Anyone keeping an eye on Canadian mortgage rates should pay special attention to our Labour Force Survey (commonly referred to as our ‘employment report’), which is released by Statistics Canada each month.

The Survey gives us a bevy of useful information about whether and where our economy is adding jobs, whether average incomes are rising or falling, and whether the average worker is putting in more or less  hours of work each month. Together, these factors combine to give us valuable insight into where our overall economic momentum is headed.   read more…

There will be no Update this week. (I ran the Toronto marathon yesterday and spent the rest of the day in recovery!)

Back next Monday.

Today’s consensus on mortgage rates goes something like this: Central banks around the world are printing money like crazy in an attempt to stimulate (and reflate) their economies and to keep their governments (and in many cases their banks) from going broke. All of this ‘new money’ will eventually lead to higher inflation and when it does, higher mortgage rates will inevitably follow.

I agree with this general premise but it omits the most important detail – when. read more…

The Bank of Canada (BoC) left its overnight rate unchanged last week, as expected.

The Bank also released its latest Monetary Policy Report (MPR), which I read with great interest because it gives us the BoC’s views on the state of the world’s economies and includes projections for where the Bank sees foreign and domestic economic momentum headed over the next several years.

In a perfect world, the MPR would offer an unbiased assessment but bluntly put, that has not been the case for some time now. The BoC remains primarily concerned about our elevated household debt levels and continues to warn Canadian consumers about higher future interest rates. The Bank’s hope is that this form of ‘moral suasion’ will help counteract the natural effect that its ultra-low interest-rate policy is having on household borrowing. If successful, the BoC would be able to continue stimulating the rest of our small, open economy, which is needed in light of current global economic conditions, without fueling a household credit bubble as a by-product. read more…

Since the start of the Great Recession, Government of Canada (GoC) bond yields have been consistently pushed lower by wave after wave of troubling economic news from beyond our borders.

GoC bonds are part of a shrinking pool of available safe-haven assets and as economic fear and uncertainty have increased, so has the premium that international bond-market investors are willing to pay for those assets. Since our ever popular fixed-mortgage rates move in close relation to GoC bond yields, this fear premium has created a significant interest-cost saving for the majority of Canadian mortgage borrowers. read more…

The latest Canadian and U.S. employment reports were released last Friday and the data in both came in well below expectations.  

U.S. and Canadian employment data should always be counted among the most important economic indicators for anyone keeping an eye on where Canadian mortgage rates are headed. In normal times, this is primarily because rising labour costs have an 80%+ correlation with rising inflation which then leads to higher mortgage rates. But in today’s world, the employment data in both countries take on an even greater significance. Here’s why: read more…

Cyprus is a tiny country that accounts for only 0.2% of the euro zone’s economic output and its finances are broken beyond repair.

Given its small size, the temptation to use Cyprus to set a tough new precedent for future euro-zone bailout proposals is understandable. This is especially true for German Chancellor Angela Merkel, who will stand for re-election in September and who needs to re-establish her austerity-at-all-cost credentials with German voters after repeatedly compromising on bailout deadlines for the euro zone’s larger countries.

From that perspective, last weekend’s bailout proposal was just what the Chancellor Merkel’s political strategists ordered. It came with the toughest bailout provisions yet, including an unprecedented requirement that Cypriot deposit accounts with balances of less than 100,000 euros be charged a one-off tax of 6.50%. read more…

Long time readers of my Updates will remember that last year I was writing about how our ultra-low mortgage rates were partly a by-product of rising investor fears of a euro-zone collapse.

The Bank of Canada (BoC) was loath to raise its overnight rate in the face of so much global uncertainty and our Government of Canada (GoC) bonds were in high demand as capital fled into a shrinking pool of safe-haven sovereign debt. Canadian fixed- and variable-rate borrowers alike were taken along for the ultra-low rate ride. But then European Central Bank (ECB) President Mario Draghi stared down Spanish and Italian bond-market vigilantes with his promise to “do whatever it takes” to save the euro zone and the crisis retreated from the headlines and appeared to calm from a boil to a simmer.

While I haven’t written about the euro-zone crisis for a while, it is still far from over. In fact, thanks to the latest bailout plan for Cyprus, it is back on the front pages today.  read more…

Bond-market yields yo-yoed last week, with more subdued comments from the Bank of Canada (BoC) pushing them down last Wednesday before strong employment reports from both the U.S. and Canada pushed them higher on Friday.

When the BoC met last week, it kept its overnight rate unchanged at 1.00% as expected. In its accompanying commentary the Bank softened its interest-rate guidance once again, saying that “the considerable monetary stimulus currently in place will likely remain appropriate for some period of time, after which some modest withdrawal will likely be required”.

Here are my key takeaways from the Bank’s latest statement: read more…

Statistics Canada released its latest round of GDP data last Friday and it provided further confirmation that our economy is hovering at just above stall speed.

The report showed that our GDP actually declined by 0.2% in December, bringing our fourth quarter GDP growth to a paltry 0.6% on an annualized basis. While our economy registered total GDP growth of 1.8% over the full year, our momentum slowed markedly in the second half.

As we piece together each new data point in our evolving economic picture, signs of deceleration are everywhere. Our latest GDP, employment and inflation reports merely confirm, at a macro level, the slowdown that we see in housing starts, factory shipments, exports, retail sales and so on.

None of this should really come as a surprise. Every major economy in the world has faced its own growth challenges since the start of the Great Recession. While we weathered the initial storm better than most, our small, open economy could not reasonably be expected to operate above trend indefinitely. read more…

Canada’s Consumer Price Index (CPI) has shown another drop in overall inflation, to 0.5% in January. Over the same period, the U.S. CPI came in flat, at 1.6%, for the most recent twelve months. 

The latest U.S. and Canadian CPI data bolster my belief that the Bank of Canada (BoC) is more likely to lower, rather than raise, its overnight rate as its next move to maintain its medium-term inflation target of 2%.

That said, while I continue to believe that inflation will remain benign for the foreseeable future, eventually, inevitably, it will rise in accordance with the intentions of the U.S. Fed (more on that in a minute). read more…

Today’s economic data imply that our mortgage rates will stay low for the foreseeable future. So much so that even the ‘end-of-low-rates-is-nigh’ forecasters at the Bank of Canada (BoC) have finally come around to the lower-for-longer rate view.

 Cue my contrarian itch, which reminds me of Bob Ferrell’s rule number nine from his famous Ten Market Rules to Remember: “When all the experts and forecasters agree – something else is going to happen.”

 Mr. Ferrell’s rule reminds me that markets have a long history of surprising us and while the odds of rates staying low for some time yet are stacked in our favour, make no mistake, the seeds that will eventually push rates higher (perhaps dramatically so) are being sown in abundance. read more…

For the past several months there has been a disconnect in the Canadian economic data.

While most measures (GDP growth, income growth, inflation) have shown our economic momentum to be slowing for some time, we have still managed to generate a surprisingly robust average of 27,000 new jobs each month over the most recent six months. But sooner or later the data had to converge and when Statistics Canada released its latest employment report on Friday of last week, they did just that. read more…

Bond yields rose again last week in response to new economic data. As is so often the case, beauty was in the eye of beholder.

First, we learned that U.S. GDP fell by 0.1% in Q4, 2012, which was well below the consensus estimate of 1.5% GDP growth for the quarter. Despite this, investors shrugged off the result and took solace in the report’s details, which showed household incomes, consumer spending, house prices and capital spending all rising in the quarter. The sharp slowdown in headline GDP was largely attributed to the effects of super storm Sandy and an unusually large cut in military spending.

While optimists argued that the report showed strong fundamentals that would carry momentum into the first quarter of 2013, those who are governed by a more cautious view of the U.S. economy interpreted the data differently: read more…

Last week was filled with good news for variable-rate mortgage borrowers.

The Bank of Canada (BoC) met last Wednesday and, as expected, left its target overnight rate unchanged. More surprisingly though, the Bank also eliminated its oft-repeated warning about near-term rate increases. Here is the exact wording from the announcement:

While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving a 2 percent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of the imbalances in the housing sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.

The first notable wording change was the BoC’s “more muted inflation outlook”, which was supported by the December Consumer Price Index (CPI), released by Statistics Canada last Friday. The report showed overall inflation of only 0.80% over the most recent twelve months, along with core inflation of 1.10% over the same period. (Reminder: core inflation strips out the more volatile inputs to the CPI like food and energy prices.)

Our inflation rates have fallen steadily over the past year and a half and are among the lowest in the world. If they remain at current levels, the BoC will have to think seriously about lowering its overnight rate, not raising it, to achieve a two percent inflation target over the medium term.

Sound crazy? Let’s look at the other key wording change in the BoC’s latest statement – the “more constructive evolution of the imbalances in the housing sector”. read more…