16 Nov

US Treasury yields down due to jobless numbers


Posted by: Chris Cavaghan


Courtesy of Tania Hatcher at RMG Mortgages

Thursday initial jobless claims higher than consensus.  Causing US Treasury yields to drop early this morning and likely bond yields in Canada will follow.  Export/import prices in US also negative and disinflationary.

US 10 year treasury down 8.2 bps this morning

The number of Americans filing for unemployment benefits rose by 13,000 to 231,000 on the week ending November 11th, the highest in nearly three months, and well above market expectations of 220,000. In the meantime, continuing claims rose by 18,000 to 1,865,000 in the previous week, the highest in nearly two years and sharply above market forecasts of 1,847,000, suggesting that jobseekers are having a more difficult time in finding suitable employment. The data pointed to a marked softening in the US labor market, aligning with the Fed’s recent warnings of a slowing economy, and underscoring that business conditions are giving in to restrictive interest rates following a period of resilience.

6 Nov

October Jobs Report


Posted by: Chris Cavaghan

Weak October Jobs Report Likely Takes Further BoC Rate Hikes Off The Table
Today’s StatsCanada Labour Force Survey for October was weak across the board. Total job gains were meagre, full-time jobs fell, hours worked were flat, wage inflation eased (a bit), and the unemployment rate rose.

Employment changed little in October, up only 17,500 (0.1%), after rising 64,000 in September and 40,000 in August. The employment rate—the proportion of the working-age population with a job—fell 0.1 percentage points to 61.9% in October, as the population aged 15 and older increased by 85,000 (+0.3%).

Most notably, the unemployment rate rose 0.2 percentage points to 5.7%–its fourth monthly increase in six months and its highest level in 21 months, adding evidence to a weakening economy. The latest monthly GDP figures released earlier this week point to a flat to negative growth rate for the third quarter this year. Final data will be released later this month, but today’s numbers suggest that the overnight policy rate at 5.0% has peaked. The pace of employment gains is running below labour force growth from record population increases. It indicates that labour demand is cooling while supply is catching up quickly. The Bank of Canada expects the economy to move into modest excess supply in the fourth quarter, helping to reduce consumer price inflation.

As unemployment has increased and job vacancies have decreased in recent months, the labour force participation rate—the proportion of the population aged 15 and older that was either employed or looking for work—has remained relatively high. The participation rate in October (65.6%) was unchanged from the previous month and up 0.2 percentage points on a year-over-year basis.

The most significant job gains were in construction, rising by 23,000, more than offsetting a decline of 18,000 in September. The most economically sensitive sectors posted job losses. These included manufacturing, wholesale and retail trade, finance, insurance, real estate, and rental and leasing, as well as accommodation and food services.

Wage inflation continues to be troubling for the central bank. On a year-over-year basis, average hourly wages rose 4.8% in October, following an increase of 5.0% in September.

Bottom Line

The Bank of Canada meets once again on December 6th. Before then, we will see another CPI inflation report on November 21, Q3 GDP on November 30 and the November Labour Force Survey on December 1. Given the Bank’s general reluctance to hike rates just before the holiday season, the Bank of Canada will remain on the sidelines.

Judging by today’s weaker-than-expected employment report in the US as well, the Fed will also hold their pause for the remainder of this year.

Rate relief, however, is still many months away. The central banks will want to see inflation at 2% with the belief that it will remain there before they begin to cut interest rates. That will happen, but probably not before next summer. According to Bloomberg News, “Traders in overnight swaps brought forward their expectations for when the Bank of Canada will start loosening policy, and are now betting policymakers will cut interest rates by 25 basis points in July, from September a day ago.”

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
18 Sep

Home Sales Dipped Once Again Last Month In The Wake of Two Consecutive BoC Rate Hikes


Posted by: Chris Cavaghan

@DrSherryCooper https://dominionlending.ca/economic-insights/canadian-home-sales-dipped-in-august-following-boc-rate-hikes


Not surprisingly, buyers moved to the sidelines last month as the central bank took the overnight policy rate up to 5.0%. Home sales posted a 4.1% decline between July and August, well below the 10-year moving average shown in the chart below. However, on a year-over-year (y/y) basis, the number of transactions rose 5.3%.

The national sales data were depressed in August by declines in Greater Vancouver and the Fraser Valley, Montreal, Ottawa, Hamilton-Burlington, London and St. Thomas.

New Listings

The number of newly listed homes edged up 0.8% m/m in August, adding to the cumulative gain of more than 24% between March and July. New listings started 2023 at a 20-year low but are now closer to average levels. Recent survey data suggest pent-up supply is coming down the track as many homeowners reported they planned to their home in the next three years.

With sales falling and new listings edging up in August, the sales-to-new listings ratio eased to 56.2% compared to 59% in July and a peak of 67.4% in April. The measure is now closely aligned with its long-term average of 55.2%.

There were 3.4 months of inventory on a national basis at the end of August 2023, up from 3.2 months in July. While the measure is up a bit from its recent low of 3.1 months in May and June, it remains below the second half of 2022 and well below its long-term average of about five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) edged up 0.4% on a month-over-month basis in August 2023— only about half as large as the July gain, which was only nearly half as large as the gains recorded in April, May, and June. This leveling off of prices aligns with slowing sales and a rebound in listings.

While prices are stabilizing at the national level, regional differences are re-emerging. Price growth has remained solid in Quebec and the East Coast, followed by British Columbia and the Prairies. Ontario is now a mixed bag, with some of the more significant increases and some of the bigger declines.

As of August 2023, the Aggregate Composite MLS® HPI was up 0.4% y/y. This was the first year-over-year increase since September 2022. Even though prices appear to be leveling out near current levels, year-over-year comparisons will likely continue to rise in the months ahead because of how prices continued to decline through the second half of 2022.

Bottom Line

With the Bank of Canada moving to the sidelines and more supply gradually coming on board, housing activity will likely pick up in the coming months. Year-over-year home prices will rise owing to base effects, as lower prices were posted in the fall and winter of last year, making the y/y comparisons more favourable. We don’t want to see a burst of activity because that could cause the central bank to rethink its rate pause.

Housing affordability remains a significant problem for buyers, but recent data released for the second quarter shows an uptick in first-time purchases despite the affordability crunch.

The housing shortage and the resulting high cost of rent and buying are political issues at all levels of government. On Thursday, Prime Minister Trudeau pledged to cut the federal Goods and Services tax on constructing new apartment buildings as part of a promised host of measures to address affordability issues. Canadians are used to such actions by the feds, but the housing shortage will only worsen until municipalities address impediments to densification, building delays, and development costs.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
24 Aug

Inflation and Rate Hike


Posted by: Chris Cavaghan

Why Bank of Canada hike is not a done deal despite inflation ‘head fake’

Adapted From the Financial Post PostHaste article dated August 17, 2023 entitled ‘‘Why Bank of Canada hike is not a done deal despite inflation ‘head fake’’ 

– 2 minute read-


We were warned that the battle against inflation would get rough, but nonetheless, this week’s numbers were a gut punch for Canadians looking for interest-rate relief.


“There’s no sense sugar coating this one — it is not a good report for the Bank of Canada,” BMO chief economist Douglas Porter wrote after the data came out.


The Inflation Increase Beat the Forecasts of Bank Economists


Consumer prices rose 0.6 per cent in July, pushing the headline rate to 3.3 per cent, a big comedown from June when the reading (2.8 per cent) fell into the Bank of Canada’s target range for the first time in more than two years.


While a modest uptick had been expected, Tuesday’s data “blew the doors off economists’ forecasts,” said Randall Bartlett, senior director of Canadian economics at Desjardins.


It also pushed Canada’s inflation higher than the United States for the first time since before the pandemic.


How did this happen?


A couple of “idiosyncratic factors” drove the gain, including a spike in Alberta electricity prices and higher airfares and travel services, said Bartlett in a note entitled “CPI head fake masks cooling under the hood.” Gas prices played a role as they fell less on a year-over-year basis than they did in June.


The Canadian Economy Continues to Show Signs of Cooling


However, Bartlett argues that key measures that the Bank of Canada looks at showed signs of improvement. The Bank’s preferred CPI median and trimmed mean slowed slightly and its newest measure of core inflation which excludes shelter fell to 4.2 per cent annualized from 4.6 per cent in June.


“The modest slowing core CPI is a thin silver lining for policy makers in an otherwise strong CPI report,” said BMO’s Porter.


BMO economists like Desjardins’ believe the Bank of Canada would prefer to hold rates next month given that other data suggest the economy is cooling.


But “the inflation figures will make it a tougher call,” Porter said.


One of the main reasons the Bank began hiking again at the beginning of the summer was because of a bump-up in April’s inflation, he points out.


While the majority of economists expect the central bank to hold at 5 per cent next month, there are some in the hike camp. CIBC economists see a final 25-basis-point increase in September as likely.


Derek Holt, head of Scotiabank Capital Markets Economics, warns that the Bank of Canada is at “high risk of losing the fight” and needs to crush inflation with more rate hikes.


“If the BoC waits for the lagged effects, then it faces the high risk of losing as wages and expectations get out of hand,” he wrote in a note on the data.


For now economists will watch for the next piece in the puzzle. The reading on second-quarter gross domestic product comes out Sept. 1, giving the central bank something else to ponder before its decision Sept. 6.

31 Jul

Controlling Inflation


Posted by: Chris Cavaghan


19 Jul

Inflation Down


Posted by: Chris Cavaghan


24 Apr

weakening housing markets pose a risk for the canadian economy


Posted by: Chris Cavaghan

On April 18, Canada’s national banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), released its second Annual Risk Outlook (ARO), outlining what it believes are the most significant headwinds facing the Canadian financial system – and what the regulator plans on doing about it.

According to the report, the severe downturn in real estate prices and demand following their significant rise during the pandemic was the most pressing issue. OSFI acknowledges that the housing market changed significantly over the past year, and house prices fell substantially in 2022. The regulator is preparing for the possibility that the housing market will experience continued weakness throughout 2023.

The report also highlights how the Bank of Canada’s rate hiking cycle has impacted borrowers’ ability to pay down mortgage debt, with the central bank increasing its benchmark cost of borrowing eight times between March 2022 and January 2023, bringing its Overnight Lending Rate from a pandemic low of 0.25% to 4.5% today.

Mortgage holders may be unable to afford continued increases in monthly payments or may experience a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities. Given the considerable impact of real estate-secured lending (RESL) activities in the Canadian financial system, a housing market downturn remains a critical risk.

OSFI also highlights the dangers posed by more borrowers hitting their trigger rates; according to a National Bank study, eight in ten variable fixed-payment borrowers who took their mortgages out between 2020-2022 are impacted. Lenders have addressed this by extending the amortization period for affected borrowers, but OSFI says this is just a temporary solution.

Borrowers and lenders alike will need to pay the price in due course, as OSFI points out. The growth in highly leveraged borrowers increases the risk of weaker credit performance, potentially leading to more borrower defaults, a disorderly market reaction, and broader economic uncertainty and volatility.

These recent comments strengthen expectations that stricter mortgage rules could be in the cards before the year ends. Back in January, OSFI announced it was considering making tweaks to its Guideline B-20, which outlines borrowing and risk requirements for banks underwriting residential mortgages and qualification rules for borrowers, including the mortgage stress test.

OSFI may increase borrowers’ debt servicing ratio requirements, making it more challenging for those with larger debt loads to qualify for a mortgage. It is also considering limiting how many of these higher-leveraged borrowers banks can have in their portfolios, potentially leading to fewer borrowers making the cut at A-lenders and turning to the B-side and alternative mortgage market.

Finally, OSFI may change the threshold criteria for the mortgage stress test. Currently, borrowers must prove they can carry their mortgage at a rate of 5.25%, or 2% above the one they’ll receive from their lender, whichever is higher. However, following last year’s rapid rate increases, the 5.25% threshold has become obsolete, with all current market rates above 3.25%.

OSFI wrapped up consultations on these potential changes late last week and will release a report on its recommendations. Borrowers should keep an eye out for changes in the months to come.

Please Note: The source of this article is from SherryCooper.com/category/articles/
16 Aug

Canadian Home Prices


Posted by: Chris Cavaghan

Home prices continued to decline across the country in July, according to Canadian Real Estate Association data released Wednesday.

The Ottawa-based group said the average price of a home sold last month was $353,147, a decline of 2% from a year earlier. The year-over-year decline in June was 0.8%.

“Prices are off their recent peaks in Greater Vancouver and Greater Toronto, but remain above year-ago levels in most markets,” the group said in a release.

Activity was up from the previous month in Kingston, Ont., Chilliwack, B.C., and Calgary, offset by fewer sales in Toronto, Newfoundland and Labrador, and Edmonton. Actual sales across the country were up 3.3% overall from a year ago.

Much of the decline in the national average can be blamed on Vancouver’s volatile market.

The city’s average sale price dropped more than 12% to $667,462 from $761,763 last year.

A senior economist at Royal Bank of Canada said the city’s lack of affordable homes is pulling down the market.

“We still believe that Vancouver is probably the most stressed market right now because of extremely poor affordability,” said RBC economist Robert Hogue.

“Plot the resale figures over the last year or so and you see a fairly significant decline in resales, so I think that this does the fit the definition of correction,” he said.

But a B.C. real estate economist said speculation of a market correction in Vancouver is unwarrwanted, as the economy continues to heal.

“Typically to see a price correction you need to see a macroeconomic shock — recession, very high unemployment, for example — or you need to see interest rates go up very dramatically in a short period of time. Both of those we don’t see on the horizon,” said Cameron Muir, the British Columbia Real Estate Association’s chief economist.

He said one-third of the market is first-time buyers, of which the market has no shortage.

“As long as we have first-time buyers that can get into the market to buy the homes from the people who are moving up, moving over, moving down, then the market should remain healthy,” Mr. Muir said.

Meanwhile, Toronto experienced a cooling, with prices increasing at a slower rate of 3.9% year over year, which BMO economist Douglas Porter called a “just-right” pace in a note Wednesday.

Mr. Hogue said the market across Canada is moderating and low resale numbers in the past three months were a result of compensation for a strong winter market and do not necessarily spell an impending pronounced correction.

“We believe that much of this easing was payback for a stronger-than-expected start to the year when warmer than usual weather this past winter and mortgage rate promotions by financial institutions provided a temporary boost to activity,” he said.

The Canadian Real Estate Association said tighter mortgage and lending regulations seemed to have cooled Canada’s national housing market, even in the bigger markets.

“Recent changes to mortgage regulations were widely expected to temper sales and prices in Greater Toronto and Greater Vancouver, and the data released today confirms that,” said Wayne Moen, president of the association, in a statement.

Finance Minister Jim Flaherty said Wednesday it may be too early to determine the extent of the impact of mortgage insurance reform, but that market moderation is a good thing.

“We want to avoid, obviously, the kind of thing that happened in the U.S. market, the Irish market and other markets in the Western economies with respect to their housing. So we want to have moderation,” he told The Canadian Press