An interest rate hike this summer?

Don't count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast

David Rosenberg Published on Wednesday, Jan. 27, 2010

David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business

Canadian market watchers will get some good news this week. The predictions for a "blowout" reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.

This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the "output gap" being 3.7 per cent ("output gap" is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.

The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank's modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.

Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.

Unless the bank wants to be pre-emptive - highly unlikely when it acknowledges in its economic outlook last week that "the recovery continues to depend on exceptional monetary and fiscal stimulus" and that "the overall risks to its inflation projection are tilted slightly to the downside" - then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less "hawkish" than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.

The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.

And whatever future "policy tightening" is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: "The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada," the bank says.

In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.

The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: "Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.

Until then, homeowners opting for variable rate mortgage financing will likely not have to face the interest rate music.

Economic recovery becoming more solidly entrenched, says Bank of Canada

OTTAWA - Canada’s economy is becoming more solidly entrenched with the private sector beginning to play an increasingly pivotal role in leading the country out of recession, the Bank of Canada said today in its latest policy report.

In a mildly upbeat assessment of the recovery, the central bank’s quarterly outlook contains some upward revisions for growth in the United States, China, Europe and Japan that should help Canada’s battered exporters and manufacturing sector in the next two years.

And it says Canada’s economy will grow faster going forward than expected, in part because it got off to such a slow start last summer.

Overall, the bank appears more optimistic about the sustainability of the recovery that is happening around the world, although it also cautions that risks of a stall remain.

There is also some upside hope, the bank adds, that conditions may continue to improve better than projected.

“It is thus possible that the recovery in global demand could be more vigorous than projected, resulting in stronger external demand for Canadian exports,” the bank judges.

In Canada, it adds: “Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold.”

The analysis is broadly similar to what the bank said last October, when it last issued a comprehensive forecast on the economy, but the tone is brighter at the margins and the danger signals less frequent.

For months, bank governor Mark Carney has been cautioning Canadians not to get overextended in purchasing homes, but there is no such warning this time. In fact, the bank says it expects the housing market to cool this year and next as a result of pent-up demand becoming satiated and relatively high home prices.

As well, the bank appears more confident that the private sector is ready to take the handoff from governments as the main driver of economic growth.

The bank says Canada’s reliance on government stimulus spending likely hit its peak at the end of 2009, representing about two per cent of all economic output for the country, and will decline this year.

By 2011, the private sector will be the sole driver of Canadian growth, the bank said.

But while Canada’s domestic demand continues to be the key driver of economic growth, the big change from October’s outlook is that prospects are also improving for the country’s battered export and manufacturing sectors.

“Export volumes are expected to continue to recover over the projection period in response to growing external demand and higher commodity prices. Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters,” the bank says.

Those volumes would be even greater but for the strong Canadian loonie, it adds.

Canada’s auto and forest products sectors were particularly hard-hit during the recession, the bank notes, and will benefit most from renewed growth in the U.S. Canadian manufacturers shed about 200,000 jobs last year.

The central bank now says the U.S. gross domestic product will grow by 2.5 per cent this year, largely as a result of improvement in the financial sector. Three months ago, the bank estimated U.S. growth at a mere 1.8 per cent.

In Canada, the bank says the economy likely grew by 3.3 per cent in the last three months of 2009. For 2010, the economy will advance by 2.9 per cent, followed by a 3.5 per cent pickup in 2011.

In retrospect, the bank noted that Canada’s recession, while severe, was not nearly as damaging as it was in other industrialized countries, partly because of Canada’s solid banking system.

But neither has the recovery been particularly impressive in Canada, starting with a disappointing 0.4 per cent advance in the third quarter of 2009, which the bank attributes to a surprisingly strong influx in imports. The U.S., backed by a weak currency, rebounded more strongly with a 2.2-per-cent increase in the third quarter and a bouncy 4.7-per-cent advance in the fourth quarter of 2009.

The bank believes Canada will make up for the slow start this year, projecting it will advance stronger than the U.S., Japan and Europe.

The main engine of global growth remains China, however, which is expected to be back close to double-digit growth this year.

The Canadian Press

Seniors growing, Ontario workforce shrinking over next 20 years: report

January 22, 2010

THE CANADIAN PRESS TORONTO - Ontario's economy may be challenged over the next 20 years by an aging population and shrinking workforce, a new government report suggests.

Seniors will account for 22 per cent of the population by 2030 - up from the current 13.7 per cent - putting more pressure on Ontario's health-care system which already accounts for nearly half of every dollar the government spends.

Meanwhile, the growth in Ontario's working-age population will shrink to 61.5 per cent from the current 69.4 per cent, according to the report released Friday.

Slower population growth and an aging population suggest that there may be slower economic growth than Ontario has experienced in the past, making capital investment and productivity growth more important for future prosperity, the report said.

Ontario is already seeing the effects of its aging population in the growth of health-care spending over the last few years, said Finance Minister Dwight Duncan.

"Seniors will account for a bigger percentage of the overall population - that has obvious consequences for health-care costs and so on," he said.

"So I think it's important to keep these things in mind and as part of the discussion.

The shifting demographics also provide "a very good indication of the kinds of things that governments today need to begin addressing will be very front-and-centre down the road," such as pension reform, he said.

"One of the reasons I'm so focused on post-retirement income is because of health-care costs and long-term care costs," he said.

"Are people in our age group planning well for their own elderly years?"

The study projects that Ontario's average real GDP will grow 2.6 per cent over the next 20 years and its exports to other countries will almost double by 2030, although the United States will remain its largest trading partner.

Immigration will continue to drive Ontario's population growth, which is expected to add another 3.7 million people and reach 16.7 million by 2030.

In 20 years, more than half of Ontario's population will live in the Greater Toronto Area, the report predicts.

Ontario's Long-Term Report on the Economy provides insights into what may lie ahead for Ontario and explain trends to help with long-term planning, Duncan said.

But it isn't a policy document and doesn't provide any new guidance on what the government plans to do to address the province's long-term challenges.

"Every once in a while, it's important I think to sit down and look and see what the long-term trends are," Duncan said.

Retailers' deep discounts keep rate fears at bay

Paul Vieira, Financial Post

OTTAWA -- Retailers chopped prices for clothing, furniture and appliances at a record pace in December in a battle to lure cautious consumers in the key Christmas period, data showed Wednesday - reinforcing the view that inflation poses no threat and the Bank of Canada could hold off longer than expected on rate hikes.

That helped send the Canadian dollar into a tailspin, as it posted its sharpest decline in three months. Also weighing down on the currency was news that Chinese authorities had instructed certain of its banks to curb lending because they failed to meet capital requirements. Traders sold the loonie on worries that the red-hot Chinese economy could slow, and hence dampen expansion in commodity-rich Canada.

But the shocker for markets was Canadian consumer price data for December, which showed inflation was much softer than analysts' expected. The Bank of Canada sets its key policy rate to achieve inflation of 2%.

Headline inflation dropped 0.3% month over month, while the year-over-year rate stands at 1.3% - a big swing from negative readings in September but below the expected 1.6% rate. Meanwhile, core inflation, which removes volatile-priced items such as energy, also fell 0.3% in the month, leaving the year-over-year rate unchanged from November at 1.5%.

Six of the eight broad consumer-price categories measured by Statistics Canada were either flat or down in December.

"Inflation is subdued with a capital ‘S,'" said David Rosenberg, chief economist at asset manager Gluskin Sheff + Associates of Toronto. "These are hardly [inflation] rates that will cause the Bank of Canada to tighten policy prematurely."

Driving prices lower was a bid by retailers to lure weary consumers to spend. Prices for clothes, furniture and appliances sustained their biggest single-month drop on record, said Douglas Porter, deputy chief economist at BMO Capital Markets.

"This says more of the competition among retailers than anything else," he said, adding prices have mostly dropped on discretionary goods, which are the type consumers delay buying in uncertain economic times.

Sales volumes have returned to pre-recession levels, but Mr. Porter said the rate of sales growth "is not blowing the door down" as in previous recoveries. Retail sales are expected to advance between 2.5% and 3% in the fourth quarter, which would be down from the 3.1% gain recorded in the preceding three-month period.

In its interest-rate statement on Tuesday, the Bank of Canada acknowledged core inflation was ahead of expectations. Nevertheless, it indicated it was comfortable with keeping its key rate at a record-low 0.25% until at least July, which it has conditionally pledged to do, as a result of "persistent strength" in the Canadian dollar, which makes imports cheaper; weak U.S. demand; and the large amount of economic slack, which includes unused industrial capacity and relatively high levels of unemployment.

The central bank is scheduled to expand on its rate statement and economic outlook with the release of its quarterly monetary policy report Thursday.

Mr. Rosenberg told clients in a note Wednesday he reckons the Bank of Canada would not begin raising its target rate until mid-2011 "at the earliest."

He said historically the central bank has resisted tightening until the economic slack is nearly absorbed and the unemployment rate drops 150 basis points from its peak. (That peak - 8.7% - was set last August. The jobless rate is now 8.5%.)

"Unless the bank wants to be pre-emptive, which is highly unlikely when it acknowledges that ‘the recovery continues to depend on exceptional monetary and fiscal stimulus' ... then to go and raise rates before the middle part of 2011 would be totally inconsistent with its own forecast as it stands right now," Mr. Rosenberg said

Bank lowers slightly growth forecast for 2009 and 2010, but keeps interest rates unchanged

OTTAWA - The global recovery is under way but expansion of the Canadian economy remains dependent on government support and historically low interest rates, the Bank of Canada said today.

As expected, the central bank again pledged to keep its trendsetting policy rate at the lowest practical level of 0.25 per cent until mid-2010, saying the economy at the moment is performing slightly worse than it projected three months ago.

To reinforce the commitment, the bank said it was extending its emergency lending instruments to April, with maturity dates beyond June, at the low policy rate.

The announcement contained few surprises for markets, but the tweaking of growth rates — although at the margins — was somewhat unexpected.

“Economic growth in Canada resumed in the third quarter of 2009 and is expected to have picked up further in the fourth quarter,” bank governor Mark Carney and his policy-making council said in an accompanying note.

“Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009.”

Carney had been among the most bullish of forecasters for the economy this year, although by historic standards, even Carney was not anticipating a robust recovery.

Now the bank says the economy likely contracted by 2.5 per cent last year, a little worse than the 2.4 per cent it had predicted in October.

As well, it says growth this year will be 2.9 per cent, one-tenth of a point less than it had previously forecast and more in line with the private sector consensus of 2.6 per cent.

The good news is that the economy will make the up ground in 2011, says the bank, with a growth rate of 3.5 per cent. It had earlier pegged next year’s growth at 3.3 per cent.

The bank’s message to Canadians is that although conditions are improving, strengthened by a global economy that is expanding faster than expected, the recovery still is dependent on “exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”

In Canada, the bank says the private sector won’t become the sole driver of domestic demand until 2011.

As has been the case throughout the recession, Canada’s recovery continues to be hampered by the slow pick-up in U.S. demand for Canadian products and the high Canadian dollar, which makes those exports less competitive.

That means Canada’s internal domestic economy, largely reflected in consumer spending and the hot housing market, will be the main engine of the recovery.

The bank noted that inflation has been rising faster than it anticipated, but appeared not to be overly concerned, especially with the large amount of slack in the economy.

Although economists forecast inflation likely hit 1.6 per cent in December, after being below zero through much of the summer and part of the fall, the bank said it still doesn’t believe inflation will return to the two-per-cent target until the third quarter of 2011, when it expects the economy to be firing on all cylinders.

The Canadian Press

Record home sales capping 2009 due to supply and demand, not bubble

By Sunny Freeman, The Canadian Press

TORONTO — Record home sales last month are based on low supply and high demand and are more likely to drop off this year than inflate a housing bubble that could threaten a fragile recovery, economists say.

A Canadian Real Estate Association report released Friday said December and the 2009 fourth quarter were the best periods on record for home resales, while prices also rose sharply from their year-earlier levels.

Meanwhile, strong demand continued to deplete the number of homes for sale and the estimated 5.6 months it would take to sell a house through the Multiple Listing Service in December was less than half the 12.3 months it would have taken a year earlier.

The number of total listings fell 22 per cent in December from the same 2008 period and 12.6 per cent for the year.

The imbalance in supply and demand drove the national average price of homes to $337,410 in December, 19 per cent higher than in December 2008, but slightly lower than the 2009 average of $348,840.

Douglas Porter, deputy chief economist at BMO Capital Markets said while high prices caused by strong demand and weak supply could pose a risk to the fragile recovery, he is not willing to jump on the “bubble bandwagon” yet.

A bubble occurs when prices increase without any sound underlying fundamentals, he explained, and that’s not the case in Canada’s housing market, which is closely tied to changing interest rates and economic fundamentals.

“We still do have a relatively tight supply situation and exceptionally low interest rates and a mild recovery in the economy, so there are a lot of good reasons why home prices are rising.”

“What we’re seeing is almost textbook recovery,” he said. “The speed of the recovery is mind-boggling, the fact that housing is leading the recovery is really not a surprise... it’s exactly what you’d expect to happen.”

Finance Minister Jim Flaherty said Friday he does not see a housing bubble yet, but he noted the government has many tools at its disposal — from raising down payment requirements on insured mortgages, to lowering amortization periods and urging the banks to be more cautious in their lending — to prevent such a thing from happening.

“We don’t want to have a group of house purchasers who purchased houses now at insured mortgages at relatively low rates who would not be able to manage them if rates were to increase later on,” Flaherty said in an interview with Business News Network, a cable TV business channel in Toronto.

“I’ve looked at the numbers with CMHC,” he added. “We’re monitoring it. I do not see evidence of a bubble right now, but we’re going to keep watching it. There are some steps we can take that we will take if it’s necessary.”

The association said 27,744 units were sold across Canada in December, up 72 per cent from the same month in 2008. The year-earlier period saw the lowest sales in a decade in the wake of a global credit crunch and the start of the recession in Canada.

The Kitchener-Waterloo Real Estate Board set a record in December with 356 sales. The Real Estate Board of Cambridge recorded 150 sales, up 60 per cent from the same month a year earlier.

December also marked the end of the strongest quarterly sales volume ever measured by CREA, with 137,957 homes sold over three months on a seasonally adjusted basis — up 2.6 per cent from the previous record set in the first quarter of 2007.

“CREA’s latest statistics will no doubt spark further bubble talk amongst the usual suspects,” said the association’s chief economist Gregory Klump. “(But) cooler heads recognize that many of the recent gains reflect temporary factors that could fade by summer.”

The 59 per cent year-over-year fourth quarter gain drove last year’s annual sales volume above 2008 levels, but the number of transactions last year was 10.7 per cent below the peak reached in 2007.

“The extraordinary decline in activity one year ago and subsequent rebound, particularly for higher-priced real estate, is stretching current year-over-year comparisons,” said Klump.

Klump believes the market will balance out in 2010 because consumer demand will be met with a supply side rise as the number of new homes increases and cautious homeowners become confident about selling, which will add more homes on the market and help drive prices down.

Porter said Friday’s report signals that Canadians have regained their confidence in the economy and the surge in demand is beginning to be met with a serious supply response, citing a notable uptick in December housing starts.

“Builders had been very cautious and they’re only now starting to crank up their output again, but even so, the comeback in new housing starts has been much more modest than the rebound we’ve seen in sales,” he said. “And people who own homes have also been a little reluctant to put their house up for sale because of the broader uncertainty that we’ve seen.”

He said that the demand in housing was most pronounced in B.C. and Ontario, where home buyers might be hoping to beat the introduction of the HST, the harmonized sales tax which is set to replace provincial taxes in those provinces later this year.

The Bank of Canada indicated last week that it was premature to be talking about a housing bubble in Canada and said recent house price increases are in line with supply and demand fundamentals.

The bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates.

A CIBC forecast released Thursday indicated that the hot housing market will continue to drive economic growth during the first half of 2010, but will come to a screeching halt in the second half of the year, when interest rates are expected to rise.

The Canadian Press

Canada to press G7 finance ministers to reform financial system

By Julian Beltrame

OTTAWA — Canada believes time is running out for meaningful reforms to the world financial system to avert future economic meltdowns and will push for movement on the issue at next month’s G7 finance ministers meeting in Iqaluit.

Canadian officials briefing reporters on what is likely to be the most unusual G7 meeting ever say signs of hubris are again apparent among many of the global financiers blamed for plunging the world into recession.

Finance Minister Jim Flaherty is hoping that holding the meeting in isolated Iqaluit in the middle of winter will concentrate minds and lead to a renewed commitment to implement reforms.

The officials, speaking on background, said Monday that Flaherty is concerned that the momentum for reform of the world’s financial and banking sectors is waning as the economic crisis recedes.

The United Kingdom has imposed a punitive tax on executive bonuses, and the United States is also proposing to tax its largest banks. But system reform, such as ensuring risk is properly assessed, still remains to be implemented.

Canada believes the G7 countries have the primary responsibility for ensuring abuses are not repeated since the crisis originated within the world’s leading economies, the officials said.

The Iqaluit meeting in early February will be the first since the larger Group of 20 forum was declared the pre-eminent body for dealing with the world’s economic and financial problems.

And it will be unusual not just for its location, but also for its form.

Unlike past meetings, there will be no final communique issued of policies adopted in principle by the ministers and central bank governors.

By making the meetings more informal, the officials say Flaherty hopes they will be more frank and useful and prove that the G7 club is worth preserving.

One official said the necessity of producing a communique, or final concluding text, tends to concentrate discussions along producing unanimity. Freed of the need to produce a text, ministers and governors can engage in a more freewheeling, frank and political discussion.

One of those discussions will actually be held by a roaring fire, the official said.

The future of the G7, whether it will remain as a separate institution or becomes a subgrouping of the larger G20, remains up in the air and will be an issue before the ministers and governors in Iqaluit.

One reason it’s important to Canada that the G7 remain an influential institution is that collapsing the group into the larger G20 dilutes the country’s influence at the top table.

The officials say the Feb. 5-6 meeting in Iqaluit will tackle the gamut of issues dealing with the global economy, including ensuring the recovery is sustainable, exit strategies from government stimulus spending, global imbalances, currency exchange rates and trade.

One agenda item was added in the past week — Haiti — since the G7 countries are the biggest donors to the earthquake-devastated nation’s relief effort.

Flaherty has indicated that with relief efforts underway, the G7 meeting would be an ideal time to begin exploring how countries can help Haiti reconstruct and recover from the disaster.

The meeting’s unusual location, above the treeline in the middle of winter, has also necessitated contingency plans in case of inclement weather.

Should Iqaluit become inaccessible from air for the Feb. 5-6 meeting, the conference will be switched to Ottawa, officials said.

BoC sees no housing bubble yet

Paul Vieira, Financial Post Published: Monday, January 11, 2010

Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2429324#ixzz0cP2yMcAq
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OTTAWA -- The Bank of Canada Monday dismissed talk of a housing bubble in Canada as "premature," warning that calls for higher interest rates now in an effort to temper real-estate markets would be akin to "dousing" the economic recovery with cold water.

It delivered this message through a speech in Edmonton, and marked the first time the central bank tried to address directly myriad concerns that the country's real-estate market is appreciating too quickly, too soon.

"Recent house price increases do not appear to be out of line with the underlying supply-demand fundamentals," David Wolf, an advisor to the governor, Mark Carney, said in prepared remarks.

Data indicate existing-home prices have climbed 21% from a year ago while sales volume has surged 41%, prompting observers to indicate a housing bubble was underway due to record-low interest rates. New figures released Monday suggest housing starts rose 5.9% to a seasonally adjusted rate of 174,500 units in December, easily beating economists' average forecast of 160,000.

Mr. Wolf said housing bubbles, such as the one the United States experienced last decade, are usually fuelled by credit expansion, as borrowers and lenders "take false comfort from exaggerated house prices."

The current rally, during which existing-home sales have climbed more than 40% on a year-over-year basis as of November and prices have surged nearly 20%, is largely due to what Mr. Wolf described as "temporary factors," such as low interest rates and pent-up demand. Further, some buying has been "pulled forward," as people realize this is a once-in-a-lifetime opportunity to acquire property with historically cheap financing.

These factors cannot continue to drive home sales and prices, Mr. Wolf said.

"Thus, we see the housing market as requiring vigilance, but not alarm," said Mr. Wolf, who delivered the speech on behalf of deputy governor Timothy Lane.

He said the central bank is monitoring housing closely, and warned of the implications of using monetary policy to cool the market.

"If the bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession. As a result, it would take longer for economic growth to return to potential and for inflation to get back to target," he said.

The Bank of Canada has pledged to keep its benchmark rate at a record low 0.25% until July in an effort to foster growth and bring inflation to the central bank's preferred 2% target (which is expected in the second half of 2011).

Instead, regulatory changes - from changes to banks' capital requirements to the terms and conditions for mandatory mortgage insurance - are the preferred route to deal with housing-market excess, should concerns mount. This largely repeats the view forwarded last week by Ben Bernanke, chairman of the U.S. Federal Reserve.

Jim Flaherty, the Minister of Finance, has indicated he is concerned about the record levels of household debt and could introduce regulatory changes to address it, such as more stringent requirements to get mortgage insurance, which is a key condition required before banks agree to extend financing for a home purchase. Analysts say such a change could be included in the next federal budget, to be tabled in early March.

Economists at Scotia Capital said in a note the speech suggested the central bank was becoming "uncomfortable" with the "lightning-rod bubble talk" in the marketplace.

Nonetheless, the central bank "flagged the temporary nature of many of the factors driving recent strengths," they said.

Michael Gregory, senior economist at BMO Capital Markets, said mortgage growth has been rapid - around 7% on a year-over-year and three-month basis - but remains in single-digit territory and below historical peaks. Still, "a few more months of rapid credit growth and the [central bank's] conclusion may be very different."

pvieira@nationalpost.com

December job losses reality check

8.5% unemployed

Paul Vieira, Financial Post

OTTAWA - Financial markets were dealt a reality check yesterday with disappointing December jobs data from Canada and, more notably, the United States signalling an uneven and choppy recovery, and prompting U.S. analysts to scale back expectations on rate hikes.

Analysts noted, however, that an improving trend is definitely emerging in both countries. Furthermore, some reckon unemployment levels in Canada may have peaked.

Statistics Canada said the economy lost 2,600 jobs last month, but the unemployment rate remained unchanged at 8.5%. Markets expected 20,000 new jobs in December, after an off-the-chart 79,000 gain in November.

"It's looking more believable by the day that the 8.7% jobless rate in August will mark the peak for the cycle, far below past recession highs -- 13% in 1982 and 12.1% in 1992 -- and no worse than the average unemployment rate in Canada over the past 30 years," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Stewart Hall, economist at HSBC Securities Canada, said there was "palatable" disappointment given the big gain in November. But the fact the economy held onto most of those jobs "is in and of itself fairly significant," he said.

With the December figures in hand, they suggest the Canadian economy shed 240,000 jobs in 2009 -- the bulk of which occurred in the first half of the year. In the last five months of the year, the economy generated an average of 20,000 new jobs per month.

Mr. Hall said average monthly gains of 20,000 are likely in the offing, as this recovery is likely to mirror the one following the recession of the early 1990s. "One characterized by some jobs growth followed by consolidation. Not terrific, but infinitely preferable to the experience of the previous year."

The Canadian recession ended in the third quarter with meagre annualized growth of 0.4%, as domestic strength was offset by a weak export sector that was hampered by a strong Canadian dollar and weak U.S. demand. Economists estimate growth in the final three months of 2009 to register between 3% and 4%.

The Bank of Canada is expected to begin raising its benchmark lending rate in the third quarter. There is less confidence about near-term tightening from the U.S. Federal Reserve Board.

The U.S. Bureau of Labor Statistics said non-farm employment in December fell 85,000, compared to expectations for no change. The unemployment rate was unchanged at 10%, although analysts note it was due to a plunge in the labour force, as people stopped looking for work.

"Firms are still bent on boosting productivity and remain cautious about hiring," analysts from London-based Capital Economics said of the U.S. data.

The yield on the two-year U.S. Treasury note -- a market gauge of interest rate expectations -- dropped yesterday below 1%, indicating analysts believe the likelihood of a Fed rate hike has been "pushed out for a few more months," Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays PLC in New York, told Bloomberg News.

The U.S. bureau noted, however, that during 2009 monthly job losses moderated, from an average 691,000 in the first quarter to 69,000 in the fourth quarter. Also, the bureau revised data for November indicating the U.S. economy created 4,000 jobs -- the first monthly gain in more than two years.

Still, Avery Shenfeld, chief economist at CIBC World Markets, said the 10% U.S. jobless rate masks the "true extent" of labour slack, "as it ignores those working part-time involuntarily [and] those who gave up looking for work."

As a result, the Fed is unlikely to raise rates for some time.

Bad numbers, but good news

Hope remains despite rise in U.S. jobless figures

Ian McGugan, Financial Post

Wall Street is looking for a happy ending to the Great Recession. Now if it can just get the facts to agree.

Many forecasters had expected yesterday's release of U.S. payroll data to show that the world's largest economy was no longer destroying jobs. Instead, the U.S. Labor Department reported that nonfarm payrolls continued to shrink, shedding 85,000 jobs this past month.

There were bright spots in the lacklustre report. Most notably, November figures were revised upward to show that the economy gained a handful of jobs during that month. It was the first time in two years that U.S. payrolls have managed to eke out any increase.

Overall, though, the U.S. unemployment rate remains stubbornly high at 10% of the workforce. About 15 million people are unemployed, double the number of two years ago.

The continuing pace of job destruction should raise concerns about the gap between the sunny views of the recovery propounded by Wall Street and the darker reality that appears to be prowling Main Street. While stocks are surging, the real economy isn't.

This is distinctly unusual. Stocks usually suffer during periods of rising unemployment because unemployment typically goes hand-in-hand with falling corporate profits. Declining profits make stocks less attractive.

In this downturn, though, stock markets have taken off like a rocket despite rising unemployment. The S&P 500 has advanced by 70% since March, although about two million jobs have been destroyed during those months.

One force driving stock prices higher is massive stimulus spending by government. Another is near-zero interest rates, which make the future stream of dividends from stocks that much more valuable.

But stimulus spending and low interest rates can't keep a stock market up forever. Japan provides the ultimate proof of that. Despite massive government spending and near zero interest rates for much of the past two decades, the Nikkei stock index trades for about a quarter of what it did back in the glory days of the 1980s.

Based on the ratio of its current price to its earnings over the past 10 years, the U.S. stock market is trading at valuations well below its dot-com levels, but about 30% above its average levels. Stocks could take a tumble if the unemployment picture -- and the profit picture -- don't start to recover soon.

Many traders believe such a recovery is well in progress. First-time claims for unemployment benefits have been dwindling, and job losses have grown steadily smaller since the darkest days of early 2009, when nearly 700,000 U.S. workers were being thrown out of work each month.

The small gain of 4,000 jobs in November is invisible compared to the entire U.S. workforce of about 150 million people, but any jobs number with a plus sign these days constitutes a victory in the recovery story. "The fact that positive job creation occurred in November 2009 is a very important fact, one that should not be ignored despite the headline print in December," says Ian Pollick of TD Securities.

Another positive sign is the continued increase in temporary help services, which added 47,000 positions in December. This was the fifth-consecutive monthly increase in the sector and suggests that employers are feeling out opportunities, although they're still reluctant to hire full-time workers.

A further jolt of good news may be in store thanks to the U.S. Census. The once-a-decade count of every American takes place on April 1 and hiring for the survey will provide as many as a million jobs during the first half of 2010.

Derek Holt and Karen Cordes of Scotia Capital believe the combined effects of census hiring and the natural recovery process could propel job creation in the U.S. far past expectations and create two million jobs in 2010. While those new jobs would only partially replace the seven million jobs that have been lost over the past couple of years, they would at least signal an end to the current downturn.

But there is the risk of a double-dip recession if Congress and the Federal Reserve decide to remove stimulus too early. Holt and Cordes, as well as Nobel-winning economist Paul Krugman, worry that any sudden improvement in the jobs numbers could lead to a premature hike in interest rates and withdrawal of stimulus.

If there is any undeniably good news in yesterday's disappointing numbers, it's that nobody will be agitating to hike interest rates or remove stimulus anytime soon. The Great Recovery remains a work in progress.

20,600 Total U.S. jobs lost among women 25 and over.

13,400 Full-time U.S. jobs lost among women 25 and over.

Real estate market expected to remain strong in first half of 2010

David Paddon, THE CANADIAN PRESS
TORONTO - Canada's residential real estate market is expected to remain unusually strong through the first half of this year after a strong finish to 2009, according to a survey published Thursday by Royal LePage.

The Royal LePage analysis is consistent with other recent reports on the state of the Canadian real estate market, which has rebounded over the past 12 months after sales dried up in late 2008 and hit a multi-year low in January 2009.

The Canadian market's sudden plunge was sparked by a credit crunch that originated in the U.S. housing and lending industries - eventually spreading globally, causing a worldwide recession in the late summer and early fall of 2009.

However, the Canadian real estate market has been much quicker to recover than its American counterpart, in part because of a more stable banking industry, historically low interest rates and improving consumer confidence.

Royal LePage executive Phil Soper says Canada's real estate market enters 2010 with "considerable momentum from an unusually strong finish to the previous year."

The stimulus effect of low borrowing costs has contributed to a sharp rise in demand that has driven activity to new highs, he said in a statement.

Royal LePage says house prices appreciated in late 2009, with fourth-quarter price averages higher than in the fourth quarter of 2008.

The average price of detached bungalows rose to $315,055 (up six per cent), the price of a standard two-storey home rose to $353,026 (up 5.2 per cent), and the price of a standard condominium rose to $205,756 (up 6.4 per cent).

Regions that saw the strongest declines during the recession are now showing marked gains. Those regions include Toronto and the Lower Mainland, B.C.

Vancouver, which is frequently Canada's most expensive real estate market, experienced a particularly robust quarter, with home prices rising across all housing types surveyed.

"No other sector of the economy has been as highly affected by economic stimulus as housing," said Soper.

"As consumer confidence has improved, Canadians have shown a lingering reluctance to acquire depreciating assets such as consumer durables, but have embraced the opportunity to invest in real property."

Royal LePage estimates that Vancouver's real estate prices will rise a further 7.2 per cent this year, although February may be soft because of the Olympic Winter Games that will be held in the city and nearby Whistler, B.C.

Detached bungalows in Vancouver sold for an average of $828,750 in the fourth quarter, up 11.4 per cent from the same period last year. Standard condominiums in Vancouver went up 11.8 per cent year-over-year to an average of $452,750. Prices of standard two-storey homes in Vancouver rose 9.6 per cent year-over-year, selling at $917,500.

In Toronto, the average price of a standard condo rose 2.9 per cent to $309,316, detached bungalows rose 9.9 per cent to $446,214 and standard detached homes increased 3.5 per cent to $564,175.

In Montreal, the average price of a detached bungalow rose to $245,125 (up 3.1 per cent; a condo increased to $216,667 (up 16 per cent) and a two-storey house increased 12.3 per cent from a year earlier to $345,789, Royal LePage said.

The Greater Montreal Real Estate Board reported Thursday that the number of sales last year increased 41,802, up three per cent from 2008. The median price of a single-family home was $235,000 last year, up four per cent from 2008.

"Although sales decreased the first four months of 2009, Montreal's real estate market rebounded and finished the year on a positive note," said Michel Beausejour, the Montreal board's chief executive.

The group that represents Toronto-area realtors reported Wednesday that there were 87,308 transactions last year through the Multiple Listing Service, a 17 per cent increase over 2008.

In December, there were 5,541 sales in the Greater Toronto Area (average price $411,931), up from 2,577 sales in December 2008 (average price $361,415), according to the Toronto Real Estate Board.

The Toronto board also said the number of sales of existing homes rebounded in the latter half of 2009 after a slow start at the beginning of last year.

Royal LePage's average price estimates for other Canadian cities include:

-St. John's, N.L.: Detached bungalow, $217,167 (up 14.3 per cent); standard two-storey house $298,833 (up 14.1 per cent).

-Halifax: Detached bungalow, $238,000 (up 10.7 per cent); standard two-storey homes, $265,333 (up 1.8 per cent).

-Charlottetown: Detached bungalow, $160,000 (up 1.9 per cent); standard two-storey $195,000 (up 3.7 per cent).

-Saint John, N.B.: Detached bungalow, $228,000 (up 1.3 per cent); standard two-storey $299,000 (up 1.5 per cent).

-Moncton, N.B.: Detached bungalow, $152,300 in the fourth quarter (up 1.5 per cent); standard two-storey home, $131,000 (up 4.0 per cent)

-Fredericton: Detached bungalow, $182,000 (up 12.3 per cent); standard two-storey, $210,000 (unchanged).

-Ottawa: Detached bungalow, $332,417 (up 3.4 per cent); standard two-story home $331,917 (up 3.7 per cent).

-Winnipeg: Detached bungalow, $241,650 (up 9.9 per cent); standard two-storey home $275,500 (up 10 per cent).

-Edmonton: Detached bungalow, $299,286 (down 0.7 per cent); standard two-storey home, $340,557 (down 1.2 per cent)

-Calgary: Detached bungalow, $412,478 (up 0.5 per cent); standard two-storey home, $427,067 (up 2.3 per cent).

Have a great weekend!

Bernanke says regulation is first defence against bubbles By Jeannine Aversa

WASHINGTON — Stronger regulation is the best way to prevent financial speculation from getting out of hand and throwing the U.S. economy into a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday.

But he didn’t rule out higher interest rates to stop new speculative investment bubbles from forming.

The Fed chief’s remarks were his most extensive on the subject since the housing market’s tumble led to the gravest financial crisis since the Second World War — and perhaps the worst in modern history, in his view.

Critics blame the Fed for feeding that speculative boom in housing by holding interest rates too low for too long after the 2001 recession.

But Bernanke, in a speech to the American Economic Association’s annual meeting in Atlanta, defended the central bank’s actions. Extra-low rates were needed to get the economy and job creation back to full throttle after the Sept. 11 attacks and accounting scandals that rocked Wall Street, he said.

He said the direct links were weak between super-low interest rates and the rapid rise in house prices that occurred at roughly the same time. The stance on interest rates during that period “does not appear to have been inappropriate,” he said.

Still, the enormous economic damage from the housing bust — the longest and deepest recession since the 1930s and double-digit unemployment — shows how important it is to guard against a repeat, Bernanke said.

“All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs,” he said.

“However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool,” Bernanke added.

Speculative excesses are not easy to pinpoint in their early stages, he said, and using higher interest rates to combat them can hurt the economy.

For instance, rate increases in 2003 and 2004 to constrain the housing bubble could have “seriously weakened” the economy just when a recovery from the 2001 recession was starting, Bernanke said.

To help the country emerge from that recession, the Fed under then-chair Alan Greenspan cut its key bank lending rate from 6.5 per cent in late 2000 to 1 per cent in June 2003. It held rates at what was then a record low for a year. It’s this action that critics blame for feeding the housing speculation.

Bernanke, however, said the expansion of complex mortgage products and the belief that housing prices would keep rising were the keys to inflating the housing bubble. As a result, lenders made home loans to people that they couldn’t afford.

The Fed in 2005 did crack down on dubious mortgage practices and the type of mortgages blamed for the crisis. He acknowledged that these efforts “came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

Still, Bernanke said the lesson learned from the crisis isn’t that regulation is ineffective but that regulation “must be better and smarter.”

However, the Fed’s regulatory lapses and its failure to spot problems leading up to the crisis have spurred efforts in Congress to rein in the Fed’s powers and subject it to more oversight. Bernanke, who has been tapped by President Barack Obama to a second term as Fed chief, faces a contentious confirmation in the Senate.

When the Fed meets later this month, it is expected to keep its key bank lending rate at a record low, near zero. The big question is whether the Fed will provide clues at that time about when it will need to start raising rates to prevent inflation from taking off.

Some analysts worry that the Fed, which has held rates at record lows since December 2008, could be fuelling a new speculative period and potentially a future economic crisis.

Looking back, Bernanke suggested the Fed might have underestimated the full force of the recession, which struck in December 2007. “It turns out the recession was worse than we thought at the time,” he said.

After four straight losing quarters, the economy finally grew from July through September last year. Much of that growth, though, came from government-supported spending on homes and cars. There’s concern about how vigorous the recovery will be once government supports are removed later this year.

The Associated Press