian business to attract foreign talent. The decline in the Canadian dollar, while boosting exports and foreign investment, reduces the value of the money Canadians earn and invest. The negative wealth effect damages consumer confidence.

These are difficult times for Canada and extreme measures should be taken. The Bank should cut rates and the government should introduce larger increases in infrastructure spending than were promised during the election campaign. None of Canada’s economic pain was our own doing, but counter-cyclical policy measures can and should reduce the pain as we work our way towards a more diversified economy.

12 Jan

Another Interest Rate Cut?


Posted by: John Dunford

Bank of America Merrill Lynch told its clients Monday that the weakness in the oil industry spreading out to other industries will prompt a further interest rate cut by the Bank of Canada when it meets on January 20. In a note to investors the bank called for a cut of 25 basis points. With some of Canada’s largest banks having recently increased some mortgage rates a cut in interest rates may not cut the cost of mortgages, however it could mean that there are no more increases for now either. The consensus among economists is for the BoC to take no action on interest rates in the near-term.

7 Jan

Exports, Oil Rebound No Panacea for Canada, Bank Economists Say


Posted by: John Dunford

The troubles that plagued the Canadian economy last year are going to persist through 2016, but things may be a bit brighter by the end of the year, according to a panel of chief economists at the country’s five biggest banks.

Here’s what they’re expecting for the world’s 11th biggest economy, which is on pace for 1.2 percent growth in 2015 after being dragged down by the collapse in commodity prices:

No Panacea

Canada’s gross domestic product can be expected to grow about 1.5 percent in 2016, with 0.5 percent coming from exports and 1 percent from domestic demand, said Douglas Porter, chief economist at Bank of Montreal. That compares with an average forecast of 1.8 percent, according to estimates compiled by Bloomberg.

“But the reality is we just cannot count on an export bonanza,” Porter said. “Not with a very intense competition that we continue to see from China, and Mexico to a lesser extent, and with the fact that this country just does not have the industrial capacity that it may have had 10 years ago.”

Stocks, Bonds

“All’s well that ends well,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said of the outlook for the equity market in 2016. After an 11 percent slide in 2015, Canadian stocks will post single digit returns and end 2016 on a better note in anticipation of a marginally improved year for the global economy in 2017, he said.

For bonds, it’s “much ado about nothing” for the front-end of the yield curve, Shenfeld said. The Bank of Canada might cut interest rates one more time in 2016 and take it back in 2017, but short-term interest rates aren’t going anywhere, he said.

“This is a slow boat to nowhere,” he said.

Oil Price

“We’re all looking for some sort of rebound in commodity prices, with oil at some point getting back towards $60 or above by 2017,” said Beata Caranci, chief economist at Toronto- Dominion Bank. The central bank estimates $55 oil by the end of this year. U.S. crude is currently trading at about $36 a barrel.

Bank of Nova Scotia’s Warren Jestin warned $60 oil could “reinvigorate” some shale projects but it won’t be enough to encourage the multibillion-dollar investments in the oil sands in a way that will stimulate growth in the province of Alberta and Canada as a whole.

“We changed the conversation in energy,” he said. “The conversation used to be $90-$100 oil. Now we’re talking optimistically about $50-$60 oil.”

Currency Pressure

The Canadian dollar will stay below 80 U.S. cents over the next two years, Caranci said. The currency hit its lowest since 2003 on Tuesday, with one U.S. dollar buying C$1.4019 and the Canadian dollar buying about 71.33 U.S. cents.

“That’s because we need the helping hand on the trade side from foreign demand, specifically the U.S.,” she said.

U.S. Lift

“The U.S. is the bright shining star — that’s the good news story,” said Craig Wright, chief economist at Royal Bank of Canada. “But it’s also suggested it’s not a very fast race or a very bright sky.”

U.S. growth will be marginally better than 2015’s growth rate of 2.5 percent driven by accommodative monetary policy, easing fiscal policy, and low oil prices leaving more money in consumers’ pockets. Employment and income have been strong and investment outlook is a bright spot, he said.

“More competitive currency, stronger U.S. and a pick up in global growth we think will give Canadian exports the lift that we’ve been waiting for,” he said.

6 Jan

Brokers Comment on Acquisition


Posted by: John Dunford

It was another feather added to the cap of the country’s largest network, one that industry professions are saying points to the strength of the industry.

Dominion Lending Centres acquisition of Mortgage Architects “is good for us; it gives us a bigger presence in the industry and more clout with lenders,” Walter Faria, a mortgage agent with Mortgage Architects, told MortgageBrokerNews.ca. “It’s nice that we now have the backing of DLC.”

The broker network announced the acquisition of Mortgage Architects early Monday morning. The deal was finalized on New Year’s Eve 2015.

DLC claims it now boasts close to 40% market share, with a combined $32 billion in annual mortgage volume. It also claims it is now the largest mortgage originator in the country, ahead of all other networks and major banks.

That chunk of market share is made up of Dominion Lending Centres brokers, Mortgage Centre brokers, and Mortgage Architects brokers.

And it isn’t just MA players who hare applauding the biggest acquisition the industry has seen in years.

“Congrats to Gary (Mauris) and (DLC founder) Chris (Kayat); these two gentlemen know the best way to prove you really are committed to an industry is to write a big cheque,” Ron Butler, a Verico broker, wrote in response to the original news story. “They have purchased a great company with a fantastic group of agents and brokers.

“Betting big on the future of the mortgage brokerage business is a huge complement to all of us who help clients with their home financings every day.”