Will the U.S. Fed Sooth Nerves or Stay the Course?

Monday Morning Interest Rate Update for December 17, 2018

by David Larock

Toronto mortgage ratesThe U.S. Federal Reserve is widely expected to hike its policy rate by another 0.25% when it meets this Wednesday. The question that is being actively debated is whether it will also adopt more dovish language in its forward guidance (and the answer could impact Canadian mortgage rates).

The consensus expects (and hopes) that it will.

U.S. equity markets have taken a pounding of late (the S&P 500 Index has dropped by 12% since its 2018 peak on September 21). A growing number of market watchers are forecasting slowing U.S. economic momentum in 2019, and recession fears are rising. Those fears are evident in the spread between 2-year and 10-year U.S. treasury rates, which has now narrowed to almost zero. If that spread goes negative, history says that a U.S. recession will more than likely follow (see chart).

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Canadian Mortgage Rates Aren’t Headed Higher After All

Monday Morning Interest Rate Update for December 10, 2018

by David Larock

Canada mortgage ratesJust like that, all of the dire warnings about rapidly rising Canadian mortgage rates disappeared faster than cookies and carrots on Christmas Eve.

To recap, when the Bank of Canada (BoC) met in October, it raised its policy rate by another 0.25% and declared that our economy was operating at its full capacity. The Bank warned that it would need to increase rates by another .75% to 1.75% in order to keep inflation near its 2% target, and it removed the reassurance that it would apply “a gradual approach” to additional hikes from its policy statement.

Not surprisingly, the consensus warned that mortgage rates were about to move materially higher.

I was more sceptical. In the post I wrote at that time, I argued that if the BoC was really going to be “guided by the incoming data”, then it seemed unlikely that a steady string of additional policy-rate rises was just around the corner. Our economic data were mixed at best and, since then, inflation has further moderated, oil prices have collapsed, average wage growth has continued to fall, and our GDP growth has slowed. (At the same time, trade tensions and instability risks beyond our borders have also intensified.)

Nobody said that the BoC’s job was easy, especially today.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Will the Bank of Canada Pivot This Week? (Hint: It Should)

Monday Morning Interest Rate Update for December 3, 2018

by David Larock

Toronto Mortgage RatesA lot can change in six weeks.

On October 24 the Bank of Canada (BoC) hiked its overnight rate by another 0.25% and warned that additional increases were likely.

BoC Governor Poloz assessed that our policy rate of 1.75% remained “stimulative” and that it would need to rise to between 2.5% and 3.5% in order to keep inflation close to the Bank’s 2.0% target. Both he and BoC Deputy Governor Wilkins sounded upbeat about our economic momentum, and they expressed confidence in our economy’s ability to handle additional rate hikes.

Variable-rate mortgage borrowers grew increasingly nervous. Who could blame them?

After seven years without a single rate increase, they had just seen their fifth quarter-point hike in the last seventeen months, and the person with his hand on our policy-rate lever was warning that there were more to come.

I had my doubts, which I first outlined in this post asking “How Much Higher Will Canadian Mortgage Rates Go?”. In it, I outlined recent Canadian and U.S. economic data that showed signs of slowing momentum and highlighted the BoC’s own forecasts, which projected reduced economic growth rates for the global economy, the U.S., China and Canada over the next three years.

Then oil prices went from falling to free-falling. Worse still, the price gap between a barrel of Western Canadian Select (WCS) and a barrel of West Texas Intermediate (WTI) continued to widen, reaching a staggering 50 USD (a record), and that exacerbated the impact of the oil-price collapse on the Alberta oil patch.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Will Last Month’s Inflation Rise Lead to Higher Canadian Mortgage Rates?

Monday Morning Interest Rate Update for November 26, 2018

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) is caught between a rock (rising inflationary pressures) and a hard place (waning economic momentum).

On the one hand, the Bank may believe that it needs to raise its policy rate pre-emptively to stay out in front of rising inflationary pressures, but on the other hand, if our economic momentum has already begun to slow naturally, incremental rate hikes risk doing more harm than good.

Last week BoC Deputy Governor Carolyn Wilkins gave a speech about how the Bank’s monetary policy framework is evolving. In the Q & A session afterward she commented that the BoC may end up being a victim of its own success because if its policy-rate rises keep inflationary pressures contained, observers might say that the Bank’s monetary-policy tightening was unnecessary.

What she didn’t say is that in such a circumstance, because some of our economic momentum will need to be sacrificed at the altar of price stability, criticism may still be warranted. After all, over-tightening monetary policy also controls inflation, but at too high a cost.

I see that as the BoC’s biggest risk in the current environment.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Fixed vs. Variable: Is the Five-Year Fixed-Rate Mortgage Now a No Brainer?

Monday Morning Interest Rate Update for November 19, 2018

by David Larock

Toronto mortgage ratesToday’s post returns to the question that every borrower I work with loves to ask: “Should I choose a five-year fixed- or variable-rate mortgage today?”

Most market watchers now argue that fixed is the way to go in the current environment.

That view is based in large part on the latest policy-rate statement from the Bank of Canada (BoC), wherein it assessed that “the policy interest rate will need to rise to a neutral stance to achieve the inflation target”.

In plain English, the Bank essentially said that it expects it will need to raise our current policy rate of 1.75% into a neutral-rate range of between 2.5% and 3.5% in order to keep inflation at or very near 2%. (As a reminder, the neutral rate is defined as the BoC’s policy-rate level that neither stimulates nor restrains our economic growth.)

Variable mortgage rates are priced on the policy-rate, so if the Bank hikes by another 1% to 2%, our variable rates will increase by the same amount.

Given that five-year variable rates are only about 0.5% lower than their fixed-rate equivalents in the current environment, it might seem like a no brainer to choose fixed. But at times like this, the contrarian in me remembers the famous quote from legendary investor Bob Farrell who said: “When all the experts and forecasts agree — something else is going to happen”.

With that in mind, here is why the five-year variable rate may still be worth a look in the current environment.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Is the Bank of Canada Bullish on Pot?

Monday Morning Interest Rate Update for November 12, 2018

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) recently warned that higher interest rates will likely be required to keep inflation near to its 2% target. That view, however, is underpinned by what many consider to be an optimistic assessment of our current economic trajectory.

The Bank is predicting that accelerated business investment, increased demand for labour and resilient consumer spending will push our economy closer to its maximum capacity and fuel rising inflationary pressures. That said, the BoC also insists that it will be guided by the incoming data, and if that’s true, one wonders what data it is seeing that so many others, myself included, are missing.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Canadian Wage Growth Decelerates Again

Monday Morning Interest Rate Update for November 5, 2018

by David Larock

Toronto mortgage ratesLast Tuesday senior Bank of Canada (BoC) officials spoke to the House of Commons Finance Committee and reiterated the Bank’s intention to continue raising its policy rate over the near term.

BoC Governor Poloz assessed that our current policy rate of 1.75% “remains stimulative” and that it will need to rise to between 2.5% and 3.5% in order to keep inflation close to 2.0% (which I detailed in last week’s post). Both he and BoC Deputy Governor Wilkins sounded upbeat about our current economic momentum, and they expressed confidence in our economy’s ability to handle additional rate hikes.

While Governor Poloz restated that the Bank would be guided by the incoming data and would not operate on a predetermined path, he left little doubt that the BoC expects to keep raising rates over the near term. Interestingly, the data may test the veracity of that claim in short order.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

How Much Higher Will Canadian Mortgage Rates Go?

Monday Morning Interest Rate Update for October 29, 2018

by David Larock

Toronto mortgage ratesLast week the Bank of Canada (BoC) raised its overnight rate by 0.25%, as was widely expected, and that means that variable mortgage rates (and line-of-credit rates) will increase by the same amount in short order.

What really caught the market’s attention was the Bank’s decision to drop the word “gradual” from its policy statement.

Instead of reiterating that it would take “a gradual approach, guided by incoming data”, as it has for some time now, the BoC instead cautioned that “the policy interest rate will need to rise to a neutral stance to achieve the inflation target”.

Let’s unpack that key phrase by first reviewing some terminology:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

The One Word That Will Determine Where Canadian Mortgage Rates Are Headed

Monday Morning Interest Rate Update for October 22, 2018

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) is widely expected to increase its overnight rate by another 0.25% when it meets this Wednesday, and if that happens, variable-rate and home-equity line-of-credit (HELOC) borrowers will see their rates rise by the same amount shortly thereafter.

While fixed-rate mortgages will not be directly impacted by the BoC’s looming policy-rate hike, its accompanying commentary and the release of its latest Monetary Policy Report (MPR) may also push Government of Canada (GoC) bond yields higher, which our fixed mortgage rates are priced on. Most market watchers expect the BoC to sound a more upbeat tone on our economy this week for the following reasons:

  • Our trade uncertainty clouds have finally parted. NAFTA has been replaced with the USMCA, and our policy maker’s worst fears of an escalating tariff war with our largest export partner can now be put to rest (subject to each member country approving the new agreement).
  • Our economy grew faster than expected in the second quarter. In its July MPR, the Bank projected annualized second quarter GDP growth at 1.9%, but our actual result came in much higher, at 2.9%.
  • Canadian businesses are upbeat. The BoC’s latest quarterly Business Outlook Survey, which was completed just before the USMCA was signed, showed that Canadian businesses were optimistic about future sales and already inclined to invest in productivity enhancements and expansion. That is encouraging because the BoC is hoping that business investment and rising export sales will replace consumer spending as the main drivers of our economic momentum.
  • CIBC Chief Economist Avery Shenfeld recently noted that the BoC is likely “to sound sufficiently hawkish to justify the pain that rate hikes impose on debtors”. Essentially, the Bank’s words need to back up its actions.

All that said, the bond market’s reaction may well boil down to the inclusion or exclusion of the key word “gradual”.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

U.S. Inflation Slows, But for How Long?

Monday Morning Interest Rate Update for October 15, 2018

by David Larock

Toronto mortgage ratesIf you’re keeping an eye on Canadian mortgage rates, you would be wise to keep your other eye focused on what is happening south of the border.

For better or worse, our economy is deeply linked with the U.S. economy, and while that means that strong U.S. economic growth is currently helping to fuel momentum here at home, it also means that rising U.S. inflationary pressures, if sustained, will work their way north of the border through our extensive trading relationship.

That will likely cause the Bank of Canada (BoC) to raise its policy rate, which our variable mortgage rates are priced on, more quickly than it would otherwise. At the same time, bond-market investors will bid up Government of Canada (GoC) bond yields, which our fixed mortgage rates are priced on, in anticipation of that outcome.

With that in mind, let’s look at the most recent U.S. and Canadian growth and inflation data.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

How Will the New USMCA Trade Agreement Impact Canadian Mortgage Rates?

Monday Morning Interest Rate Update for October 9, 2018

by David Larock

Toronto mortgage ratesFixed mortgage rates rose again last week as Government of Canada (GoC) bond yields continued to march higher, with most lenders increasing their five-year fixed-mortgage rates between 0.10% and .15%.

The main catalyst was the recent resolution of the NAFTA renegotiations, which lifted a cloud of uncertainty that had been hanging over the Canadian economy for the past thirteen months.

The new deal, called the United States-Mexico-Canada Agreement (USMCA), included several tweaks to the previous North American Free Trade Agreement (NAFTA), but none of them are likely to have a substantial impact on our economy. The real victory was simply that Canada would be included in this new “NAFTA 2.0” agreement and that U.S. President Trump’s most ominous threats, like slapping a 25% tariff on Canadian automotive imports, would not be realized.

Here are the key details in the new USMCA:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

How Will the Latest U.S. Rate Hike Impact Canadian Mortgage Rates?

Monday Morning Interest Rate Update for October 1, 2018

by David Larock

Toronto mortgage ratesThe U.S. Federal Reserve increased its policy rate by another 0.25% last week, as was universally expected.

The Fed’s policy-rate movements are noteworthy to Canadians because our two economies are so deeply integrated and because the U.S. economy is about nine times bigger than ours. The Fed moves rates in response to changing U.S. economic conditions, and given that the Canadian economy tends to track the U.S. economy over time, the Fed’s actions can act as a bellwether for anyone keeping an eye on Canadian mortgage rates.

To that end, here are the key highlights from last week’s Fed meeting:

  • The Fed’s policy-rate range was raised from 2.00% to 2.25%. (For context, the BoC’s policy rate currently stands at 1.5%.)
  • The Fed raised its forecasts for U.S. GDP growth from 2.8% to 3.1% for 2018, and from 2.4% to 2.5% for 2019. Its previous estimate for GDP growth in 2020 was left unchanged at 2.0%.
  • The Fed observed that “the labour market has continued to strengthen and that the economy has been rising at a strong rate”. The Fed also expressed confidence that U.S. inflation would continue to hover in the 2% range and said that it did not yet see evidence that recently enacted trade tariffs have impacted prices.
  • The Fed’s most noteworthy change was the removal of the word “accommodative” when describing its current monetary policy stance in its press statement. Market watchers interpreted this as a sign that the Fed would slow the pace of its rate hikes, but U.S. Fed Chairman Jerome Powell subsequently clarified that the wording change was merely an acknowledgement “that policy is proceeding in line with our expectations”.
  • The Fed is forecasting that it will raise its rate by another 0.25% when it meets in December, three more times throughout 2019, and then once more in 2020. (Interestingly, and by way of contrast, the futures market is pricing in only two more Fed rate hikes between now and the end of 2019.)

Now let’s draw out some implications for the Canadian economy and our mortgage rates:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Should Existing Canadian Variable-Rate Borrowers Lock in Now?

Monday Morning Interest Rate Update for September 24, 2018

by David Larock

Toronto Mortgage RatesLast week we learned that our overall inflation rate, as measured by our Consumer Price Index (CPI), increased by 2.8% on a year-over-year basis in August.

While that result marked a slight decrease from our CPI growth rate of 3% in July, it was still well above the Bank of Canada (BoC) target rate of 2.0%. Also, the BoC’s three key measures of core-inflation, which are designed to smooth out short-term spikes in volatile CPI inputs, like energy, all came in at 2.0% or higher last month.

Not surprisingly against that backdrop, the bond market is now assigning about 90% odds that the BoC will raise its overnight rate, which our variable mortgage rates are priced on, when it next meets on October 24.

If the BoC raises its policy rate by another 0.25% as expected next month, it will mark the fifth quarter-point increase for existing variable-rate borrowers in the last fifteen months. That’s quite a contrast to the seven years prior to that period, when the Bank didn’t raise rates a single time. Understandably, many variable-rate borrowers are starting to wonder if now is a good time to pull their conversion parachute cords and switch to a fixed rate.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

A Look Back at The U.S. Housing Crisis Ten Years Later

Monday Morning Interest Rate Update for September 17, 2018

by David Larock

On September 15, 2008, the global economy teetered on the brink of collapse when Lehman Brothers filed for bankruptcy.

I was the vice-president of sales and marketing at a small but fast growing publicly traded Canadian lender at the time, and not long before then we had been deep into negotiations with U.S. teams from both Lehman Brothers and Goldman Sachs, who were vying to purchase our company.

As the financial crises unfolded, my focus shifted from helping to lead our company’s rapid expansion to validating the basic viability of our business model. Instead of mapping out a path for market domination, I was criss-crossing the country giving presentations that highlighted the many differences between U.S. and Canadian residential mortgage-underwriting rules and practices, while reassuring our industry partners that wide-scale defaults in our loan portfolio were most unlikely.

In the end, that assertion proved correct, but at the time, fear was palpable and emotions resonated much more profoundly than facts.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

The Bank of Canada Holds Rates Steady, But for How Long?

Monday Morning Interest Rate Update for September 10, 2018

by David Larock

Toronto mortgage ratesWhen the Bank of Canada (BoC) met last week, it left its overnight rate unchanged at 1.5% as was widely expected. The real question for anyone keeping an eye on Canadian mortgage rates was whether the Bank would hint at its plans for its next meeting on October 24.

The futures market is currently assigning about an 80% probability that it will raise by another .25% next month. In the past, the Bank would often use language that effectively warned the market if another hike was imminent. But in a recent speech, BoC Governor Poloz conceded that the Bank is currently navigating through a period of heightened uncertainty that is diminishing its ability to offer forward guidance and that it would rely more heavily than normal on our fast-moving stream of incoming data when determining its future policy-rate path.

With that in mind, in today’s post I’ll provide the highlights for the BoC’s latest statement, but more importantly, I’ll summarize what the key recent data are indicating about our economic momentum. (Spoiler alert: If the Bank really is now extremely data dependent, I don’t think it will raise rates next month.)

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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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