Interest rate cuts: Treading water in a rising tide

General Robyn McLean 10 Sep

Valuable insight regarding the future direction of interest rates from our friends at FNAT.

In the rising tide of interest-rate-cut expectations, the Bank of Canada is treading water.  The central bank did meet expectations by holding its policy rate at 1.75% for a seventh consecutive setting, last week.

The reasons are fairly apparent: inflation is on target, GDP growth is good (Q2 was far better than expected even if it was based on some one-off stats), job growth is steady and unemployment is at a generational low of 5.7%.

It seems pretty clear that the BoC really does not want to trim its trend setting rate.  The economic numbers do not warrant it and we are in a federal election cycle.  The Bank has a long history of stepping to the sidelines during elections in an effort to preserve its reputation for political neutrality.

But the BoC is under a lot of external pressure to cut its rate.  Canada is one of just a handful of developed economies with a policy rate above zero.  Of course, the United States is one of the others and it is already making cuts.

The U.S. Fed says it is trying to ensure the economy does not stall in the months ahead.  Being as the U.S. is the biggest economy in the world, others – including Canada – will likely have to take out some insurance of their own.

The next BoC setting is October 30th.  That is close to, but after, the October 21st election so it is politically doable.  The next opportunity is December 4th, just in time for Christmas.

Sep 9, 2019
First National Financial LP

6 ESSENTIAL FALL MAINTENANCE TASKS

General Robyn McLean 10 Sep

Some excellent advice from my friends at Pillar to Post!

With autumn just around the corner, now is the perfect time for homeowners to get their property in shape and help avoid problems in the months ahead. Here are six key jobs to tackle before cold weather sets in.
  1. Caulk around exterior door and window frames for a tight seal. Look for gaps where pipes or wiring enter the home and caulk those as well. Not only does heat escape from these openings, but water can enter and damage underlying materials, and even cause structural damage.
  2. Check the roof for missing or damaged shingles. Water, wind, ice and snow can cause serious damage to a vulnerable roof, leading to a greater chance of further damage inside the home. Always have a qualified professional inspect and repair the roof, but binoculars can be used to do a preliminary survey from the ground.
  3. Clear gutters of leaves, sticks, and other debris. If the home gets heavy leaf fall, this may need to be done more than once during the season. If the gutters can accommodate them, leaf guards can be real time-savers and prevent clogging. Check the joints between sections of the gutter, as well as between the gutter and downspouts, and make any necessary adjustments or repairs. Make sure downspouts direct water away from the house.
  4. In cold-weather climates, garden hoses should be drained and stored indoors to protect them from the harsh winter elements. Shut off outdoor faucets and make sure exterior pipes are drained of water. Faucets and pipes can easily freeze and burst, causing leaks and increasing the potential for serious water damage.
  5. Have the furnace inspected to ensure that it’s safe and in good working order. Most utility companies will provide basic, no-cost furnace inspections to their customers, but schedule early as there can often be a long waiting list as the weather cools down. Replace disposable furnace air filters or clean the permanent type according to the manufacturer’s instructions. Using a clean filter not only helps with interior air quality, it will help the furnace run more efficiently, saving money and energy.
  6. A wood-burning fireplace can be a real pleasure on a chilly fall evening. For safety, have the firebox and chimney professionally cleaned before use this season. Creosote, a byproduct of wood burning, can build up to dangerous levels and cause a chimney fire that can spread to the rest of the house.
With these easy steps, you can enjoy the comforts of home all season long and know that you’re protecting your investment, too.

Bank of Canada Holds Overnight Rate Steady Amid Uncertainty

General Robyn McLean 4 Sep

Some great insight on the recent Bank of Canada hold on interest rates from DLC’s Dr. Sherry Cooper, Chief Economist.
The Bank of Canada held the target overnight rate at steady at 1.75% for the seventh consecutive decision date but will monitor closely the impact of the US-China trade war on economic activity around the world and in Canada. The second-quarter growth–posted at 3.7%–exceeded the Bank’s forecast in the July Monetary Policy Report (MPR), but the Bank expects the economy to slow from that pace in the second half of the year.

Q2 was boosted by stronger energy production and robust export growth, both recovering from a weak Q1 performance. But evidence suggests that export growth slowed in July and could weaken further as the global economy slows. Canada bears the brunt of Chinese trade restrictions on Canadian agricultural imports. Housing activity also boosted the expansion in the second quarter as resales and housing starts picked up. Falling longer-term interest rates have driven down mortgage rates. The Bank asserted that “this could add to already-high household debt levels, although mortgage underwriting rules should help to contain the buildup of vulnerabilities.”

Wages picked up further last quarter, boosting labour income, yet consumption spending was unexpectedly soft. Canadian consumer confidence recorded its most significant monthly drop this year in August amid growing concerns about the global economic outlook. The setback reflects waning optimism about Canada’s economy and effectively reverses the pick-up in sentiment earlier this summer.

The deterioration in confidence coincides with the escalation of the U.S.-China trade war. Many Canadians increasingly worried they’ll soon feel a bigger impact. Consumers aren’t the only ones feeling the uncertainty as business investment weakened sharply in the second quarter. Trade tensions have hit farmers and manufacturers hardest. The U.S. implemented additional tariffs on China September 1 and have slated more on December 15. These include duties on clothing and electronics, will pinch US consumers where it hurts, in the pocketbooks. These moves will sideswipe Canada.

Despite all of this gloom, the central bank held off from signalling explicitly any immediate need to cut interest rates. While growth has been stronger than expected, inflation has remained on target.

“In sum, Canada’s economy is operating close to potential and inflation is on target. However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies,” the central bank said in its statement. “In this context, the current degree of monetary policy stimulus remains appropriate.”

Market Interest Rates Are Tumbling

The Bank prefers to wait for more concrete evidence that the economy is in need of additional stimulus. Despite this, market interest rates have fallen to record lows in Canada and elsewhere and the yield curve is inverted. Government of Canada 5-year yields have slid from 1.85% to 1.15% this year, an incredible 38% decline. Ten-year returns are down from 1.92% to 1.13% (lower than the 5-year yield), and the 30-year bond yield has plunged from 2.13% to 1.40%.

Short-term interest rates are higher than longer-term yields. The overnight rate, controlled by the Bank of Canada, is 1.75%–well above all of these long-term yields. The 3-month bill rate is at 1.62%, almost 50 basis points higher than the 5-year yield.

The posted mortgage rate is the qualifying rate for mortgage borrowers. It has barely moved this year, down only 15 basis points to 5.19%. Its stickiness at elevated levels has prevented many borrowers from taking advantage of today’s low contract mortgage rates.

Mortgage Rates Have Fallen Even More Than Bond Yields

According to Rate Spy, the best high-ratio 5-year fixed mortgage rate is at 2.25%, down 94 basis points from the 3.24% rate posted at the beginning of the year. Conventional high-ratio 5-year fixed mortgage rates are down 95 bps and refinance 5-year fixed rates have fallen 118 bps. Much of this phenomenon might be lenders playing catch-up as they were slow to cut fixed rates when interest rates began to fall at the end of last year.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres