10 Dec

What To Expect In 2019


Posted by: John Dunford

The Canadian economy is showing cracks in its foundation and, beginning with turmoil in Alberta, they will reverberate through the coming year.

Alberta’s oil glut in tandem with the federal government’s inability to build pipelines is having country-wide ramifications.

“The federal government has not been able to get its pipelines done and it’s really hurt the prospects of the Canadian economy,”  “That, along with the closing of the GM plant in Oshawa—eventually there will not be a GM plant in Canada—and I can see the Canadian and U.S. economies taking downturns.”

Even if the province goes ahead with a railcar transportation option, too much time will pass in the interim.

“They’re not going to have any way of getting their oil out,” said Ron Butler. “If they buy railcars, they won’t come on stream until November of next year.”

We expect fixed rates to be up to 0.5% higher in 2019 because of the variable rate spike and, specifically, how much more expensive it is for lenders to fund mortgages in light of repeated government intervention in the market.

“It’s become a lot more expensive for lenders to do mortgages with all the government intervention and the level of insurance they have to carry and their capital expenses,” he said. “It means higher rates. Banks are 1.8% above the five-year government bond rate and they’re happy to make a profit. Banks want to make up for their lower volume through higher rates, so they’re making more off every deal because it’s no longer a volume play.”

The Greater Toronto Area isn’t likely to change much next year. While there isn’t necessarily anything to make it worse, there doesn’t appear to be anything on the horizon that will improve it, either.

“There will be a softening of values, lower sales units and reduced total mortgage originations across the province,”. “There will be a tiny softening on the price side. Bear in mind that this year was down and next year will be even less so. There’s nothing that will improve it. Will the economy get better? No chance of that. Are mortgage rules suddenly going to be revised so that it will be enormously easier to get a mortgage? No chance.”

Condo sales will be strong in Toronto proper next year, but the 905 will be languid and so will the single-family detached market.

“Toronto is a tale of two markets,”. “Condos and houses, and people aren’t  just buying for investment purposes.”

5 Dec

Rate Rises May Be Reshaped By Oil Production Cuts Says CIBC


Posted by: John Dunford

The Bank of Canada will announce its December interest rates decision Wednesday and few are expecting a Grinch-like pre-Christmas shock.

But while there should be a pause on rate rises this month, a change from the central bank’s previously bullish tone on rate rises will be in focus given some shifting conditions since October’s increase.

CIBC Economics says that it may be necessary for the BoC to ease back from its confident stance of increasing rates to a 2.5-3.5% range, a range that CIBC believed was too aggressive even then.

With the oil production cuts announced by Alberta at the weekend, along with some other economic conditions, economist Avery Shenfeld says the BoC may sound a more dovish tone.

He says that the oil production cut will reduce real GDP in Q4 2018 and Q1 2019 but that is not the only issue.

“More broadly, wage inflation seems to be in retreat, and GDP growth has been zero over the most recent two months. South of the border, both the Fed Chair and Vice Chair sounded less assured that American overnight rates would keep climbing as steadily as they have in the past year,” Avery wrote in a client note.

The BoC is not due to update its outlook at tomorrow’s meeting but Shenfeld says that there could still be some mention of the downside risks to previous GDP expectations.

CIBC Economics is holding steady on its forecast that interest rates will increase by 50 basis points in 2019 stretched over two hikes.

4 Dec

No Rate Rise at Least February Suggests C.D. Howe Institute


Posted by: John Dunford

The Bank of Canada should hold pat on interest rates until the spring according to The C.D. Howe Institute’s Monetary Policy Council.

It is calling for a hold-steady at 1.75% in December and January, with the next rate rise taking place by May 2019 (2%) and then a further rise by the end of 2019 to 2.25%.

The MPC provides an independent assessment of the monetary stance consistent with the Bank of Canada’s 2% inflation target.

The MPC was unanimous in its opinion that rates should not rise when the BoC meets to decide next week, although was split on what to do in January with 4 in favour or a hike and 6 against.

Why the caution?

Many of the MPC members are concerned about lower global growth in the near and medium term and weaker demand for Canadian natural resources. This is worsened by the oil transportation challenges for producers.

Several members noted that lower prices and volumes for Canadian exports would depress national income in the coming quarters, with adverse effects for business and government revenues.

Domestically, although consumer credit has been growing strongly, mortgage lending has levelled off with housing activity, and the announcement that GM will close its Oshawa plant signifies that the auto cycle is past its peak.

Although some MPC members said that the federal government’s recent announcement of accelerated capital cost allowances will help at the margin, they emphasized that businesses are shifting to a defensive stance: the forecasters in the group said they had not revised their projections of business investment up appreciably.