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.

How NAFTA Uncertainty Is Impacting Canadian Mortgage Rates

Monday Morning Interest Rate Update for September 4, 2018

by David Larock

Canada mortgage ratesThe Bank of Canada (BoC) meets this week and that’s always noteworthy for anyone keeping an eye on Canadian mortgage rates.

While the Bank isn’t expected to increase its overnight rate, which our variable mortgage rates are priced on, market watchers will be looking for indications that it will raise at its next meeting on October 24. Right now, the futures market is assigning about a 75% probability that this will happen, but those odds have been coming down of late, and understandably so.

In Chinese astrology, 2018 is the year of the dog, and it will go down as the year of uncertainty for the BoC.

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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.

Five Key Canadian Mortgage Rate Questions for the Remainder of 2018

Monday Morning Interest Rate Update for August 27, 2018

by David Larock

Mortgage RateIn case anyone needed reminding as we close out the dog days of summer, we still live in interesting times. To cite some examples:

  • The U.S. and Mexico have decided to bypass Canada during their NAFTA negotiations, and with our policy makers forced to the sidelines, trade uncertainty hangs over our collective heads like the sword of Damocles. At the same time, ongoing trade tensions between the U.S. and China threaten to unleash a broader, global trade war.
  • Ill-advised U.S. tax cuts and aggressive stimulus spending (unsuitable during this phase of the business cycle) are stoking U.S. inflationary pressures, which have risen steadily on a year-over-year basis from 1.6% in June of 2017 all the way to 2.9% last month. Canada’s year-over-year inflation has soared even higher over that period, rising from 1.0% in June of 2017, to 3.0% last month.
  • The UK is hurtling towards its Brexit deadline with no deal in place, Turkey’s economy teeters on the brink of collapse, and Italy’s newly formed government is promising to implement populist policies that will likely lead to a showdown with German policy makers. To add some perspective, consider that Turkey’s GDP is about five times the size of Greece’s GDP, and the Italian bond market is the third largest in the world.
  • Last year’s theme of synchronized global growth has been tested thus far in 2018. Recent data show that the U.S. economy’s recent surge in economic momentum is slowing, as is China’s, which will have an indirect but material impact on commodity-based economies like ours. At the same time, the continued strength of the U.S. dollar has created a powerful headwind for many emerging market economies, which have had to raise interest rates to defend their currencies at a time when their economic momentum would otherwise not be calling for tighter monetary policy.

As summer turns to fall, Canadian mortgage borrowers will be trying to determine how the factors outlined above will affect rates. To that end, here are five key questions that we’ll be looking to answer in the months ahead:

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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.

Why the Latest Canadian Employment Headline Is All Hat and No Cattle

Monday Morning Interest Rate Update for August 13, 2018

by David Larock

Canada Mortgage RatesLast Friday we learned that the Canadian economy added an estimated 54,100 new jobs in July.

To put that number in perspective, consider that our economy needs to create about 20,000 new jobs each month in order to keep up with the natural growth rate of its labour force. When our economy creates additional jobs above that threshold, it reduces the supply of unutilized labour and narrows our output gap.

(As a reminder, the output gap measures the gap between our economy’s current output and its maximum potential output. When the output gap closes, costs rise as resources, like labour, become scarcer. As that happens, the Bank of Canada (BoC) typically raises its policy rate to combat rising inflationary pressures.)

On first pass, last week’s banner jobs-number headline should have sent Government of Canada (GoC) bond yields soaring as investors priced in accelerating job growth and raised their bets that the BoC’s next rate hike would come sooner rather than later. But the details in the report were not nearly as encouraging, and the five-year GoC bond yield, which our five-year fixed mortgage rates are priced on, actually finished slightly lower on Friday.

Here is a look at the details in our July employment data that tempered the bond market’s enthusiasm:

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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.

Five Mortgage-Rate Related News Highlights from Last Week

Monday Morning Interest Rate Update for August 7, 2018

by David Larock

Toronto Mortgage RatesHere are five news items from last week that should be of interest to anyone keeping an eye on Canadian mortgage rates:

  1. Canadian GDP Growth Surges in May

Last week Statistics Canada estimated that our GDP increased by 0.5% month-over-month in May, which was higher than the 0.3% reading the consensus had expected. Most interestingly, nineteen of the twenty sectors that are tracked by Stats Can showed a pick-up in activity over the month, which this National Bank report noted was the broadest dispersion of monthly growth that we have seen since 2004.

The Bank of Canada (BoC) predicted that our year-over-year second-quarter GDP growth would come in at 2.8% in its latest Monetary Policy Report, but the consensus raised its year-over-year forecast for that period 3.0% after the May GDP data were released. At the same time, the futures market increased the odds of a BoC rate hike in October from 65% to 72%.

It will be interesting to see if the Canadian economy can continue this impressive run of increasing growth. The May result was boosted by several temporary factors such as a tax-cut-induced surge in U.S. GDP growth, a bounce back from unseasonably cold temperatures in April, and the ramping up of Alberta oil-sands production following temporary shutdowns.

In the ensuing months, our current GDP momentum will have to overcome rising headwinds from the recently enacted mortgage rule changes, the BoC’s previous rate hikes, and relatedly, reduced consumer spending. Our labour market isn’t exactly rolling along any more either – our economy still hasn’t created a single net new job thus far in 2018.

That said, our May GDP result has market watchers betting that the next BoC rate rise will come sooner rather than later.

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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 Today’s U.S. Growth Surge Spur a Bank of Canada Rate Cut Down the Road?

Monday Morning Interest Rate Update for July 30, 2018

by David Larock

Toronto mortgage ratesLast week we learned that U.S. GDP grew by 4.1% on an annualized basis in the second quarter. This was an impressive surge for the U.S. economy, which has averaged GDP growth of about 2.2% over the past nine years.

Most economists believe that the U.S. economy has no room left for non-inflationary growth. If they’re right and U.S. inflation continues to accelerate, Canada will import that inflation through its extensive trade with the U.S., and that could compel the Bank of Canada (BoC) to accelerate its rate-hike timetable.

So the key question for anyone keeping an eye on Canadian mortgage rates is “Will this rise in U.S. GDP growth be sustained?”

Many market watchers think not, for the following reasons:

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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 Inflation Hits a Six-Year High

Monday Morning Interest Rate Update for July 23, 2018

by David Larock

Toronto mortgage ratesLast Friday we learned that overall Canadian inflation, as measured by our Consumer Price Index (CPI), came in at 2.5% in June, and that result was higher than the consensus forecast of 2.4% for the month.

The reaction was predictable. Most mainstream economists speculated that the Bank of Canada (BoC) would raise its policy rate again in either September or October to rein in rising inflationary pressures.

Our inflation rate has certainly increased of late.

In January, our CPI rose by just 1.7%. But then rising inflationary pressures pushed it over the BoC’s target rate of 2% for each of the next five months. This extended period of above-target inflation is unfamiliar territory for our economy of late. It has spent most the past ten years looking up at that target (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.

The Bank of Canada Hikes Rates Despite Uncertainty

Monday Morning Interest Rate Update for July 16, 2018

by David Larock

Toronto Mortgage RatesThe Bank of Canada (BoC) raised its overnight rate by 0.25% last Wednesday and it now stands at 1.5%. The move was widely expected, and Canadian lenders quickly increased their variable mortgage rates in response.

This marked the fourth BoC rate hike over the past twelve months, matching the U.S. Federal Reserve’s policy-rate increases over the same period. That is somewhat surprising given the significant differences in our current economic trajectories and the fact that our federal government has raised taxes at the same time that the U.S. federal government has cut theirs substantially.

Yet here we are.

The BoC’s recent guidance left little doubt about its immediate plans, so the only real question was whether additional near-term rate hikes were also likely. To that end, the Bank’s accompanying statement was deemed to be a little more hawkish than the consensus had expected, and that put upward pressure on the Government of Canada (GoC) five-year bond yield, which our five-year fixed-rate mortgage rates are priced on. But that run-up was short lived and the five-year GoC bond yield actually ended the week slightly lower.

In today’s post, I’ll offer my take on the highlights from both the BoC’s latest policy statement and the release of its latest Monetary Policy Report (MPR), which provides us with the Bank’s assessment of  current economic conditions at home and abroad and includes forecasts for key economic data. Now that the Bank has decided to offer less guidance going forward, its MPR forecasts have increased importance as benchmarks that will confirm whether our economy Is evolving as expected, and if not, whether additional policy-rate moves may be required. I’ll summarize the Bank’s key forecasts and observations and offer my related comments in italics.  

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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.

Thoughts on the Bank of Canada’s Meeting This Week

Monday Morning Interest Rate Update for July 9, 2018

by David Larock

Toronto Mortgage RatesIt is widely expected that the Bank of Canada (BoC) will raise its overnight rate by another 0.25% when it meets this week, and if it does, lenders will pass that increase on to variable-rate mortgage borrowers in short order.

The Bank signaled its plans when it made its most recent policy announcement on May 30, and it has appeared largely unmoved by the U.S.- initiated trade war that began almost immediately afterward or by the steady string of weaker-than-expected economic data that we have seen since. With the Bank’s next rate hike now a seemingly foregone conclusion after BoC Governor Poloz’s speech last week, the most important question remaining to be answered is whether additional rate hikes are looming on the near horizon.

Variable-rate borrowers who are expecting the Bank to offer clear reassurances in that regard are likely to be disappointed.

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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 Plans to Offer Less Guidance Going Forward

Monday Morning Interest Rate Update for July 3, 2018

by David Larock

Toronto mortgage ratesIn its most recent policy statement released on May 30, the Bank of Canada (BoC) gave every indication that it would raise its overnight rate, which our variable mortgage rates are priced on, at its next meeting on July 11. But right afterwards, U.S. President Trump started a trade war with Canada (among other countries), and we were hit with a steady string of mostly weaker-than-expected economic data.

These events fueled speculation that the BoC might not actually follow through with a rate-hike next week and piqued everybody’s interest in BoC Governor Poloz’s speech to the Greater Victoria Chamber of Commerce, which he delivered last Wednesday. Market watchers expected Governor Poloz to use this forum to confirm whether recent events had changed the Bank’s near-term plans.

Governor Poloz began his speech by chronicling the evolution of transparency in Canadian central banking and extolling the benefits that it has brought to our economy. But then he made the case that forward guidance, a key recent element of that transparency, had actually diminished the Bank’s effectiveness, and he explained why the BoC wants to phase it out altogether.

This was a somewhat surprising acknowledgement and one that seemed more significant than whether or not the Bank will move its policy rate at its next meeting (which I’ll get to in a minute).

Here are the highlights from Governor Poloz’s speech:

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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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