BoC may have to break interest rate promise

Alia McMullen, Financial Post Published: Thursday, July 23, 2009

TORONTO -- The Canadian dollar hit a 10-month high Monday amid growing risk appetite and rising expectations that inflation will ultimately force the Bank of Canada to break its promise to keep interest rates on hold until mid-2010.

"The time for tightening is not yet at hand, but June 2010 seems too late," said Yanick Desnoyers, the assistant chief economist at National Bank Financial. "The day when the condition for the Bank's low-rate commitment is no longer met will probably come before then."

Mr. Desnoyers said the benchmark interest rate had been lowered to a record low of 0.25% to limit the damage of the recession and financial crisis. However, he said the rate was too low relative to core inflation, which stood at 1.9% in June, just one basis point below the bank's target rate.

The outlook for higher interest rates, whether they come sooner or after June next year, has helped support the Canadian dollar, which has increased by about 8% since the beginning of the month.

The loonie inched up US0.16¢ to US$92.50 Monday after reaching its highest level since October in intraday trade. The rise was boosted by an improvement in investor sentiment after new U.S. home sales surged by 11% in June and the three-month Libor rate, the benchmark borrowing rate banks generally charge each other, fell to a record low 0.496%.

The decline in Libor, which peaked at 4.82% in October, is a sign that credit pressures continue to ease. Commodity prices were also marginally higher amid expectations of an uptick in demand.

Aron Gampel, vice president and deputy chief economist at Scotia Capital, said the Canadian dollar has also strengthened against the greenback because many were concerned U.S. stimulus efforts would leave behind a problematic debt hangover. He said the loonie was likely on its way back to parity with the U.S. dollar.

With the Bank of Canada having declared that the recession is likely over, interest is beginning to turn to when interest rates will begin to rise. Some, such as Mr. Desnoyers, believe the Canadian recovery, bolstered by government stimulus, will push inflation up faster than expected, forcing the Bank of Canada to use its "get out of jail free card" and raise the benchmark policy rate before June 2010.

The central bank said it would keep interest rates on hold until June 2010 "conditional on the outlook for inflation".

Bond yields have risen in recent weeks and now reflect a 90% chance of an interest rate rise withing nine months.

Others, such as Mr. Gampel, believe the central bank will keep interest rates on hold until mid next year, but embark on an aggressive tightening thereafter. However, he said the economy was at a turning point and the Bank of Canada's ultimate decision would depend on the speed of economic recovery.

"They could be looking at having to push interest rates up at a faster rate, and sooner, if the recovery takes on a greater scope going forward," Mr. Gampel said.

He said the recovery could well be on track to outpace expectations as businesses rebuild inventories, consumer spending picks up and fiscal stimulus kicks in.

However, he said evidence to date does not suggest the central bank will need to hike rates before June, particularly with a large amount of excess capacity in product and labour markets.

Reccesion is not over until the Consumer Sings!Recession ain't over 'til the consumer sings

Garry Marr, Financial Post with files from Paul Vieira Published: Thursday, July 23, 2009

There are at least 1,592,000 Canadians who don't believe the recession is over.

Benjamin Tal, senior economist with CIBC World Markets, says consumers - including the almost 1.6 million unemployed - are unlikely to be overjoyed by the Bank of Canada's pronouncement Thursday that the recession is all but over.

"This is a technical economic recovery and something only economists get excited about," said Mr. Tal. "Does it mean unemployment will go down? Will it be easier to get a job? For the average person, it's not over and it won't be over until it's easier to get a job."

There have been some signs that consumers are feeling more confident and ready to spend - one of the top indicators being the moribound housing market that saw record sales activity for June in major markets across the country.

But it may be a tad early to get excited ahout a housing market that was dealing with pent-up demand from a winter that saw little transaction actvity, said Mr. Tal. "The affordability aspect has become extremely important in this market," said the economist.

Record low interest rates, and a housing market that has all but stalled on the price side, has presented a dilemma for consumers thinking about making major purchases, including a house.

Variable-rate mortgages tied to the prime rate are now as low as 2.85%. The rate on a fixed-rate five-year mortgage is still as low as 4.3% after dipping to 3.75% last month.

If consumers needed more assurances, they got it from Bank of Canada governor Mark Carney Thursday, who reiterated the pledge not to raise rates again until at least June of next year.

"We have a conditional commitment and it is conditional on the outlook for inflation. And we have reaffirmed that with this decision, because we believe keeping the overnight rate at 0.25% - thinking all the way through the chain of the impact of that rate on short-term rates, floating rates and fixed rates - that it is what is necessary in order to help the economy achieve the inflation target. But it is conditional. And if that outlook changes, we would change. It is not a guarantee. That's an important point to make," Mr. Carney told reporters in Ottawa.

Many in the industry feel that once next June comes, rates will start to rise. "Once it moves in June, there are expectations it will move in July and August," says Joan Dal Bianco, vice-president of real estate secured lending with TD Canada Trust. Rates did fall about four percentage points in a year and a half on the way down, so there is no reason they may not rise just as quickly.

Ms. Dal Bianco said she saw record levels of borrowing last month. And why not? Consumers using an existing secured line of credit were borrowing for as little as 2.25%. "Those people with lines at prime have been drawing it to the max because the rates are so good," she said.

Certified financial planner Ted Rechtshaffen, of TriDelta Financial Planners, has to be the voice of reason to some of his clients who want to spend on goods as well as jump back into the stock market.

"Part of our job is to be the other voice," Mr. Rechtshaffen said. "The same people who said in March ‘Can stocks go to zero?' want to get back in. We are starting to see bits of that greed again."

As for that big purchase, the Toronto-based planner said the rules are still the same. You have to know your financial situation, including your job prospects. He said you can look for deals, but he cautions consumers to ask: Do you really need it?

"Six months ago we couldn't afford a car and we were saying ‘Let's keep it as long as we can'," Mr. Rechtshaffen said. "Some people are saying ‘Things are looking good maybe I should be looking at stuff.' But if buying a car didn't make sense six months ago, then it doesn't make sense today. If did make sense, then it still does."

Retail sales rise more than expected in May

Financial Post

OTTAWA -- Canadian retail sales rose much more than expected in May after a surprise drop the previous month, Statistics Canada said Wednesday.

Sales increased 1.2% during the month to $34-billion, with gains in seven of eight sectors, led by a 2.4% increase in automotive products, the federal agency said.

"Retail sales have been generally rising since the beginning of 2009," it said.

Most economists has expected sales to rise by just 0.5% cent in May after a 0.6% decline in April.

"This sturdy report marks a nice reversal from April's sour note. It also drums home the point that Canadian consumers are not nearly as stressed as their U.S. counterparts, a point made amply clear by recent home sales data," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Statistics Canada said the jump in auto sector sales was driven by a 3.4% increase in purchases at new car dealers. Sales of used and recreational motor vehicle, as well as auto parts, were up 1.8%, following declines in the previous six months, the agency said.

Sales at gasoline stations rose 0.9% in May after dropping 4.7\% over the previous two months, it said. Building and outdoor home supply stores saw sales rise 1%, double April's rate.

Retail sales were higher in nine provinces in May, with the biggest jump coming in New Brunswick, up 2.5%. Prince Edward Island was the only province to post a decline, down 0.7%.

Charmaine Buskas, senior economics strategist at TD Securities, said Wednesday's report "does not necessarily suggest a turnaround in retail sales."

"The backdrop for the Canadian economy remains soft, and consumers are sure to adjust their spending behaviour accordingly in the coming months," she said.

Canada's economy shrank 5.4% in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7% decline in the fourth quarter of 2008.

On Tuesday, the Bank of Canada revised its outlook for the economy, saying it will contract 2.3% this year, which is less than the 3% drop it forecast in April. The economy is then expected to grow 3% in 2010, up from its previous 2.5% projection. In 2011, the bank forecast growth of 3.5%, which is down from its earlier call for an increase of 4.7%.

Last week, marketing and research group TNS Canadian Facts said Thursday its consumer confidence index edge up to 93.4 in July after slipping to 92 in June. However, its buy index, which monitors views on whether now is a good time to make major purchases, eased this month to 103.2 from 104.5.

"While spending here is no ball of fire, it is gradually climbing back from the lows at the start of the year, with consumers poised to moderately contribute to the recovery," Mr. Porter said. "As the bank noted yesterday, domestic spending is on the road to recovery -- the issue is exports, both because of the strong loonie and still-soft U.S. demand."

CanwestNews Service

Retail sales by sector (% change May from April):

Automotive +2.4

Furniture, home furnishings and electronics stores +0.5

Building and outdoor home supplies stores +1.0

Food and beverage stores +0.7

Pharmacies and personal care stores +1.5

Clothing and accessories stores 0.0

General merchandise stores +0.4

Miscellaneous retailers +0.8

Retail sales by province (% change May from April):

Newfoundland and Labrador +1.0

Prince Edward Island -0.7

Nova Scotia +0.5

New Brunswick +2.5

Quebec +1.2

Ontario +1.5

Manitoba +1.1

Saskatchewan +1.7

Alberta +0.5

British Columbia +0.8

Source: Statistics Canada

Worst may be over for the housing market

Garry Marr, Financial Post

New home construction rose for a second straight month in June, in what analysts say is another sign that the worst may be over for the Canadian housing market.

Canada Mortgage and Housing Corp. said Thursday there were 140,700 new homes constructed in June on a seasonally adjusted annualized basis. Construction was up almost 8% from the 130,300 May figure.

"There are some pretty good signs that we are starting to see in the housing market," said Bob Dugan, chief economist with CMHC. "We've seen it for quite a few months on the existing homes side."

Existing home sales rose 42% from January to May across the country and the early indications are that June was strongest month this year. Sales in Vancouver were up 76% last month compared with a year earlier and Calgary and Toronto both recorded 27% increases during the same period.

Existing home inventories have begun to shrink across the country, convincing builders to ramp up construction. CMHC said urban single family homes -- considered the best barometer of the new home market -- climbed 7.3% in May from a month earlier.

"It's well into seller's market territory again with the May and April numbers," said Mr. Dugan.

The optimism about the Canadian market comes despite the fact new construction at 140,000 units is way off the 200,000-plus figure the market in Canada has seen for the past seven years.

"I can only speculate, but maybe a lot of people are relieved we are not seeing the decreases we have seen in the U.S.," said Mr. Dugan. "Peak-to-trough, the decline in the U.S. was something like 80%. In Canada, that would mean we'd have to have 55,000 starts. Some people may have thought that's where the Canadian market was going."

The consensus among economist is construction won't return to pre-recession levels but will gradually improve in the coming months.

"This month's increase is an important confirmation that the Canadian housing sector is past the worst and in recovery mode," said Marco Lettieri, an economist with National Bank. "The recovery seems to be broad based with gains observed in both multiple [which includes condominium construction] and single units."

Robert Kavcic, an economist with Bank of Montreal, said there could be some room for modest growth in starts in the coming months.

"Higher affordability and improved consumer confidence brought buyers off the sidelines this spring," said Mr. Kavcic.

A report this week from RBC Economics said declining prices and lower interest rates led to one of the biggest quarterly improvements in affordability in history. The bank said monthly payments on a typical detached bungalow in Canada had decreased by almost 17% from a year earlier.

Royal LePage Real Estate Services was also forced this week to upgrade its forecast for 2009 because of the improved market conditions. It now expects 430,000 sales this year, an improvement from its previous call of 416,000, but still down 1% from a year ago.

"I think 2009 will go down as a moderate correction as opposed to the deep and sustained recession that we had first feared," said Phil Soper, chief executive of the real estate company.

Royal LePage expects prices this year will still fall but not by as much as previously feared. It expects the average sale price in 2009 to be $297,000, a 2% drop from last year. It had previously forecast a 3.5% decline.

Mr. Soper said a decline is still tough to swallow after years of compound growth of close to 10% in the housing market but it's proving to be a far cry from what has happened in the United States.

"We are long way from the 35% decline that a lot of regions in the United States are experiencing. It's a very different kind of correction," said Mr. Soper

Canada's economy set to shine on world stage: IMF

Paul Vieira, Financial Post

OTTAWA -- Canada's economy is set to outperform nearly all industrialized countries this year and next, the International Monetary Fund said Wednesday, leading analysts to declare the country does not need additional stimuli as advocated by certain world leaders at this week's Group of Eight summit.

The latest IMF outlook suggested the world economy is "beginning to pull out" of the deepest recession since the Second World War. The global economy will shrink 1.4% this year, it said, but growth of 2.5% is now expected in 2010, an improvement of just over a half-percentage point from its previous forecast in April.

As for Canada, the IMF said the economy would contract the least among industrialized nations this year, with a drop of 2.3%, compared with the 3.8% shortfall expected among all advanced economies. In 2010, the Canadian economy is set to post growth of 1.6%, or second-best among advanced nations after Japan's expected 1.7% gain. In contrast, the U.S. economy is seen recording meagre growth of 0.8%, or half the Canadian output.

China and India, which crave Canadian-produced raw goods, are expected to be global growth leaders in 2010, with gains of 8.5% and 6.5%, respectively.

"Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating," the IMF said, adding, however, that the recovery would likely be sluggish.

The release of the IMF report coincided with the beginning of a meeting of G8 leaders in central Italy, with much of the focus expected to be on measures to put the global economy back on track. U.S. President Barack Obama and Britain's Prime Minister, Gordon Brown, were among those advocating more fiscal stimuli be injected in the global economy, on the concern that the US$2-trillion spent worldwide may not be enough to ignite domestic demand.

On the other side is Stephen Harper, the Prime Minister, who is arguing his G8 peers should follow Canada's lead and make sure that already-announced spending initiatives are fully executed.

"Before there's talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that's been announced actually gets delivered," he told reporters. "That's been our focus in Canada and I would encourage the same priority elsewhere."

The federal government has in place a two-year, $46-billion plan aimed at creating jobs and reviving tepid demand in an effort to mitigate the fallout from the global financial crisis. (The stimulus could reach nearly $80-billion when provincial and territorial contributions are taken into account.) Mr. Harper has said 80% of the federal stimulus funds have been committed.

The fiscal stimuli is on top of the Bank of Canada's move to chop 425 basis points from its key lending rate since December 2007, from 4.5% to its current 0.25% level.

Economists say the coming stimulus from Ottawa and the provinces should show up more forcefully in the economic data in the months ahead. Given the IMF's expectations, they believe there's no need to add to the stimulus pipeline.

"Staying the course is probably the prudent path right now," said Craig Wright, chief economist at Royal Bank of Canada. "From the time you announce fiscal stimulus to the time you actually see it bearing fruit, there is a great lag involved. It is coming and it will be coming alongside of the lagged impact from the low interest-rate environment."

Stéfane Marion, chief economist at National Bank Financial, said there are distinct differences between Canada and other G8 countries – most notably, Canada did not suffer the same type of collapse in real estate holdings, and its financial system is far better shape than in the United States and Europe.

"I am not sure there is much more than we can do," he said, adding people are "underestimating" how long it takes for the impact of interest-rate cuts and government spending to wind its way into the real economy.

Mr. Marion added that several key indicators, such as surveys of purchasing managers, point to increased levels of production in the economy for the coming months.

The IMF said countries should maintain "supportive" monetary fiscal policy through 2010 until the recovery is in full swing. However, it indicated plans "should be made" to reduce the budget deficits incurred by combating the recession.

Meanwhile, the IMF and Ottawa formally signed a deal Wednesday in which Canada would make US$10-billion available to the global body for emergency purposes. If needed, the IMF could draw up to US$770-million a week to ensure emerging economies and developing countries have the access to capital during the economic crisis. The deal was first announced at last April's meeting of the Group of 20 nations.

Home ownership offers emotional, financial rewards

Toronto Star, Sat July 4, 2009 Stephen Dupuis

In the spirit of Canada Day, I wish to share with readers some survey results on home ownership that are as Canadian as saying sorry.

According to Genworth Financial Canada's First-Time Homebuyers Market Monitor, regardless of the ups and downs of the housing market of late, the spirits of potential first-time homebuyers across Canada remain strong.

The national survey of 2,521 Canadians revealed the following highlights:

88 per cent say they would feel more financially secure owning their own home.

85 per cent believe that even though homeownership may mean more work and effort, they'd rather own than rent.

84 per cent of respondents agree with the statement "owning a home provides a greater sense of emotional well-being and security."

84 per cent of respondents feel the value of owning a home goes beyond the financial value.

80 per cent consider a house/condo they own more of a "home" than a house/apartment they rent.

80 per cent say owning a home makes them feel more personally fulfilled.

In many ways, there's nothing particularly earth-shattering about these survey results unless you're surprised that the numbers aren't even higher.

No doubt the renters surveyed were less effusive about home ownership, but that's because they simply have yet to experience its joys.

Clearly, first-time buyers have realized that brings with it not only financial security but emotional well-being and self-fulfillment. When it comes to financial security, there can be nothing more satisfying as making that last mortgage payment, knowing that the biggest part of your retirement nest-egg will likely be the tax-free equity you have in your home.

Not to underestimate the non-financial attributes of home ownership, first-time buyers are obviously looking at home ownership in the right way, which is from a shelter perspective, not an investment perspective, and with a longer-term view. They also see their first home as a place to live, love and laugh as they start their families, celebrate milestones.

Yes, home ownership can be a lot of work, but it's the kind of work that brings families together as everybody pitches in to change something, clean something or fix something. Whether it's landscaping, gardening, painting or something more ambitious, whatever we do around the house, we always step back and admire the way it looks so much better and ask why we didn't do it sooner. The same is true even when you hire a professional contractor.

The survey results show Canadians have a deep emotional attachment to home ownership, says Peter Vukanovich, president of Genworth Financial Canada.

"Most people closely associate financial security and emotional well-being with home ownership. That's particularly true among first-time homebuyers," Vukanovich added.

He is such an advocate of home ownership that he's developed an entire micro-site – homeownership.ca – to help first time buyers make the big move with confidence and solid information. It's got expert advice, tools to help you determine how much you can afford, a rent-versus-buy calculator, information on government tax incentives and many more helpful links. Just for fun, you can take the Mortgage Quiz.

The Genworth survey results confirm Dorothy Gale's famous line from the 1939 film The Wizard of Oz: "There's no place like home."

Stephen Dupuis is president and CEO of the Building Industry and Land Development Association. The views expressed are those of the president.

More Canadians miss payments Half-million consumers fall more than 90 days behind on credit bills

Record news services

More than half a million Canadians have fallen behind on their various credit payments, fuelling a 19 per cent rise in the average national delinquency rate in the one-year period ending May 31, says a new report from Equifax Canada.

The credit bureau called the double-digit jump "alarming," noting the average delinquency rate for Canada hit 1.52 per cent at the end of May.

Much of the trouble stemmed from missed payments on credit card bills and for sales finance purchases of items such as furniture and electronics.

Equifax defines delinquent bills as those that are at least 90 days overdue.

Its latest snapshot on delinquencies comes just days after a Senate committee released a report urging the federal government to take more aggressive action to shield consumers and small businesses from rising interest rates and fees in the credit and debit card markets.

Finance Minister Jim Flaherty continues to review all input on credit cards and will announce his final intentions once that process is complete, a spokesperson said.

While his office gave no timeline, Pierrette Ringuette, the Liberal senator who spearheaded the study, appeared to up the ante yesterday by vowing to introduce legislation in September if the government fails to act before then.

Legislation, except money bills, can be introduced in the Senate, although most originates in the House of Commons. It was unclear what kind of support such a bill would garner in a minority Parliament.

The Senate report, released Tuesday, recommended the government create an "oversight board" and also take steps to clamp down on the rates and fees paid by consumers and merchants for the use of Visa, MasterCard and other card brands.

If Flaherty takes no action by the fall, "I'm going to be very, very disappointed," Ringuette said in a phone interview. "The small and medium businesses of this country are not asking for a bailout."

"They're only asking for fairness -- just like consumers are only asking for fairness. I think it's high time that government paid attention to them."

The Equifax report, meanwhile, was the latest study to suggest that increasing numbers of Canadians are struggling to pay their bills.

Nadim Abdo, an Equifax vice-president, stressed that the "sharpest increase" in delinquencies resulted from credit card and sales finance purchases, which have risen by 38 per cent and 58 per cent, respectively, since May 2008.

Rising delinquencies in those areas are troubling because consumers tend to miss payments on those unsecured credit products before they fail to pay back collateral-backed loans such as mortgages, bank loans and lines of credit, Abdo said.

While that's likely to spell higher loan losses for banks, consumers who skip payments will also suffer longer-term consequences because of tarnished credit scores.

"When economic conditions get better, whenever that is, if they want to go get a mortgage or get a line of credit -- with a negative rating on their credit file, that's not going to help them," Abdo said.

The Equifax data follows a Bank of Canada report last month that suggested climbing debt levels have put households under increased financial strain amid the recession.

The Financial System Review also said that households are increasingly vulnerable to "adverse shocks" such as higher unemployment.