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Five Ways That A Sustained Period of Ultra-Low Interest Rates Can Hurt Our Economy – Monday Morning Interest Rate Update (October 19, 2015)

by Dave Larock

Mortgage Rate ConceptI have subscribed to the view that our mortgage rates aren’t likely to head materially higher since the start of the Great Recession and over time, that view has become increasingly mainstream. But before we all start popping champagne corks in celebration, now seems like a good time to highlight the rising economic costs (and risks) that develop when borrowing rates are kept too low for too long.

Low interest rates have been a boon to Canadian mortgage demand so it may seem surprising to read a post written by a mortgage planner about the five ways that those low rates are hurting our economy. But if monetary policy is kept loose for too long, which many observers think has already happened, today’s cheap money may well prove to have been too much of a good thing. In the same way that chocolate tastes good in the beginning but gives you a tummy ache if you overindulge, ultra-low rates give our economy an initial boost but can then create rot and excess if left in place for too long.

Here are five examples of how ultra-low interest rates are now hurting our economy: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Happy Thanksgiving – Tuesday Morning Interest Rate Update (October 13, 2015)

by Dave Larock

Mortgage Rate ConceptI hope you had a relaxing Thanksgiving weekend. We couldn’t have asked for better weather in the GTA!

Five-year Government of Canada bond yields rose seven basis points last week, closing at 0.87% on Friday. Several lenders have recently raised their five-year fixed rates, but you can still find them in the 2.49% to 2.59% range. Five-year fixed-rate pre-approvals remain at rates as low as 2.64%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.75% range, depending on the size of your mortgage and the terms and conditions that are important to you. That said, most lenders have lowered their discounts on variable-rate mortgages to prime minus 0.50%, so I don’t expect these more deeply discounted variable rates to be around for much longer.

The Bottom Line: I expect bond yields to remain volatile this week and as such, anyone who may be in the market for a fixed-rate mortgage is well advised to lock in a pre-approval to safeguard against any short-term rate spikes. Forewarned is forearmed.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why the Weak U.S. Employment Data Give No Cause for Canadian Mortgage Borrowers to Celebrate – Monday Morning Interest Rate Update (October 5, 2015)

by Dave Larock

Mortgage Rate ConceptLast Friday’s U.S. non-farm payroll report showed that the U.S. economy generated 142,000 new jobs in September, well below the 201,000 new jobs that the consensus was expecting.

This should give the data-dependent U.S. Federal Reserve all the cover that it needs to avoid raising its policy rate in October, or perhaps at all in 2015.

Here are the highlights from the latest U.S. employment data:

  • The 142,000 new jobs that were created in September fell well short of expectations and the initial non-farm payroll estimates for July and August were also revised downwards by 59,000 jobs. While there are always revisions to initial estimates, six of the past eight reports have now been revised downwards, revealing a pattern of consistently slowing employment momentum.
  • The average workweek also shrank from 34.6 hours to 34.5 hours in September. While this may seem like a small change, economist David Rosenberg estimates that this drop in average hours worked is economically equivalent to 348,000 lost jobs.
  • Average wages were flat for the month and average year-over-year wage growth held steady at a tepid 2.2%.
  • The S. unemployment rate was unchanged at 5.1% but only because 350,000 Americans gave up looking for work and are no longer counted as part of the labour force (the U.S. participation rate, which measure this, fell from 62.6% to 62.4% in September.)

While the weak U.S. employment data should reassure Canadian mortgage borrowers that our rates aren’t likely to head higher for the foreseeable future (as if we needed more reassurance on that front), the slowing U.S. employment momentum is bad news for our broader economy. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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U.S. Fed Chair Yellen Continues to Confuse Markets – Monday Morning Interest Rate Update (September 28, 2015)

by Dave Larock

Last Thursday U.S. Fed Chair Janet Yellen confused markets once again when she seemed to contradict the Fed’s cautious policy statement from the week prior. For example:

  • Fed Chair Yellen said that the currently low levels of U.S. inflation are likely to prove transitory, but the U.S. Fed’s latest forecast doesn’t show overall inflation returning to the Fed’s 2% target until 2018. Transitory is defined as “brief, short-lived and passing” and this simply doesn’t correlate with the Fed’s forecast for a gradual increase in the rate of inflation.
  • The Fed had cited heightened global instability risks as a main justification for keeping its policy rate unchanged, yet last week Yellen said that she doesn’t expect these same forces to significantly alter the Fed’s policy. Haven’t these forces already significantly altered the Fed’s monetary policy?
  • Fed Chair Yellen said that most Fed participants still anticipate that it will be appropriate to begin raising its policy rate later this year, but the market is pricing in a low probability of this occurring (and the market has proven much more accurate than the Fed when it comes to forecasting the policy rate). While she included many caveats, like inflation increasing more slowly or the dollar falling more sharply than expected, it seems increasingly unlikely that the Fed will actually raise its policy rate in 2015. I wonder if Fed Chair Yellen is once again trying to use her words to keep the market from adopting a ‘low-rates-forever’ mindset without actually backing up these words with action. If that’s true, it’s hard to imagine that this technique will work for much longer before the Fed has to put its money where its mouth is.

read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The U.S. Federal Reserve Holds Rates But Loses Credibility – Monday Morning Interest Rate Update (September 21, 2015)

by Dave Larock

Mortgage Rate ConceptFinancial markets held their collective breath last Thursday as they waited to hear whether the U.S. Federal Reserve would raise its policy rate for the first time in more than nine years.

The Fed stayed its hand, as the market, but not most mainstream economists, had predicted. In its accompanying statement, the Fed cited global instability and a lack of inflationary pressures as its main justifications for continued monetary-policy caution.

Before we break down the Fed’s latest commentary, let’s recap why the Fed’s policy-rate changes matter to Canadian mortgage borrowers.

Had the Fed raised its policy rate, the U.S. dollar would most probably have surged higher, thereby lowering the cost to Americans of the exports we sell into U.S. markets while increasing the cost of the imports that we buy from our southern trading partners. The U.S. and Canadian economies are tightly linked, and Canadian provinces trade more with their neighbouring U.S. states than they do with their provincial counterparts. As such, changes in the U.S./Canadian exchange rate send ripples throughout our economy, creating winners and losers as the relative value of our currencies fluctuates.

In addition, while the Bank of Canada (BoC) has said that it will lag the Fed when it begins to tighten monetary policy, the BoC cannot decouple its monetary policy from Fed policy completely or indefinitely. Fed rate increases will hasten the arrival of the day when our own policy rate will rise, as distant as that prospect may still seem.

So it was with great interest (pun intended) that Canadians watched, and more importantly, listened to the Fed’s decision to hold rates steady based on its current assessment of the state of the U.S. and global economies. Here are my five key takeaways from the Fed’s latest commentary and analysis:  read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Bank of Canada’s Latest Statement Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (September 14, 2015)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its overnight rate unchanged last week, keeping the base rate on which our variable-rate mortgages are priced at 0.50%, as most market watchers were expecting.

The BoC also released its accompanying statement, and here are the highlights that I think are most relevant for anyone keeping an eye on Canadian mortgage rates (with my comments in italics): read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Happy Labour Day – Tuesday Morning Interest Rate Update (September 8, 2015)

by Dave Larock

Mortgage Rate ConceptI hope you enjoyed a relaxing Labour Day weekend.

This week’s post will be brief because this past weekend had me focused on enjoying the last days of summer and getting the kids ready for the new school year.

I’ll be paying close attention when the Bank of Canada (BoC) meets this Wednesday and will share my thoughts on their accompanying statement next Monday.

Five-year Government of Canada bond yields rose by one basis point last week, closing at 0.75% on Friday. Five-year fixed-rate mortgages are still offered in the 2.49% to 2.59% range and five-year fixed-rate pre-approvals are available at rates as low as 2.64%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.75% range, depending on the size of your mortgage and the terms and conditions that are important to you.

The Bottom Line: I don’t expect the BoC to cut its overnight rate this week. While it’s true that we experienced a recession in the first two quarters of this year, it was a mild one, and the most recent data suggest that our economy is bouncing back nicely in the third quarter. As such, I think the BoC will focus on these recent positives in its coming policy statement, especially on the data that show that our much needed and long hoped for manufacturing sector recovery appears to be finally getting traction. Stay tuned.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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How Unfolding Events in China Are Likely to Impact Canadian Mortgage Rates – Monday Morning Interest Rate Update (August 31, 2015)

by Dave Larock

Mortgage Rate ConceptChina has been in the news a lot lately as it tries to shift its economic focus away from infrastructure spending and export-led growth toward increasing domestic demand and expanding its service sector.

What is happening in China matters to Canadians, and specifically to Canadian mortgage borrowers, because China has been the marginal buyer of the world’s commodities for many years now. Our economic momentum is still highly correlated with changes in the global demand for commodities, and as such, even though we do not have much direct trade with China, we still keenly feel the impacts of its slowing growth rate.

The rest of world also watches its second largest economy closely and there have been two developments that have garnered a lot of ink of late.

First, earlier this month, China announced that it would devalue its currency after letting it rise for nearly a decade. There were differing opinions on why China did this. Some believed that China wanted to weaken its currency as a way to boost flagging export demand, which had dropped by an estimated 8.3% in July on a year-over-year basis. Second, others argued that China was trying to shift the yuan away from its well-established peg to the U.S. dollar, which is inconveniently high at the moment, and thereby allow it to move more freely in response to market forces.

While both factors were probably at play, I believe that there is a third important factor: perhaps China’s primary goal was to make the yuan a more market-based exchange rate. China has been petitioning the International Monetary Fund (IMF) to include the yuan among its basket of official reserve currencies, and letting the yuan float was one of the IMF’s key conditions for this approval.

Regardless of China’s motives, other countries are also expected to devalue their currencies in response. Currency devaluation is a zero-sum game, often referred to as a ‘beggar thy neighbour policy’ because any related improvements in China’s export demand will come at the expense of other countries, leaving them little choice but to respond in kind. The U.S. dollar has surged of late and therefore the prospect of an East Asian currency war should decrease the odds that the U.S. Federal Reserve will raise its policy rate any time soon. A rate hike against this backdrop would push the greenback higher still and heap more suffering on U.S. exporters. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why Today’s Fixed Versus Variable Debate Is All About the Spread – Monday Morning Interest Rate Update (August 24, 2015)

by Dave Larock

Mortgage Rate ConceptCanadian mortgagors from past generations look on with envy at borrowers today, who must decide whether record-low fixed-mortgage rates and/or rock-bottom variable-mortgage rates are the best option. While past generations would have camped out overnight on the sidewalk to take either of today’s five-year mortgage rates, today’s borrowers still agonize over their choice.

To help inform this age-old decision in our current environment, this week’s post will explain why I think that the spread between today’s fixed and variable rates is the key factor to consider when deciding between these options.

Right now a competitive five-year variable rate with excellent terms and conditions can be found in the 2.00% range, while a good five-year fixed-rate mortgage is in the 2.50% range. The current 0.50% gap between these two options is quite narrow by historical standards, and would be closer to 1.00% under more normal (and stable) economic circumstances.

If you are leaning towards a variable rate today, the 0.50% gap between five-year fixed and variable rates can be thought of as the ‘margin of safety’ that protects you if/when your variable rate starts to rise. Since the Bank of Canada (BoC) typically increases its overnight rate, on which variable-rate mortgages are priced, by 0.25% increments, it would only take two increases by the BoC before today’s five-year variable rates cost the same as the available five-year fixed-rate alternatives.

Of course, this assumes that variable rates won’t fall further, but that assumption seems reasonable with the BoC’s overnight rate currently sitting at 0.50% – and I write this even as the Chinese stock market plummets and contagion fear begins to spread to North American markets. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why I’m Not Buying the Consensus View That the U.S. Federal Reserve Will Raise Its Policy Rate in September – Monday Morning Interest Rate Update (August 17, 2015)

by Dave Larock

Mortgage Rate ConceptMarkets remain focused on whether the U.S. Federal Reserve will raise its policy rate when it next meets in September. Investors are assigning increasing odds that it will but I remain unconvinced.

There is no doubt that U.S. economy is improving and the U.S. job numbers have showed continued strength after some loss of momentum to start the year, but the future of the U.S. recovery is still far from assured.

For example, while the official U.S unemployment rate hovers at 5.3%, more detailed measures of the U.S. unemployment data which include discouraged workers and those working part-time because they cannot find full-time work indicate that more than 10% of the available U.S. workforce is still either unemployed or underutilized.

Meanwhile, overall U.S. inflation still hovers just above 0% and while it’s true that this is partly a result of the temporary effects of the surging U.S. dollar, other longer-term trends are also keeping prices down. For example, average wages have only risen by 2.1% over the last twelve months, which is less than would be expected given the improvements in the employment data, and falling energy costs have also helped to keep average prices in line.

Speaking of the surging U.S. dollar, prominent Canadian economist David Rosenberg recently noted that the Greenback’s sharp rise has created a headwind for the U.S. economy that is equivalent to a 3.00% rise in the Fed’s overnight rate, which is felt mainly by U.S. exporters whose products are now less competitively priced in international markets. If the Fed does raise its overnight rate in September, this rise will lift the Greenback higher still, thus exacerbating the impact of such a move.

There is an old saying that history doesn’t repeat itself but it does rhyme. To that end, the Fed is keen to draw lessons from its past monetary-policy mistakes and it remembers well that it raised rates too quickly during the Great Depression, prolonging that downturn as a result. This inherited bias towards looser policy is also bolstered by the Fed’s belief that its tools are better suited to reining in inflation if rates are kept too low for too long, as opposed to counteracting deflationary forces if rates are raised too quickly instead.

It seems clear from the recent commentary of its voting members that the U.S. Fed would like to raise its policy rate, and given that markets are expecting it to do so, perhaps September is as good a time as any. But is the Fed really ready to raise, or does it just want markets to think that it will do so as a way to keep lower-rates-for-longer speculators in check? read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Current Canadian and U.S. Employment Trends Mean for Our Mortgage Rates – Monday Morning Interest Rate Update (August 10, 2015)

by Dave Larock

Mortgage Rate ConceptLast week we received the latest U.S. and Canadian employment reports and both offered useful insights into where Canadian mortgage rates may be headed.

The U.S. nonfarm payroll report showed that the U.S. economy added 215,000 new jobs overall in July. The prior May and June nonfarm payroll estimates were also revised upwards by another 14,000 jobs. Digging a little deeper into the details, the U.S. economy added 536,000 new full-time jobs last month, with that number being partially offset with a big drop in part-time employment. Average hours worked rose by an impressive 0.5%.

Despite this continued strength in U.S. employment momentum, which lends support to the belief that a rate rise is imminent, there was still plenty of debate about how the report might influence the U.S. Fed’s decision to raise its policy rate for the first time in almost a decade when it meets in September.

That’s because average hourly wages only rose by 0.2% for the month, and they have only risen by about 2% over the most recent twelve months. That is an important statistic and it is not showing strength.

Some market watchers continue to believe that the slow rise in average U.S. wages combined with the complete lack of overall U.S. price inflation thus far in 2015, as measured by the Consumer Price Index, gives the Fed more time to be patient. Furthermore, a look at broader employment growth trends shows that the U.S. economy added an average of 246,000 new jobs per month in 2014, as compared with an average of 211,000 new jobs per month in 2015. Thus, while overall U.S. job growth continues, it is losing some momentum, and the Fed may be concerned that a rate rise could exacerbate that deceleration. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will Mortgage Rates Head Higher in 2015? Tuesday Morning Interest Rate Update (August 4, 2015)

by Dave Larock

Mortgage Rate ConceptThe U.S. Federal Reserve issued its latest press statement last week and it didn’t leave me with the impression that it would raise its short-term policy rate in the near future, as some still expect it will.

The Fed’s timing matters to Canadian mortgage borrowers because the U.S. and Canadian economies are tightly linked and as such, our monetary policies tend to move in the same direction over the long run, even though they can diverge for a period of time (as is expected to be the case if the Fed starts tightening any time soon).

Interestingly, while many economists think that the Fed will hike its policy rate as early as September, bond market investors are now pricing in only a 20% probability of that occurring.

One group has it wrong.

Here are five highlights from the Fed’s latest statement to help inform your opinion on who that might be, with my comments in italics: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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All Eyes on the U.S. Federal Reserve This Week – Monday Morning Interest Rate Update (July 27, 2015)

by Dave Larock

Mortgage Rate ConceptWhen the U.S. Federal Reserve meets this week, investors will be parsing its accompanying statement for any hint that it will raise its policy rate at its September meeting. If signs of an imminent rate rise are detected, we may well see a spike in both U.S. and Canadian bond yields that could push our fixed mortgage rates higher over the short term. As such, anyone who might be in the market for a mortgage in the near future is well advised to lock in a pre-approval now, just in case.

Forewarned is forearmed.

Five-year Government of Canada bond yields rose by six basis points last week, closing at 0.77% on Friday. Five-year fixed-rate mortgages are offered in the 2.49% to 2.59% range and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the size of your mortgage and the terms and conditions that are important to you.

The Bottom Line: I still don’t think that the U.S. Fed will raise its short-term policy rate in September, but it may try to test the market’s readiness for monetary-policy tightening with more bullish interest-rate commentary in this week’s statement. Also, if the Fed does plan to keep rates lower for longer, striking a little fear and uncertainty into the hearts of speculators will help keep complacency, along with all of its potential excesses, at bay.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Five Key Questions Relating to the Bank of Canada’s Latest Rate Cut – Monday Morning Interest Rate Update (July 20, 2015)

by Dave Larock

Mortgage Rate ConceptLast week the Bank of Canada (BoC) lowered its overnight rate from 0.75% to 0.50% in an effort to counteract downside risks to inflation and weaker-than-expected overall economic growth.

The Bank also downgraded its projections for GDP growth to “just over 1% in 2015 and about 2 ½ per cent in 2016 and 2017”, and now projects that “the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017”. Reading between the lines, that means that the Bank doesn’t expect to raise its overnight rate for about another two years.

I was surprised by the BoC’s decision for the reasons outlined in last week’s post. In summary, I thought that our policy makers would judge that our economy needed fiscal stimulus more than monetary stimulus in the current environment, and that they would worry that cheaper borrowing rates could further elevate our household borrowing rates, which the BoC has repeatedly flagged as the most significant domestic risk to our economy.

In the end, the Bank acknowledged this risk but felt that more monetary stimulus was required to help our economy continue its “significant and complex adjustment”.

In today’s post I’ll address five key questions relating to the BoC’s latest rate drop: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will the Bank of Canada Cut Its Overnight Rate This Week? Monday Morning Interest Rate Update (July 13, 2015)

by Dave Larock

Mortgage Rate ConceptThis week’s big question is whether the Bank of Canada (BoC) will cut its overnight rate when it meets on Wednesday. It’s a tough call for the BoC because there are plenty of compelling reasons both for and against lowering this key rate from its current 0.75% level.

As a reminder, lender prime rates, on which our variable-rate mortgages are priced, typically move in lockstep with the BoC’s overnight rate. Our fixed mortgage rates are priced on Government of Canada (GoC) bond yields, and while these are not directly correlated with the overnight rate, GoC bond yields do move in the same direction of the overnight rate over time. As such, if you’re keeping an eye on where mortgage rates are heading, the BoC’s overnight rate is the one to watch.

The consensus believes that the BoC will lower on Wednesday, and there are plenty of reasons why. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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