The euro-zone crisis returned to its roots last Friday when Greek riots erupted in response to demands for still more austerity measures from the “Troika”: the European Commission, International Monetary Fund and the European Central Bank (but really Germany).

While the markets have been more focused on Italy and Spain lately (where bond-yield pressures have begun to ease), Greece remains the euro zone’s bailout test case. Any deals struck with the Greeks will set a precedent for future bailouts; and with Portugal waiting in the wings, there is already a line forming.  read more…

Employment and income levels provide critical gauges of the underlying strength in an economy. In the most basic sense, when good jobs are plentiful and incomes are rising faster than the rate of inflation, economies grow. When unemployment levels rise and average income levels can’t keep pace with inflation, economies contract. That’s why employment data are so important – they are the canaries in our economic mine shaft. read more…

Last week’s big news was the U.S. Federal Reserve’s announcement on Wednesday that “economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal-funds rate at least through late 2014”.

Point of Clarification: The U.S. federal-funds rate, also called the policy rate, is the U.S. equivalent to the overnight rate of the Bank of Canada’s (BoC). It is the floor rate on which all U.S. short-term interest rates are based.    read more…

The Bank of Canada (BoC) left its overnight rate unchanged at 1.00% last week, and also released its latest quarterly Monetary Policy Report (MPR). The MPR tells us where the BoC thinks inflation is headed and offers the Bank’s perspective on where the greatest risks to the Canadian economy lie. Regular readers of the MPR can also compare the latest report to previous versions to gauge where the BoC’s views have changed at the margin. read more…

The European Central Bank (ECB) made a bet in December that if they offered unlimited three-year loans to liquidity-starved European banks, those banks would then support ailing euro governments by buying up their bonds and creating enough demand to bring their spiraling bond yields down from the stratosphere. Specifically, they extended more than US$600 billion worth of these loans to 500 banks at a rate of 1% and hoped that the banks would use some of that money to buy-up sovereign debt with yields of 5% or more, locking in a handsome spread for their troubles. read more…

Let’s begin the new year where we finished off the last one – in the euro zone.

After a brief period of calm as the calendar flipped to 2012, bond yields in the euro zone’s vulnerable member states are moving higher again. Most notably, Italian bond yields closed at 7.13% on Friday. This is significant because Greece, Ireland, and Portugal all sought bailouts shortly after their ten-year government bond yields breached the 7% threshold, and Italy’s bond market, the third largest in the world, is simply too big to save. read more…

Last week the Bank of Canada (BoC) issued its latest Financial System Review (FSR), and its governor, Mark Carney, gave a speech called “Growth in the Age of Deleveraging”. If you’re trying to gauge where mortgage rates are headed, both links are well worth the read.

The bi-annual Financial System Review basically outlines what the BoC is worried about and explains to what degree. Not surprisingly, the report concludes that “the risks to the stability of Canada’s financial system are high and have increased markedly over the last six months”. Here are the highlights: read more…

Friday’s much-anticipated meeting of European Union (EU) leaders in Brussels was the region’s latest attempt to reassure the markets that its financial crisis is being brought under control. Here are the highlights:

• Twenty-six of the EU’s twenty-seven member countries agreed to limit their future structural deficits to .5% of GDP (the UK rejected this proposal).
• Over-indebted member countries agreed to reduce their debt loads by one-twentieth each year.
• Failure to comply with either commitment will, in most cases, trigger sanctions and penalties.
• Participating countries agreed to submit their budgets to a pan-European body in charge of fiscal oversight to ensure compliance.
• EU members also agreed to boost the IMF’s reserves by another 200 billion euros and to move up the launch date for a new bailout fund, called the European Stability Mechanism, to next summer.

But was it enough to reassure the markets? Based on their initial reaction, the answer appears to be “no”. read more…

On Friday, all twenty-seven leaders from the countries that make up the European Union (EU) will assemble in Brussels to take their latest shot at resolving the region’s financial crisis, which is based largely in the seventeen EU countries that use the euro as their currency (called the euro zone).

If past is prologue, the meeting will end with a press conference where EU leaders announce new measures and declare an end to the current crisis once and for all. The markets will rally around the headline, but as scant details emerge in the coming days, doubt will creep back in, and we’ll be one more whippy rally away from being right back where we started. (Sorry to spoil the ending for you.) read more…

In a financial crisis, bond yields provide a real-time gauge of whether a country’s prospects are getting better or worse. If a country’s outlook is worsening, the market will demand higher yields on its new bond issues and the government will have no choice but to pay. But those higher yields raise a struggling country’s borrowing costs, intensifying the debt burden on its already cash-strapped government. This creates more investor fear, and subsequent bond yields must be raised again, and again, and again. It is a cycle of fear that feeds on itself.

Last week, the yields on the euro zone’s latest round of new bond issues indicated that the region’s financial crisis has reached a new level of urgency. Simply put, the bond-yield gauges for Italy and Spain are now red-lining. Let’s check out the difference in their government bond yields last week versus one month ago: read more…

On Friday of last week Statistics Canada released its October Consumer Price Index (CPI) report on general price changes over the most recent twelve months. It showed that the overall rate of inflation fell from 3.2% to 2.9%, and core inflation (which excludes more volatile inputs like food and energy) fell from 2.2% to 2.1%. A drop in both measures was expected, and while we always keep our eye on the CPI data because inflation and mortgage rates normally go hand-in-hand, remember that the Bank of Canada and the federal government have both told us that changes in inflation won’t drive our interest-rate policy until the economic weather improves. read more…