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…

Last week’s big news was that China clocked a Q4, 2012 GDP growth rate of 7.9%. This was significant because it reversed a seven-quarter decline in that country’s growth rate. (By comparison, China’s Q3, 2012 GDP growth rate was 7.4%.)

From a Canadian variable-rate mortgage perspective, it can be argued that strong GDP growth in China combined with continued weak GDP growth in the U.S. might just be today’s ideal scenario. Here’s why: read more…

This week we’ll focus on some recent currency-related news and look at how exchange-rate movements, particularly in the U.S., are affecting Canadian mortgage rates.  

Japan Steps Up the Currency Wars

Japan recently adopted a much more aggressive policy of ‘Beggar Thy Neighbour’ currency devaluation.  Newly elected Prime Minister Shinzo Abe wants to weaken the yen to make Japanese exports more competitive in an attempt to boost his country’s growth prospects. Japan has suffered from stagnant growth for decades so this populist approach sold well during election season. But currency devaluations are a zero sum game, meaning that the only way Japan can gain momentum using this approach will effectively be to steal growth from other countries. read more…

Happy New Year indeed.

Markets are up, bond yields are rising and there is renewed optimism about the green shoots of economic recovery in the air. (Yes Virginia, there is a Santa Claus.)

The U.S. government swerved at the last minute to avoid the dreaded fiscal cliff, the latest U.S. and Canadian employment data were once again solid and we haven’t heard much out of Europe lately. Right? Well, before I start passing around the “This Time It’s Real Recovery Kool-Aid” and warning about higher mortgage rates, let’s first look back at some recent history. read more…

Last week the U.S. Federal Reserve replaced its pledge to keep its policy rate in a range of 0.00 to 0.25% until 2015 with a pledge to keep its policy rate at today’s emergency levels for “at least as long as the unemployment rate remains above 6.50%” and for as long as inflation “is projected to be no more than half a percentage point above the committee’s 2.00% longer-run goal”.

This is big news for anyone keeping an eye on Canadian mortgage rates. read more…

My ears are still ringing from the peal of celebratory trumpets that blared in response to the latest U.S. and Canadian employment reports released last week.

There’s nothing like a good headline number to kick-start the running of the bulls.

It’s just too bad about those devilish details. Not to be a party pooper, because I’ll take a good headline number any day (especially these days!), but let’s not count on escaping from economic purgatory and start worrying  about higher interest rates just yet. read more…

“It’s tough to make predictions, especially about the future” – Yogi Berra.

Trying to predict the timing and direction of future mortgage-rate changes is like trying to guess how a jig saw puzzle will look when you can only see half of the pieces at any point in time and when the underlying (economic) picture itself is constantly being altered by a shifting landscape and competing forces. read more…

Last Friday Statistics Canada released its latest Consumer Price Index (CPI) and it showed prices increasing by an average of 1.2% over the most recent twelve months.

This was good news for anyone keeping an eye on mortgage rates because the CPI is the single most important data point used by the Bank of Canada (BoC) when setting its monetary policy. read more…

Variable-rate mortgage discounts aren’t what they used to be and for that reason, I have tended to favour fixed-rate options for some time now. Here, based on steadily accumulating economic data, is the case for the contrary view.

A good five-year variable-rate mortgage can now be found in the prime minus 0.40% range (which works out to 2.60% using today’s prime rate), compared to prime minus 0.75% or better in years past (which works out to 2.25% or lower using today’s prime rate).

At the same time that variable rates have been rising due to shrinking discounts, five-year fixed-mortgage rates have dropped to record low levels of 3.00% or less. Not surprisingly, with such a small gap between fixed and variable rates, just about anyone who has been in the market for a mortgage over the past year has chosen fixed. read more…

Now that the U.S. election is over, markets will shift their attention back to the European Union (EU), and more specifically, the 17 of its 27 member states that share the euro as their common currency, known as the euro zone. 

But first, some readers might be wondering why I have devoted so much ink to the euro-zone crises over the last year, especially considering that the entire EU buys less than 5% of Canada’s exports. Here are three reasons: read more…

Statistics Canada recently changed the way it calculates key economic data to bring its methods into line with agreed upon international accounting standards. As a result, the debt-to-income ratio for the average Canadian household shot up 11%, literally overnight, to 163% (a record high).

This has inspired lots of foreboding talk about how our “soaring” household debt-to-income levels are now higher than U.S debt-to-income ratios were at the peak of their housing bubble. That may be technically true, but it is also totally misleading. read more…

When the Bank of Canada (BoC) released its latest interest-rate statement last Tuesday it did not shift to a more neutral stance on the future direction of Canadian interest rates as many were expecting.

Well, not quite anyway.

In its carefully worded final paragraph, the BoC closed with the following statement:

“Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”

Here is what was noteworthy in that statement: read more…

When Bank of Canada (BoC) Governor Mark Carney speaks, the experts I read carefully parse his words, searching for subtle differences in his phrasing that may indicate a change in the BoC’s interest-rate outlook. This is a man whose words can literally move markets and last week when Governor Carney gave a speech in Vancouvertitled “Uncertainty and the Global Recovery”, they appeared to do just that. read more…

Last week was a slow one for new economic data so in today’s Update I’m taking a step back and offering a general overview of how the world looks from my desk:

The U.S.

The beauty (or lack thereof) of the U.S. economic recovery is still in the eye of each beholder. Some experts are touting the start of a jobs-led recovery and are writing about signs of housing market recovery. Others believe that U.S. consumers, long serving as engines of global growth, are waking from their spending slumbers just in time for the holiday shopping season. read more…

Monthly employment reports should be closely monitored by anyone keeping an eye on mortgage rates because they provide a wealth of specific information about an economy’s momentum.

We learn whether average incomes are rising or falling (which ties into many other parts of the economy such as the cost of labour and consumer spending rates). We learn where jobs are being created and lost (this tells us which sectors and industries are strengthening and which are weakening). We learn whether people are working more or less (which helps us gauge whether our economy is gaining or losing momentum – expressed as the change in our GDP output). We also learn, on an overall basis, what percentage of our total available labour force is currently employed (this tells us how much more room our economy has to grow before it reaches full capacity – a key threshold in our economic cycle beyond which adding incremental production becomes more expensive and as such, can lead to significantly higher rates of inflation). read more…