Bond rates have increased 37 points in the month of May. Originators should prepare for higher interest rates.
RBC Capital Markets is now predicting no rate cut by the Bank of Canada on June 10, citing, higher commodity prices, higher currency, and rising inflation since the last rate cut on April 22. Rates have already started to increase in the Australian market, which typically trends ahead of the Canadian market.
Take advantage of our market leading fixed rates….Before it is TOO LATE!!.
....rates can go up in a HURRY and normally quicker than they go down….
· TSX -111.45
· Dow +52.19
· Dollar +.08c to $101.10
· Oil -4.41 to $126.62US per barrel
· Gold -23.30US to $881.70US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
Canadian Bonds Fall Amid Speculation Banks to Stop Rate Cuts
By Haris Anwar
May 29 (Bloomberg) -- Canada's bonds declined, pushing the two-year's yield to the highest in more than three months, amid speculation the Bank of Canada and U.S. Federal Reserve will stop cutting borrowing costs.
Government securities fell for a fourth day as interest- rate futures suggested traders were reducing bets on rate cuts. Canada's central bank lowered the target lending rate by a half- percentage point to 3 percent on April 22 to shield the economy from a U.S. economic slowdown. Borrowing costs have been lowered four times since December from 4.5 percent.
``The Bank of Canada won't cut rates on June 10,'' said Mark Chandler, a senior fixed-income strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank. ``We can see a further upward pressure on short-term yields if that is the case. Higher commodity prices, a strong currency and rising inflation are going against the case for more rate cuts.''
The yield on the two-year Canadian government bond rose 2 basis points, or 0.02 percentage point, to 3.12 percent at 12:49 p.m. in Toronto. It reached 3.16 percent, the highest since Feb. 26. The yield has increased 37 basis points this month.
The price of the 3.75 percent security due in June 2010 fell 5 cents to C$101.23.
10-Year Yield
The 10-year government bond's yield increased 3 basis points to 3.72 percent. The price of the 4 percent security due June 2017 fell 23 cents to C$102.16. The yield is up 13 basis points this month.
Fed Bank of Dallas President Richard Fisher said the central bank will raise the benchmark interest rate if inflation expectations increase. Canada ships about 80 percent of its exports to the U.S.
Bankers' acceptances futures contracts for September rose to 2.99 percent, from 2.64 percent on May 20. The futures have settled at a three-month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.
``The Bank of Canada can still afford to cut rates, but the magnitude of the cutting is likely to be scaled back,'' said Eric Lascelles, chief economist and rates strategist at TD Securities Inc. in Toronto, a unit of Canada's second-largest bank. ``The bank may signal a pause after a 25-basis-point cut on June 10. Unattractive yields and capital losses'' are making the government bond market an unfriendly place. ``The recent sell-off may be difficult to fight.''
Futures Contracts
Futures contracts on the Chicago Board of Trade show 98 percent odds the Fed will keep borrowing costs at 2 percent during its next meeting on June 25. The odds were 94 percent yesterday.
The 10-year bond yielded 60 basis points more than the two- year security, down from 109 basis points on March 17.
Canada's two-year bond yield will touch 2.90 percent by the end of this year, with the 10-year yield reaching 3.82 percent, according to the median forecast in a Bloomberg survey.
Canadian government bonds have returned 2.7 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries during the same period returned 1.5 percent.
Canada's dollar rose 0.2 percent to 98.82 cents per U.S. dollar, from 99.01 cents yesterday. One Canadian dollar buys $1.0120. Canada's dollar has strengthened 2 percent so far this month, making it the best performer against the 16 most-active currencies.
U.S. Economy
The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record. The 0.9 percent gain in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent.
``As the market becomes less concerned about the downside risk in the U.S., that would also suggest less downside for the Canadian side,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``That bodes well for the Canadian dollar.''
Bank of America predicts Canada's currency will peak at 98 cents per U.S. dollar in the second quarter and decline to C$1.03 in the first quarter of 2009.
The loonie, as the currency is known because of the image of the bird on the one-dollar coin, has traded near parity with its U.S. counterpart this year after climbing 17 percent in 2007. It touched a 2008 low of C$1.0379 on Jan. 22, and a high of 97.12 cents per U.S. dollar on Feb. 28.
The currency reached 98.20 cents per U.S. dollar on May 21, the strongest since March 14.
Canada's dollar will decline to C$1.08 by the first quarter of 2009, according to the median forecast of 38 analysts in a Bloomberg survey
Friday, May 30, 2008
Thursday, May 29, 2008
Financial Update
There was barely a whimper when the price of oil raced passed key milestones this decade – $50 (U.S.) a barrel, $80, even $100.But with oil gaining strength at more than $130 a barrel, “shock” and “panic” have suddenly entered the popular lexicon. See article “A NEW KIND OF ENERGY CRISIS” below.
· TSX + 166.49
· Dow +45.68
· Dollar remains above par +.35c to $101.02
· Oil +$2.18 to $131.03US per barrel
· Gold -7.40US to $900.500US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html <http://www.bankofcanada.ca/en/rates/bonds.html>
CIBC loses more than $1-billion TARA PERKINS Globe and Mail Update May 29, 2008 at 9:42 AM EDT
Canadian Imperial Bank of Commerce, the last big bank out of the gate with its second-quarter results, said Thursday it lost $1.11-billion, down from a profit of $807-million a year ago.
Bankers see signs of credit crunch easing
JOHN PARTRIDGE AND TARA PERKINS Globe and Mail Update
Both the Bank of Canada and one of the country's major commercial banks say the credit crunch is easing, although analysts argue it depends on how you measure the situation.
The central bank said Tuesday market conditions have improved, prompting a decision to cut by half the amount of cash it has been regularly lending commercial banks to keep the financial system liquid.
“The decision to reduce the amount of term financing outstanding reflects the general improvement in market conditions since the end of April, including funding conditions out to three months,” the central bank said in a statement.
Separately, Bank of Montreal chief executive Bill Downe said there are signs the impact of the crunch, which began with the U.S. subprime mortgage crisis last summer and has stung financial institutions around the world, is dissipating.
“Our outlook is improving as there are indications that concerns are easing in credit markets as credit spreads are trending towards more normal levels and we are encouraged by these developments,” Mr. Downe said as BMO reported a dip in profit for the second quarter.
Bank of Montreal said the global markets that banks tap for funds have improved in recent weeks. Spreads on investment grade corporate debt are decreasing, while the gap between the rates at which banks borrow money and treasury bill spreads have also been shrinking.
Also helping the outlook is the continuing support of central banks, which have been injecting liquidity into the market, BMO said.
The Bank of Canada said it will make $1 billion available in the next 28-day purchase and resale agreement auction when the previous $2 billion injection matures on May 29.
The central bank has been rolling over $4 billion in liquidity injections in $2-billion instalments on a regular basis since the beginning of the year.
Bank governor Mark Carney said last week the turbulence which hit credit markets last summer was easing, although he said he was not ready to declare the crisis over.
The bank said future roll-overs will be reviewed in light of conditions in financial markets.
Financial services analysts agreed the narrowing spreads between corporate and government bonds is a good sign.
However, Mario Mendonca at Genuity Capital markets in Toronto also offered a counterpoint.
If instead of looking at credit spreads, one looks at the “real economy,” the picture is nowhere near as bright, particularly the U.S. housing market, where the crunch began and which continues to deteriorate.
“So I think there are two sides to this,” Mr. Mendonca said. “You could look at what the bond market is saying in terms of credit spreads and call it ‘easing,' or you could look at the real economy and say ‘no, it isn't.'”
Michael Goldberg at Desjardins Securities expressed a similar view. “House prices in the U.S. are [still] falling, and that's not good,” he said.
However, it does look as if liquidity issues are “getting to be a little less severe,” and this means that in the second half of this fiscal year, Canada's banks will likely see a return to a more normal credit cycle “whose severity depends on how deep the economic downturn in the U.S. is.”
With files from The Canadian Press
A new kind of 'energy crisis'
Despite pain of high prices, there are no shortages or lineups
BARRIE MCKENNA AND RICHARD BLACKWELL From Thursday's Globe and Mail
There was barely a whimper when the price of oil raced passed key milestones this decade – $50 (U.S.) a barrel, $80, even $100.
But with oil gaining strength at more than $130 a barrel, “shock” and “panic” have suddenly entered the popular lexicon.
Ominous comparisons are being made to the devastating oil jolts of the 1970s. And a global economy that once seemed immune to expensive oil is getting antsy.
Sometimes violent protests swept across Europe and Asia this week. Even in the United States, where cars are a religion, Americans are driving less for the first time since 1979, spurning SUVs and embracing public transit.
Hundreds of truck drivers protested in London this week, adding their voices to global worries about rising gas prices.
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Warning that the United States is facing “a true energy crisis,“ Dow Chemical Co. chairman and chief executive officer Andrew Liveris said Wednesday that the chemical maker is raising prices by up to 20 per cent to cope with a quadrupling of its energy and fuel costs since 2002.
“For years, Washington has failed to address the issue of rising energy costs and, as a result, the country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy,” Mr. Liveris said.
He complained that U.S. industry is losing ground to competitors abroad and is facing “demand destruction” at home. But is this an energy crisis? That may be in the eye of the beholder.
Unlike a recession, which can be tracked and quantified, a crisis is about what an environment feels like. If you're an auto maker or an airline, you're in full crisis mode.
The sheer magnitude of the recent spike is impressive. Oil is up nearly 50 per cent this year and 85 per cent in the past two years. And adjusted for inflation, oil has never been this expensive.
But for pure shock value, the recent runup still pales compared to 1973.
That's when oil shot up nearly fivefold (to $12 a barrel from $2.50), or 1979, when the price of oil more than tripled (to $40 a barrel from $12).
There are no embargos, no shortages and no lack of crude to feed refineries – as there were in the 1970s – and this isn't yet a crisis, says Robert Ebel, a former energy specialist at the U.S. Central Intelligence Agency
The main threat now, he said, is inflation.
“It's basically a price problem,” said Mr. Ebel, a senior adviser at the Washington-based Center for Strategic and International Studies. “It's beginning to hurt. You see it at the grocery store. You see at the gas station. It's having an effect on every segment of the economy.
It's something people are going to have to adapt to.”
Unfortunately for truckers, consumers, manufacturers, even fishermen, experts such as Mr. Ebel insist there's little governments can do in the short term to relieve soaring prices. Reducing gas taxes, for example, would only boost demand and lead to even higher prices down the road.
In Britain, where truckers have blocked key highways in London this week to protest fuel prices, Prime Minister Gordon Brown warned that the “global economy is facing the “third great oil shock of recent decades.”
Writing in the Guardian newspaper, Mr. Brown called on world leaders to devise a “global strategy” at next month's Group of Eight meeting in Japan, including emergency talks with major oil-producing countries and a renewed push for efficiency and alternatives. “A global shock on this scale requires global solutions,” he said.
French President Nicolas Sarkozy called for a Europe-wide cut in fuel taxes as protesting fishermen blockaded an oil depot near Marseille.
In Canada, many executives are loath to describe the spike in prices as a “crisis,” although they acknowledge they're adjusting business plans to deal with the new reality.
“I don't know if I'd say it's a crisis, but it certainly keeps you awake,” said Colin MacDonald, CEO of Halifax-based Clearwater Seafoods Income Fund.
High fuel prices have driven up the cost of operating its fleet of fishing vessels. The company is trying to become more efficient by using larger and more efficient boats, he said, but fuel costs have still boosted the input price of its products by 30 to 40 cents (Canadian) a pound this year.
At the same time, the cost of moving processed fish to markets around the world is rising, because transport companies are adding surcharges to help defray their fuel costs. And supermarkets and restaurants are reluctant to pay more.
Tom Winkler, chief financial officer at the Vancouver Port Authority, said the volume of goods handled through the facility could be hurt if higher fuel prices – and resulting surcharges shipping companies charge their customers – result in fewer containers of goods moving from Asia to Canada.
But the squeeze hasn't yet reached a crisis point, he said.
Economists at CIBC World Markets predicted this week that higher oil prices will result in less movement of global freight as companies look for local suppliers of goods.
Other companies that are taking a major hit from high fuel prices are also trying to see a silver lining.
At bus line operator Greyhound Canada, high fuel prices “drive our costs up through the roof,” said Randy Padley, director of passenger services for Eastern Canada.
At the same time, however, high pump prices “also drive people from their vehicles to the bus, so it's a double-edged sword,” he said. And Greyhound has already raised ticket prices and will do so again if it becomes necessary.
At Big Rock Brewery in Calgary, high energy prices have a significant impact on transportation costs, CEO Edward McNally said. “The truckers have been raising prices for a year or more.”
But spiking energy costs are also affecting the price of aluminum cans, and indirectly making barley more expensive. Big Rock is hedging its barley purchases, which helps, but has not made similar moves with aluminum, Mr. McNally said.
It is also focusing on selling to local markets, where it has an advantage over big Canadian rivals and importers, which now pay sharply higher shipping costs to get their beer to market in Alberta.
· TSX + 166.49
· Dow +45.68
· Dollar remains above par +.35c to $101.02
· Oil +$2.18 to $131.03US per barrel
· Gold -7.40US to $900.500US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html <http://www.bankofcanada.ca/en/rates/bonds.html>
CIBC loses more than $1-billion TARA PERKINS Globe and Mail Update May 29, 2008 at 9:42 AM EDT
Canadian Imperial Bank of Commerce, the last big bank out of the gate with its second-quarter results, said Thursday it lost $1.11-billion, down from a profit of $807-million a year ago.
Bankers see signs of credit crunch easing
JOHN PARTRIDGE AND TARA PERKINS Globe and Mail Update
Both the Bank of Canada and one of the country's major commercial banks say the credit crunch is easing, although analysts argue it depends on how you measure the situation.
The central bank said Tuesday market conditions have improved, prompting a decision to cut by half the amount of cash it has been regularly lending commercial banks to keep the financial system liquid.
“The decision to reduce the amount of term financing outstanding reflects the general improvement in market conditions since the end of April, including funding conditions out to three months,” the central bank said in a statement.
Separately, Bank of Montreal chief executive Bill Downe said there are signs the impact of the crunch, which began with the U.S. subprime mortgage crisis last summer and has stung financial institutions around the world, is dissipating.
“Our outlook is improving as there are indications that concerns are easing in credit markets as credit spreads are trending towards more normal levels and we are encouraged by these developments,” Mr. Downe said as BMO reported a dip in profit for the second quarter.
Bank of Montreal said the global markets that banks tap for funds have improved in recent weeks. Spreads on investment grade corporate debt are decreasing, while the gap between the rates at which banks borrow money and treasury bill spreads have also been shrinking.
Also helping the outlook is the continuing support of central banks, which have been injecting liquidity into the market, BMO said.
The Bank of Canada said it will make $1 billion available in the next 28-day purchase and resale agreement auction when the previous $2 billion injection matures on May 29.
The central bank has been rolling over $4 billion in liquidity injections in $2-billion instalments on a regular basis since the beginning of the year.
Bank governor Mark Carney said last week the turbulence which hit credit markets last summer was easing, although he said he was not ready to declare the crisis over.
The bank said future roll-overs will be reviewed in light of conditions in financial markets.
Financial services analysts agreed the narrowing spreads between corporate and government bonds is a good sign.
However, Mario Mendonca at Genuity Capital markets in Toronto also offered a counterpoint.
If instead of looking at credit spreads, one looks at the “real economy,” the picture is nowhere near as bright, particularly the U.S. housing market, where the crunch began and which continues to deteriorate.
“So I think there are two sides to this,” Mr. Mendonca said. “You could look at what the bond market is saying in terms of credit spreads and call it ‘easing,' or you could look at the real economy and say ‘no, it isn't.'”
Michael Goldberg at Desjardins Securities expressed a similar view. “House prices in the U.S. are [still] falling, and that's not good,” he said.
However, it does look as if liquidity issues are “getting to be a little less severe,” and this means that in the second half of this fiscal year, Canada's banks will likely see a return to a more normal credit cycle “whose severity depends on how deep the economic downturn in the U.S. is.”
With files from The Canadian Press
A new kind of 'energy crisis'
Despite pain of high prices, there are no shortages or lineups
BARRIE MCKENNA AND RICHARD BLACKWELL From Thursday's Globe and Mail
There was barely a whimper when the price of oil raced passed key milestones this decade – $50 (U.S.) a barrel, $80, even $100.
But with oil gaining strength at more than $130 a barrel, “shock” and “panic” have suddenly entered the popular lexicon.
Ominous comparisons are being made to the devastating oil jolts of the 1970s. And a global economy that once seemed immune to expensive oil is getting antsy.
Sometimes violent protests swept across Europe and Asia this week. Even in the United States, where cars are a religion, Americans are driving less for the first time since 1979, spurning SUVs and embracing public transit.
Hundreds of truck drivers protested in London this week, adding their voices to global worries about rising gas prices.
Related Articles
Recent
* Motorists driving less; truckers driving slower <http://www.theglobeandmail.com/servlet/story/RTGAM.20080528.wroilcars29/BNStory/energy>
* Airlines brace for hectic summer <http://www.theglobeandmail.com/servlet/story/RTGAM.20080528.wroilplanes29/BNStory/energy>
* Cross-border shopping loses appeal <http://www.theglobeandmail.com/servlet/story/RTGAM.20080528.wroilspending29/BNStory/energy>
* Gasoline, oil to remain high, NEB says <http://www.theglobeandmail.com/servlet/story/RTGAM.20080528.wnebstaff0528/BNStory/energy>
* Total hit with setback in oil sands <http://www.theglobeandmail.com/servlet/story/RTGAM.20080529.wrtotal29/BNStory/energy>
Warning that the United States is facing “a true energy crisis,“ Dow Chemical Co. chairman and chief executive officer Andrew Liveris said Wednesday that the chemical maker is raising prices by up to 20 per cent to cope with a quadrupling of its energy and fuel costs since 2002.
“For years, Washington has failed to address the issue of rising energy costs and, as a result, the country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy,” Mr. Liveris said.
He complained that U.S. industry is losing ground to competitors abroad and is facing “demand destruction” at home. But is this an energy crisis? That may be in the eye of the beholder.
Unlike a recession, which can be tracked and quantified, a crisis is about what an environment feels like. If you're an auto maker or an airline, you're in full crisis mode.
The sheer magnitude of the recent spike is impressive. Oil is up nearly 50 per cent this year and 85 per cent in the past two years. And adjusted for inflation, oil has never been this expensive.
But for pure shock value, the recent runup still pales compared to 1973.
That's when oil shot up nearly fivefold (to $12 a barrel from $2.50), or 1979, when the price of oil more than tripled (to $40 a barrel from $12).
There are no embargos, no shortages and no lack of crude to feed refineries – as there were in the 1970s – and this isn't yet a crisis, says Robert Ebel, a former energy specialist at the U.S. Central Intelligence Agency
The main threat now, he said, is inflation.
“It's basically a price problem,” said Mr. Ebel, a senior adviser at the Washington-based Center for Strategic and International Studies. “It's beginning to hurt. You see it at the grocery store. You see at the gas station. It's having an effect on every segment of the economy.
It's something people are going to have to adapt to.”
Unfortunately for truckers, consumers, manufacturers, even fishermen, experts such as Mr. Ebel insist there's little governments can do in the short term to relieve soaring prices. Reducing gas taxes, for example, would only boost demand and lead to even higher prices down the road.
In Britain, where truckers have blocked key highways in London this week to protest fuel prices, Prime Minister Gordon Brown warned that the “global economy is facing the “third great oil shock of recent decades.”
Writing in the Guardian newspaper, Mr. Brown called on world leaders to devise a “global strategy” at next month's Group of Eight meeting in Japan, including emergency talks with major oil-producing countries and a renewed push for efficiency and alternatives. “A global shock on this scale requires global solutions,” he said.
French President Nicolas Sarkozy called for a Europe-wide cut in fuel taxes as protesting fishermen blockaded an oil depot near Marseille.
In Canada, many executives are loath to describe the spike in prices as a “crisis,” although they acknowledge they're adjusting business plans to deal with the new reality.
“I don't know if I'd say it's a crisis, but it certainly keeps you awake,” said Colin MacDonald, CEO of Halifax-based Clearwater Seafoods Income Fund.
High fuel prices have driven up the cost of operating its fleet of fishing vessels. The company is trying to become more efficient by using larger and more efficient boats, he said, but fuel costs have still boosted the input price of its products by 30 to 40 cents (Canadian) a pound this year.
At the same time, the cost of moving processed fish to markets around the world is rising, because transport companies are adding surcharges to help defray their fuel costs. And supermarkets and restaurants are reluctant to pay more.
Tom Winkler, chief financial officer at the Vancouver Port Authority, said the volume of goods handled through the facility could be hurt if higher fuel prices – and resulting surcharges shipping companies charge their customers – result in fewer containers of goods moving from Asia to Canada.
But the squeeze hasn't yet reached a crisis point, he said.
Economists at CIBC World Markets predicted this week that higher oil prices will result in less movement of global freight as companies look for local suppliers of goods.
Other companies that are taking a major hit from high fuel prices are also trying to see a silver lining.
At bus line operator Greyhound Canada, high fuel prices “drive our costs up through the roof,” said Randy Padley, director of passenger services for Eastern Canada.
At the same time, however, high pump prices “also drive people from their vehicles to the bus, so it's a double-edged sword,” he said. And Greyhound has already raised ticket prices and will do so again if it becomes necessary.
At Big Rock Brewery in Calgary, high energy prices have a significant impact on transportation costs, CEO Edward McNally said. “The truckers have been raising prices for a year or more.”
But spiking energy costs are also affecting the price of aluminum cans, and indirectly making barley more expensive. Big Rock is hedging its barley purchases, which helps, but has not made similar moves with aluminum, Mr. McNally said.
It is also focusing on selling to local markets, where it has an advantage over big Canadian rivals and importers, which now pay sharply higher shipping costs to get their beer to market in Alberta.
Financial Update
Oil drops below US $129 a barrel on demand concerns
· TSX -236.44 Tumbling resource shares led the Toronto Stock Exchange's main index
sharply lower
· Dow +68.72
· Dollar remains above par -.14c to $100.67
· Oil -3.34 to $128.85US per barrel falling sharply on a growing sense that soaring gas and
oil prices have cut demand for fuel during the normally busy summer driving season. Oil
prices were also pressured by the U.S. dollar, which gained ground against the euro.
Investors who buy commodities such as oil as a hedge against inflation when the dollar
falls tend to sell when the greenback strengthens. Also, a rising dollar makes oil more
expensive to investors overseas
· Gold -17.90US to $907.70US
· Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
Better deals ahead expected for Canadian home buyers
New listings at record high
Alia McMullen, Financial Post Published: Saturday, May 24, 2008
Canada's housing market might still be expensive, but sellers are going to lose some of their negotiating power over the course of the year as housing supply floods onto the market.
The number of homes for sale in April was double that of the number that were sold as new listings reached a record high, the Canadian Real Estate Association's monthly Multiple Listing Service figures showed.
Residential listings for April jumped 2.8% from the previous month to a seasonally adjusted 77,248 units, while home sales rose 1.2% to 36,614 units. It was the first time monthly sales had increased this year.
The rise in supply, which comes on the back of years of under supply, caused house price growth to continue to moderate from recent highs. The national average house price was up 4% from a year earlier to $317,619-- the smallest annual gain in six years.
"Price increases are now maintaining at levels that are historically more consistent with the Canadian real estate market," Calvin Lindber, president of CREA said.
British Columbia remained the most expensive province, with the average house price up 10.7% over the year to $478,004, followed by Alberta, which fell 0.5% to $353,515. Prices rose 4.8% in Ontario to $314,041 and 4.3% in Quebec to $217,683. Prince Edward Island was the cheapest province, following a 9.8% annual decline to an average $121,807.
Amy Goldbloom, economist at RBC Financial Group said the latest results reflected the mid-point of a balanced housing market that was likely to soften gradually this year.
"As we see more supply coming to market, sellers are going to certainly lose some of their negotiating power, so the bidding wars that we've seen over the last couple of years, particularly in markets like the core area of Toronto, they're going to certainly slow," Ms. Goldbloom said.
She said there would be better opportunities for buyers as supply increases amid cheaper finance as a result of recent interest rate cuts. However, the market generally remained expensive and sales would likely continue to slow.
"The hit to affordability has certainly taken a toll on sales. People have simply been priced out of the market and that's become very evident in overheated markets in Calgary and Edmonton," Ms. Goldbloom said.
Although new listings in Calgary and Edmonton declined in April after posting record levels in March.
Derek Holt, economist at Scotia Capital said the ratio of listings to sales in Calgary and Edmonton had declined rapidly since last fall, dropping from about 90% to 40%.
"That speed of adjustment abruptly turned it away from a deep sellers market towards a marginal buyers market, so that's why they've seen prices come off their peak and why we think that they face a further housing correction in Alberta," he said.
Mr. Holt said while supply was expected to continue to enter the market, Canada would not experience the inventory overhang plaguing the U. S. housing sector.
He said Canada has not experienced the same factors that have driven the excess in U. S. supply, including the flood of foreclosed properties that have entered the market.
· TSX -236.44 Tumbling resource shares led the Toronto Stock Exchange's main index
sharply lower
· Dow +68.72
· Dollar remains above par -.14c to $100.67
· Oil -3.34 to $128.85US per barrel falling sharply on a growing sense that soaring gas and
oil prices have cut demand for fuel during the normally busy summer driving season. Oil
prices were also pressured by the U.S. dollar, which gained ground against the euro.
Investors who buy commodities such as oil as a hedge against inflation when the dollar
falls tend to sell when the greenback strengthens. Also, a rising dollar makes oil more
expensive to investors overseas
· Gold -17.90US to $907.70US
· Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
Better deals ahead expected for Canadian home buyers
New listings at record high
Alia McMullen, Financial Post Published: Saturday, May 24, 2008
Canada's housing market might still be expensive, but sellers are going to lose some of their negotiating power over the course of the year as housing supply floods onto the market.
The number of homes for sale in April was double that of the number that were sold as new listings reached a record high, the Canadian Real Estate Association's monthly Multiple Listing Service figures showed.
Residential listings for April jumped 2.8% from the previous month to a seasonally adjusted 77,248 units, while home sales rose 1.2% to 36,614 units. It was the first time monthly sales had increased this year.
The rise in supply, which comes on the back of years of under supply, caused house price growth to continue to moderate from recent highs. The national average house price was up 4% from a year earlier to $317,619-- the smallest annual gain in six years.
"Price increases are now maintaining at levels that are historically more consistent with the Canadian real estate market," Calvin Lindber, president of CREA said.
British Columbia remained the most expensive province, with the average house price up 10.7% over the year to $478,004, followed by Alberta, which fell 0.5% to $353,515. Prices rose 4.8% in Ontario to $314,041 and 4.3% in Quebec to $217,683. Prince Edward Island was the cheapest province, following a 9.8% annual decline to an average $121,807.
Amy Goldbloom, economist at RBC Financial Group said the latest results reflected the mid-point of a balanced housing market that was likely to soften gradually this year.
"As we see more supply coming to market, sellers are going to certainly lose some of their negotiating power, so the bidding wars that we've seen over the last couple of years, particularly in markets like the core area of Toronto, they're going to certainly slow," Ms. Goldbloom said.
She said there would be better opportunities for buyers as supply increases amid cheaper finance as a result of recent interest rate cuts. However, the market generally remained expensive and sales would likely continue to slow.
"The hit to affordability has certainly taken a toll on sales. People have simply been priced out of the market and that's become very evident in overheated markets in Calgary and Edmonton," Ms. Goldbloom said.
Although new listings in Calgary and Edmonton declined in April after posting record levels in March.
Derek Holt, economist at Scotia Capital said the ratio of listings to sales in Calgary and Edmonton had declined rapidly since last fall, dropping from about 90% to 40%.
"That speed of adjustment abruptly turned it away from a deep sellers market towards a marginal buyers market, so that's why they've seen prices come off their peak and why we think that they face a further housing correction in Alberta," he said.
Mr. Holt said while supply was expected to continue to enter the market, Canada would not experience the inventory overhang plaguing the U. S. housing sector.
He said Canada has not experienced the same factors that have driven the excess in U. S. supply, including the flood of foreclosed properties that have entered the market.
Financial Update
Speculation the Loonie may fly higher
· TSX + 35.21
· Dow -145.99 on Friday-closed Monday for Memorial Day
· Dollar remains above par -.38c to $100.81
· Oil +$1.36 to $132.19US per barrel
· Gold +7.70US to $925.60US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
Canada now has more workers in stores than factories
Julian Beltrame The Canadian Press
For the first time ever, more Canadians are involved in selling products than producing them.
A Statistics Canada report yesterday showing retail sales rose 5.8 per cent last year contained the added curiosity that for the first time, more people were employed in retail sales than in manufacturing.
The sales increase was the second strongest in five years and underlined the growing importance of domestic demand as the lynch pin of Canadian growth, with the red-hot West, particularly Saskatchewan and Alberta, leading the wave.
But the flip side of the coin is that as the service sector has shone, manufacturing -- especially the auto and forestry sectors -- has gone from bad to worse, so much so that there are now more people working in car dealerships, and at the local supermarket or department store than in factories and mills. Statistics Canada said yesterday that there were 1,790,000 retail jobs on average last year, compared to 1,784,700 in manufacturing.
Speculation the loonie may fly higher
Email the author
May 24, 2008 Julian Beltrame The Canadian Press
Is the Canadian loonie preparing to take flight again?
While betting on the up and down movements of a currency is risky, some economists are beginning to move off their bearish outlook for the Canadian dollar and contemplating that the loonie may be readying a move to higher ground, well above parity.
"One could make the case that the loonie is undervalued at today's oil prices,'' says Bank of Montreal deputy chief economist Douglas Porter. "Partly, this likely reflects the fact that the foreign exchange market, for one, simply doesn't believe today's oil prices will last.
"Another factor may have also been that the Bank of Canada may cut (interest rates) further, but the U.S. Federal Reserve looks done,'' he added.
For several years, the Canadian dollar has generally moved in tandem with prices of commodities Canada has in abundance, particularly oil.
But the Canadian dollar hasn't gathered much strength during the surge from $95 US oil at the end of 2007, Porter noted. It only moved past parity with the U.S. currency when oil cracked the $130 level this week.
A good sign for the loonie's prospects was Scotiabank's commodities report Thursday that forecast crude oil prices in the $135 to $140 range for the rest of the decade, based on a shortage of new non-OPEC production and rising demand from emerging economies in Asia.
Scotiabank currency analyst Stephen Malyon said the bank is forecasting the loonie to finish the year at $1.01 US and 2009 at $1.06, but said it will likely revise the forecast upward next week on the growing perception that high oil and high commodity prices are here to stay.
"I think the Canadian dollar has a lot of things going for it, from a structurally sound economy, and the fact we're a commodity exporter amid a cyclical bull market in commodities,'' he said.
Of course, there are other factors that have come into play in the relative pricing of the loonie.
The Canadian dollar is directly impacted by the interest rate spread between Canada and United States and was lifted last fall when the Fed moved aggressively to cut rates in expectation of a serious economic slowdown.
As important is recent language coming from both central banks which suggests the Fed is heading for the sidelines, while the Canadian bank remains on an easing trend.
There is also the relative purchasing power of both currencies, which suggests that the loonie remains the weaker sister.
· TSX + 35.21
· Dow -145.99 on Friday-closed Monday for Memorial Day
· Dollar remains above par -.38c to $100.81
· Oil +$1.36 to $132.19US per barrel
· Gold +7.70US to $925.60US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
Canada now has more workers in stores than factories
Julian Beltrame The Canadian Press
For the first time ever, more Canadians are involved in selling products than producing them.
A Statistics Canada report yesterday showing retail sales rose 5.8 per cent last year contained the added curiosity that for the first time, more people were employed in retail sales than in manufacturing.
The sales increase was the second strongest in five years and underlined the growing importance of domestic demand as the lynch pin of Canadian growth, with the red-hot West, particularly Saskatchewan and Alberta, leading the wave.
But the flip side of the coin is that as the service sector has shone, manufacturing -- especially the auto and forestry sectors -- has gone from bad to worse, so much so that there are now more people working in car dealerships, and at the local supermarket or department store than in factories and mills. Statistics Canada said yesterday that there were 1,790,000 retail jobs on average last year, compared to 1,784,700 in manufacturing.
Speculation the loonie may fly higher
Email the author
May 24, 2008 Julian Beltrame The Canadian Press
Is the Canadian loonie preparing to take flight again?
While betting on the up and down movements of a currency is risky, some economists are beginning to move off their bearish outlook for the Canadian dollar and contemplating that the loonie may be readying a move to higher ground, well above parity.
"One could make the case that the loonie is undervalued at today's oil prices,'' says Bank of Montreal deputy chief economist Douglas Porter. "Partly, this likely reflects the fact that the foreign exchange market, for one, simply doesn't believe today's oil prices will last.
"Another factor may have also been that the Bank of Canada may cut (interest rates) further, but the U.S. Federal Reserve looks done,'' he added.
For several years, the Canadian dollar has generally moved in tandem with prices of commodities Canada has in abundance, particularly oil.
But the Canadian dollar hasn't gathered much strength during the surge from $95 US oil at the end of 2007, Porter noted. It only moved past parity with the U.S. currency when oil cracked the $130 level this week.
A good sign for the loonie's prospects was Scotiabank's commodities report Thursday that forecast crude oil prices in the $135 to $140 range for the rest of the decade, based on a shortage of new non-OPEC production and rising demand from emerging economies in Asia.
Scotiabank currency analyst Stephen Malyon said the bank is forecasting the loonie to finish the year at $1.01 US and 2009 at $1.06, but said it will likely revise the forecast upward next week on the growing perception that high oil and high commodity prices are here to stay.
"I think the Canadian dollar has a lot of things going for it, from a structurally sound economy, and the fact we're a commodity exporter amid a cyclical bull market in commodities,'' he said.
Of course, there are other factors that have come into play in the relative pricing of the loonie.
The Canadian dollar is directly impacted by the interest rate spread between Canada and United States and was lifted last fall when the Fed moved aggressively to cut rates in expectation of a serious economic slowdown.
As important is recent language coming from both central banks which suggests the Fed is heading for the sidelines, while the Canadian bank remains on an easing trend.
There is also the relative purchasing power of both currencies, which suggests that the loonie remains the weaker sister.
Wednesday, May 21, 2008
Financial Update
Toronto stock market tops 15,000 points for the first time ever propelled by higher oil prices
· TSX hits new record +63.14 to 15.047 pts. On May 11, 2007, it first crossed 14,000,
closing that day at 14,003.82.
· Dow -199.48 in contrast, has felt the effect of waning credit and its economic fallout far
more keenly than the TSX, as worries over the impact prices will have on the consumer
deepened, while a key inflation indicator rose more than expected.
· Dollar was boosted slightly to .81c $1.008
· Oil +$2.02 to $129.07US per barrel extended its red-hot advance, coming close to $130 a
barrel.
· Gold +14.50+US to $919.50US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
Prices rise more than expected in April
HEATHER SCOFFIELD Globe and Mail Update
OTTAWA — Inflation was still benign in Canada in April, but prices rose more than analysts had projected, up 1.7 per cent from a year earlier, Statistics Canada said.
The 1.7 per cent increase was a pick-up in total inflation compared to March, when prices rose 1.4 per cent, and was the first such acceleration since last November.
Analysts had expected a 1.4 per cent rise in prices in April from a year earlier, and a 0.4 per cent increase on the month.
On the month, total inflation rose 0.8 per cent – much more than analysts had expected, with a consensus forecast of 0.4 per cent compared to March.
Core inflation, which excludes the most volatile items such as energy prices and some food, rose 1.5 per cent from a year earlier, and 0.3 per cent compared to March. Core inflation, too, was higher than economists had projected.
Food prices, which have shown little movement in Canada recently despite rampant food inflation elsewhere in the world, climbed significantly in April, rising 1.2 per cent from a year earlier. Excluding restaurants, however, food bought from stores rose 0.9 per cent in April, which is more than noted in previous months but is still a slower pace than total inflation, Statscan noted.
The main culprit was bakery products, with prices rising 10.4 per cent on the year – the steepest increase since November, 1981.
Fresh vegetable prices continued sliding, on the other hand, mainly because of the strong Canadian dollar and because there was a spike in prices a year ago due to frost in California, Statscan said.
“Food inflation may have finally come to roost in Canada, although we would need to see this trend continue over several more months before we could say that for sure,” said economists at Bank of Nova Scotia.
The main driver for higher prices in total inflation, however was gasoline, and fewer discounts for cars.
Gasoline prices were 11.6 per cent higher in April compared to a year ago, with the highest increases in the Prairie provinces. On the month, gasoline rose 6.0 per cent.
As for the price of cars, it fell 6.6 per cent compared to a year ago, but this was less than the 7.1 per cent decline noted in March, and so it added to inflationary pressure overall.
Falling car prices have been responsible for much of Canada's low inflation rate recently, and that trend will likely resume in May, as auto makers reinstate incentives for consumers, said the Scotiabank economists.
· TSX hits new record +63.14 to 15.047 pts. On May 11, 2007, it first crossed 14,000,
closing that day at 14,003.82.
· Dow -199.48 in contrast, has felt the effect of waning credit and its economic fallout far
more keenly than the TSX, as worries over the impact prices will have on the consumer
deepened, while a key inflation indicator rose more than expected.
· Dollar was boosted slightly to .81c $1.008
· Oil +$2.02 to $129.07US per barrel extended its red-hot advance, coming close to $130 a
barrel.
· Gold +14.50+US to $919.50US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
Prices rise more than expected in April
HEATHER SCOFFIELD Globe and Mail Update
OTTAWA — Inflation was still benign in Canada in April, but prices rose more than analysts had projected, up 1.7 per cent from a year earlier, Statistics Canada said.
The 1.7 per cent increase was a pick-up in total inflation compared to March, when prices rose 1.4 per cent, and was the first such acceleration since last November.
Analysts had expected a 1.4 per cent rise in prices in April from a year earlier, and a 0.4 per cent increase on the month.
On the month, total inflation rose 0.8 per cent – much more than analysts had expected, with a consensus forecast of 0.4 per cent compared to March.
Core inflation, which excludes the most volatile items such as energy prices and some food, rose 1.5 per cent from a year earlier, and 0.3 per cent compared to March. Core inflation, too, was higher than economists had projected.
Food prices, which have shown little movement in Canada recently despite rampant food inflation elsewhere in the world, climbed significantly in April, rising 1.2 per cent from a year earlier. Excluding restaurants, however, food bought from stores rose 0.9 per cent in April, which is more than noted in previous months but is still a slower pace than total inflation, Statscan noted.
The main culprit was bakery products, with prices rising 10.4 per cent on the year – the steepest increase since November, 1981.
Fresh vegetable prices continued sliding, on the other hand, mainly because of the strong Canadian dollar and because there was a spike in prices a year ago due to frost in California, Statscan said.
“Food inflation may have finally come to roost in Canada, although we would need to see this trend continue over several more months before we could say that for sure,” said economists at Bank of Nova Scotia.
The main driver for higher prices in total inflation, however was gasoline, and fewer discounts for cars.
Gasoline prices were 11.6 per cent higher in April compared to a year ago, with the highest increases in the Prairie provinces. On the month, gasoline rose 6.0 per cent.
As for the price of cars, it fell 6.6 per cent compared to a year ago, but this was less than the 7.1 per cent decline noted in March, and so it added to inflationary pressure overall.
Falling car prices have been responsible for much of Canada's low inflation rate recently, and that trend will likely resume in May, as auto makers reinstate incentives for consumers, said the Scotiabank economists.
Tuesday, May 20, 2008
Financial Update
TSX UP! Dow UP! Dollar UP! Oil UP! Gold UP!
· TSX continued skyward +201pts Thurs and another 156pts Friday to reach a new high
of 14,984.
· Dow also up both days +94. + 41.36
· Dollar +.43c to $ $1.00
· Oil +$.76 to $127.82US per barrel is worrying not just for consumers, but also for major oil
firms and producer countries fearful of demand destruction and a potential price collapse.
“The price is scary,” a Sr oil executive said. “The market may be poised for a big drop,
especially if the speculators exit in a hurry.” So far, the highest profile predictions have
been for further price rises
· Gold +13.60+US to $917US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
Tip:
Dow Jones Industrial Average (DJIA)
There are thousands of investment indexes around the world for stocks, bonds, currencies and commodities however the DJIA is one of the best known and most widely quoted stock market averages in the media. It contains an average made up of 30 actively traded blue chip stocks spanning many different industries that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.. The DJIA is calculated by adding the prices of each of the 30 stocks and dividing by a divisor. The average is quoted in points rather than dollars. It is price weighted, meaning that a $2 change in a $100 per share stock will have a greater affect than a $2 change in a $20 per share stock
TSX Composite Index
Comprises the majority of market capitalization for Canadian-based, Toronto Stock Exchange listed companies. It is the leading benchmark used to measure the price performance of the broad, Canadian, senior equity market. It was formerly known as the TSE 300 Composite Index
Please find attached an interesting mortgage article from The Financial Post on the different exotic mortgages and how both US and Canada were affected by their utilization of them.
HOW WOULD YOU LIKE YOUR MORTGAGE?
Sarah Dougherty Canwest News Service Published: Saturday, May 17, 2008
It's difficult to imagine what lenders and brokers were thinking when they dreamed up the shaky mortgage products that set off the U. S. housing meltdown.
Take the "Ninja" mortgage, for example. That's the catchy phrase one lender used for the "no income, no job, no assets" home loan for which just about anyone could qualify. Other lenders offered "liar loans" that let borrowers merely state their incomes without producing backup documentation.
In Canada, lending standards never deteriorated to the same extent, thanks to a less-fragmented and more-conservative banking sector and different regulatory environment.
But regulators have recently cut lenders in Canada some slack. Combine those changes with the entrance of new players on the mortgage scene and you have more choices for Canadian consumers, but perhaps some hidden risks for the housing market.
"Canada was kind of an anomaly compared to international mortgage markets," says Derek Holt, vice-president of Scotia Capital Economics, part of Scotiabank. "We didn't have as much mortgage product innovation. "
That changed in 2006 when the federal government liberalized the mortgage insurance market in Canada, Mr. Holt says. Until then, only Canada Mortgage and Housing Corp. (CMHC), the government-owned housing agency and one other company offered the mortgage insurance required when homebuyers put down less than 20% of the purchase price.
The changes allowed more foreign mortgage insurers to come to Canada and stimulated competition. New products emerged, including 40-year amortizations, 100% and interest-only mortgages. But the proliferation of options has some homebuyers confused. "There are so many variables in the mortgage market that you really need a road map," says Jim Rawson, a regional manager in Toronto with Invis, an independent mortgage brokerage.
So, how do some of the new products work and how risky are they for borrowers and the housing market?
With interest rates dropping, consumers might consider a front-loaded variable-rate mortgage. This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you have to decide whether to lock into a fixed rate. "This can be a terrific product for people considering playing the [interest] rate game ... if you think rates will come down again," Mr. Rawson says.
The only trick is to make sure you are, indeed, allowed to convert to a fixed rate and that when you do, you'll get the best discounted rate available, Mr. Rawson says.
Longer amortization periods, now up to 40 years, also are new. This option can suit young borrowers with high income-earning potential, people with other major short-term expenses, buyers in higher-priced urban markets and income property investors.
Mr. Holt estimates longer-term mortgages now account for three-quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that.
The upside of this change, Mr. Holt says, is it will bring more buyers into the market. A longer period to repay also means less risk to credit markets in the short term because it eases cash flow difficulties for borrowers, he says.
But over the long haul, 40-year mortgages raise a new set of risks for housing and credit markets. "The shock risks from interest rate changes and changes in employment become accentuated if you are using higher-leveraged products," Mr. Holt says. And, of course, there is no free lunch: 40-year terms come with tougher qualifying criteria, higher interest rates and higher mortgage insurance premiums.
Then there are interest-only mortgages. These loans let borrowers pay only interest and no principal for the first five or 10 years. This option can be attractive for young buyers with high income-earning potential or borrowers expecting a large inflow of money from an inheritance, for example.
Given all these innovations, this is "no longer your grandfather's mortgage market," Mr. Holt says. But that doesn't mean Canada is headed down the same treacherous path as the U.S. market
The Canadian market is more resilient, Mr. Holt says. Subprime or low-quality mortgages make up only a small portion of Canadian mortgages, unlike the U. S. peak in 2006 of one in four.
We also have stronger underwriting standards than the U. S. market, Mr. Holt says.
But Canadians are paying a price indirectly. Some mortgage rates are higher than they should be because Canadian banks are taking writedowns related to U. S. mortgage-based securities.
· TSX continued skyward +201pts Thurs and another 156pts Friday to reach a new high
of 14,984.
· Dow also up both days +94. + 41.36
· Dollar +.43c to $ $1.00
· Oil +$.76 to $127.82US per barrel is worrying not just for consumers, but also for major oil
firms and producer countries fearful of demand destruction and a potential price collapse.
“The price is scary,” a Sr oil executive said. “The market may be poised for a big drop,
especially if the speculators exit in a hurry.” So far, the highest profile predictions have
been for further price rises
· Gold +13.60+US to $917US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
Tip:
Dow Jones Industrial Average (DJIA)
There are thousands of investment indexes around the world for stocks, bonds, currencies and commodities however the DJIA is one of the best known and most widely quoted stock market averages in the media. It contains an average made up of 30 actively traded blue chip stocks spanning many different industries that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.. The DJIA is calculated by adding the prices of each of the 30 stocks and dividing by a divisor. The average is quoted in points rather than dollars. It is price weighted, meaning that a $2 change in a $100 per share stock will have a greater affect than a $2 change in a $20 per share stock
TSX Composite Index
Comprises the majority of market capitalization for Canadian-based, Toronto Stock Exchange listed companies. It is the leading benchmark used to measure the price performance of the broad, Canadian, senior equity market. It was formerly known as the TSE 300 Composite Index
Please find attached an interesting mortgage article from The Financial Post on the different exotic mortgages and how both US and Canada were affected by their utilization of them.
HOW WOULD YOU LIKE YOUR MORTGAGE?
Sarah Dougherty Canwest News Service Published: Saturday, May 17, 2008
It's difficult to imagine what lenders and brokers were thinking when they dreamed up the shaky mortgage products that set off the U. S. housing meltdown.
Take the "Ninja" mortgage, for example. That's the catchy phrase one lender used for the "no income, no job, no assets" home loan for which just about anyone could qualify. Other lenders offered "liar loans" that let borrowers merely state their incomes without producing backup documentation.
In Canada, lending standards never deteriorated to the same extent, thanks to a less-fragmented and more-conservative banking sector and different regulatory environment.
But regulators have recently cut lenders in Canada some slack. Combine those changes with the entrance of new players on the mortgage scene and you have more choices for Canadian consumers, but perhaps some hidden risks for the housing market.
"Canada was kind of an anomaly compared to international mortgage markets," says Derek Holt, vice-president of Scotia Capital Economics, part of Scotiabank. "We didn't have as much mortgage product innovation. "
That changed in 2006 when the federal government liberalized the mortgage insurance market in Canada, Mr. Holt says. Until then, only Canada Mortgage and Housing Corp. (CMHC), the government-owned housing agency and one other company offered the mortgage insurance required when homebuyers put down less than 20% of the purchase price.
The changes allowed more foreign mortgage insurers to come to Canada and stimulated competition. New products emerged, including 40-year amortizations, 100% and interest-only mortgages. But the proliferation of options has some homebuyers confused. "There are so many variables in the mortgage market that you really need a road map," says Jim Rawson, a regional manager in Toronto with Invis, an independent mortgage brokerage.
So, how do some of the new products work and how risky are they for borrowers and the housing market?
With interest rates dropping, consumers might consider a front-loaded variable-rate mortgage. This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you have to decide whether to lock into a fixed rate. "This can be a terrific product for people considering playing the [interest] rate game ... if you think rates will come down again," Mr. Rawson says.
The only trick is to make sure you are, indeed, allowed to convert to a fixed rate and that when you do, you'll get the best discounted rate available, Mr. Rawson says.
Longer amortization periods, now up to 40 years, also are new. This option can suit young borrowers with high income-earning potential, people with other major short-term expenses, buyers in higher-priced urban markets and income property investors.
Mr. Holt estimates longer-term mortgages now account for three-quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that.
The upside of this change, Mr. Holt says, is it will bring more buyers into the market. A longer period to repay also means less risk to credit markets in the short term because it eases cash flow difficulties for borrowers, he says.
But over the long haul, 40-year mortgages raise a new set of risks for housing and credit markets. "The shock risks from interest rate changes and changes in employment become accentuated if you are using higher-leveraged products," Mr. Holt says. And, of course, there is no free lunch: 40-year terms come with tougher qualifying criteria, higher interest rates and higher mortgage insurance premiums.
Then there are interest-only mortgages. These loans let borrowers pay only interest and no principal for the first five or 10 years. This option can be attractive for young buyers with high income-earning potential or borrowers expecting a large inflow of money from an inheritance, for example.
Given all these innovations, this is "no longer your grandfather's mortgage market," Mr. Holt says. But that doesn't mean Canada is headed down the same treacherous path as the U.S. market
The Canadian market is more resilient, Mr. Holt says. Subprime or low-quality mortgages make up only a small portion of Canadian mortgages, unlike the U. S. peak in 2006 of one in four.
We also have stronger underwriting standards than the U. S. market, Mr. Holt says.
But Canadians are paying a price indirectly. Some mortgage rates are higher than they should be because Canadian banks are taking writedowns related to U. S. mortgage-based securities.
Thursday, May 15, 2008
Financial Update
Economy showing signs that worst is already past: economists
· TSX +9.61.
· Dow +66.20
· Dollar -.15c to $ $99.57
· Oil -$1.58 to $124.22US per barrel
· Gold -$3.10US to $865.40US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
By Julian Beltrame, The Canadian Press
OTTAWA - The loonie once again worth about the same as the U.S. greenback, employment, exports and consumer spending continuing strong - what is happening to Canada's year of economic discontent?
Just as the Canadian and U.S. economies were expected to be at their gloomiest - falling into negative numbers or close to it in the second quarter - some economists are entertaining the notion that the worst may already be in the past.
"What's with the doom and gloom in Canada lately?" asked BMO deputy chief economist Doug Porter this week in a list of 10 reasons to feel good about the economy.
Among the categories - strong income growth and employment, no real credit crunch, rising equity prices, a surprising trade surplus and a healthy housing market.
"We know that bad news sells, but this is ridiculous," Porter said of the hand-wringing in face of the positives.
Even in the U.S. - which is the real threat to the Canadian economy in terms of falling exports - the news has not been as uniformly bad as most economists had been forecasting for months, and the talk that the U.S. had already dipped into recession has not been supported by the numbers.
Growth in the U.S. has been tepid at best at 0.6 per cent the past two quarters, but it has remained above the line. And while many had pointed to the second quarter as the time the American economy would cross the line, the early numbers are at best mixed.
This week saw another "surprise" when the U.S. Commerce Department reported retail sales had actually risen 0.2 per cent in April, or 0.5 per cent if auto sales are excluded.
Meanwhile financial markets, a key factor behind of the U.S. slump, are showing signs of normalizing, according to Federal Reserve chairman Ben Bernanke, although he stressed they are far from back to normal.
And the U.S. dollar continues to firm against most currencies except Canada, where the loonie is bucking the trend and slowly gaining on the greenback.
The Canadian and American dollars have been flirting with parity. On Wednesday, the loonie peaked above US$1 before falling to close at 99.57 cents U.S. on Wednesday, well up from the recent low of 97.61 cents on May 2.
That's not the best news for manufacturers, who prefer a weak dollar to make their exports cheaper in the U.S., but it will be welcome by Canadians who plan to cross the border for a summer vacation this year.
"The Canadian dollar will probably be stronger this summer than I thought it would be," said RBC currency strategist David Watt. "I think it will likely trade at around parity or just above over the next few months."
The big reason is oil trading at record highs near US$125 a barrel, but another is natural gas - which represents a bigger net Canadian export commodity than crude, and which has seen prices firm to above $10 per 1,000 cubic feet from about $7 at the end of 2007.
Global Insight economist Dale Orr cautions that while some signs have been encouraging, it is too early to break open the champagne.
It is now likely that the U.S. will avoid a classic recession defined as two quarters of contraction, although growth this quarter may dip into the negative side. But nobody should confuse that with a healthy economy, he added.
"Sure the U.S. economy is going to be picking up sharply from here to the end of the year, but that's probably going to be overwhelmingly because of the U.S. government fiscal rebates (about $600 per individual) that's worth about one per cent of gross domestic product," he explained.
"Now the real issue is, when we get to the first quarter of next year, are we going to be faced with weak fundamentals that take us back to almost zero growth or will all the monetary easing kick in to keep them afloat."
Another indicator of how the economies in Canada and the U.S. are faring comes Thursday when both countries report on the latest manufacturing activity, which is expected to show some growth in Canada.
A quicker than expected turnaround in U.S. growth and consumer spending would help Canadian exports to the country - the only real weakness in the Canadian economy, said Bank of Montreal economist Michael Gregory.
Yet he is not convinced the relatively good news means the U.S. or Canada are out of the woods.
"I don't know many people that can tell the difference between minus 0.5 per cent and plus 0.5 per cent growth, either way it feels bad," he pointed out.
But his colleague, Douglas Porter, would rather look at the glass as half full. He points out that economists have been too quick to accentuate the negative and even interpret good news - like last week's $5.5 billion trade surplus, the largest since last May - into bad by emphasizing that volumes of exports declined. "The glass is more than half-full in Canada and the global economy is in a lull in the middle of one of the greatest booms on record," he noted. So Canadians should stop "obsessing" about what he called a "temporary bout of cyclical weakness."
· TSX +9.61.
· Dow +66.20
· Dollar -.15c to $ $99.57
· Oil -$1.58 to $124.22US per barrel
· Gold -$3.10US to $865.40US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
By Julian Beltrame, The Canadian Press
OTTAWA - The loonie once again worth about the same as the U.S. greenback, employment, exports and consumer spending continuing strong - what is happening to Canada's year of economic discontent?
Just as the Canadian and U.S. economies were expected to be at their gloomiest - falling into negative numbers or close to it in the second quarter - some economists are entertaining the notion that the worst may already be in the past.
"What's with the doom and gloom in Canada lately?" asked BMO deputy chief economist Doug Porter this week in a list of 10 reasons to feel good about the economy.
Among the categories - strong income growth and employment, no real credit crunch, rising equity prices, a surprising trade surplus and a healthy housing market.
"We know that bad news sells, but this is ridiculous," Porter said of the hand-wringing in face of the positives.
Even in the U.S. - which is the real threat to the Canadian economy in terms of falling exports - the news has not been as uniformly bad as most economists had been forecasting for months, and the talk that the U.S. had already dipped into recession has not been supported by the numbers.
Growth in the U.S. has been tepid at best at 0.6 per cent the past two quarters, but it has remained above the line. And while many had pointed to the second quarter as the time the American economy would cross the line, the early numbers are at best mixed.
This week saw another "surprise" when the U.S. Commerce Department reported retail sales had actually risen 0.2 per cent in April, or 0.5 per cent if auto sales are excluded.
Meanwhile financial markets, a key factor behind of the U.S. slump, are showing signs of normalizing, according to Federal Reserve chairman Ben Bernanke, although he stressed they are far from back to normal.
And the U.S. dollar continues to firm against most currencies except Canada, where the loonie is bucking the trend and slowly gaining on the greenback.
The Canadian and American dollars have been flirting with parity. On Wednesday, the loonie peaked above US$1 before falling to close at 99.57 cents U.S. on Wednesday, well up from the recent low of 97.61 cents on May 2.
That's not the best news for manufacturers, who prefer a weak dollar to make their exports cheaper in the U.S., but it will be welcome by Canadians who plan to cross the border for a summer vacation this year.
"The Canadian dollar will probably be stronger this summer than I thought it would be," said RBC currency strategist David Watt. "I think it will likely trade at around parity or just above over the next few months."
The big reason is oil trading at record highs near US$125 a barrel, but another is natural gas - which represents a bigger net Canadian export commodity than crude, and which has seen prices firm to above $10 per 1,000 cubic feet from about $7 at the end of 2007.
Global Insight economist Dale Orr cautions that while some signs have been encouraging, it is too early to break open the champagne.
It is now likely that the U.S. will avoid a classic recession defined as two quarters of contraction, although growth this quarter may dip into the negative side. But nobody should confuse that with a healthy economy, he added.
"Sure the U.S. economy is going to be picking up sharply from here to the end of the year, but that's probably going to be overwhelmingly because of the U.S. government fiscal rebates (about $600 per individual) that's worth about one per cent of gross domestic product," he explained.
"Now the real issue is, when we get to the first quarter of next year, are we going to be faced with weak fundamentals that take us back to almost zero growth or will all the monetary easing kick in to keep them afloat."
Another indicator of how the economies in Canada and the U.S. are faring comes Thursday when both countries report on the latest manufacturing activity, which is expected to show some growth in Canada.
A quicker than expected turnaround in U.S. growth and consumer spending would help Canadian exports to the country - the only real weakness in the Canadian economy, said Bank of Montreal economist Michael Gregory.
Yet he is not convinced the relatively good news means the U.S. or Canada are out of the woods.
"I don't know many people that can tell the difference between minus 0.5 per cent and plus 0.5 per cent growth, either way it feels bad," he pointed out.
But his colleague, Douglas Porter, would rather look at the glass as half full. He points out that economists have been too quick to accentuate the negative and even interpret good news - like last week's $5.5 billion trade surplus, the largest since last May - into bad by emphasizing that volumes of exports declined. "The glass is more than half-full in Canada and the global economy is in a lull in the middle of one of the greatest booms on record," he noted. So Canadians should stop "obsessing" about what he called a "temporary bout of cyclical weakness."
Tuesday, May 13, 2008
Financial Update
Economy resilient, Flaherty declares
The Canadian Press Finance Minister Jim Flaherty says the Canadian economy is facing a variety of economic challenges, but has so far remained resilient. "Certainly there has been a psychological effect of the recession in the U.S. housing sector, but keep in mind Canadian projections are on the positive side of the ledger,'' he told the Economic Club of Toronto yesterday. Flaherty acknowledged that Canadians face rising costs, including food prices and higher airline fees tied to fuel. But, Canada hasn't seen the same type of inflationary impact that other countries have experienced
· TSX jumped +144.88 to a new record high
· Dow +130.43
· Dollar continued upwards +.12c to $ $99.56
· Oil -$1.73 to $124.23US per barrel
· Gold -$.80US to $883.70US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
TSX soars to new record thanks to RIM, EnCana
David Friend The Canadian Press
Two of Canada's most valuable companies have helped lift the Toronto stock market above its previous record high, set 10 months ago just before the credit crunch took the life out of many investments.
But some economists suggest the gains could wash away in the foreseeable future.
Both Research In Motion, the maker of the famed BlackBerry portable device, and oil and gas giant EnCana Corp. drove the market skyward yesterday. The two stocks were heavily traded, with RIM shares up eight per cent and EnCana ahead six per cent. Both stock jumps were motivated by corporate announcements, with EnCana saying it will divide itself into two companies, one focused on the oilsands and another concentrating on natural gas.
RIM investors gave its stock a boost after the company unveiled the new BlackBerry Bold smartphone, which has a wider array of functions aimed at the business market.
The two companies' combined weight pushed the TSX at the end of the day to 14,666.07, above a high of 14,625.76 set last July.
It was the third attempt the Toronto stock market has made at returning to the heights it left when the U.S. subprime mortgage mess surfaced. Last Thursday, the TSX just missed the benchmark despite a record-high closing price for crude oil.
The increase will likely evaporate somewhat if the two companies can't sustain their charge as the week progresses, said Fred Ketchen, a manager of equity trading at Scotia Capital. "We're going to give back some of these gains somewhere along the way,'' Ketchen said. "But if I keep looking out, I don't see the demand for energy backing off any time soon.''
Much of the momentum has been caused by strength in resource stocks, which represent about one-third of the market capitalization of the TSX. The energy sector has climbed 40 per cent since January while the price for crude oil rose above $125 US.
The Canadian Press Finance Minister Jim Flaherty says the Canadian economy is facing a variety of economic challenges, but has so far remained resilient. "Certainly there has been a psychological effect of the recession in the U.S. housing sector, but keep in mind Canadian projections are on the positive side of the ledger,'' he told the Economic Club of Toronto yesterday. Flaherty acknowledged that Canadians face rising costs, including food prices and higher airline fees tied to fuel. But, Canada hasn't seen the same type of inflationary impact that other countries have experienced
· TSX jumped +144.88 to a new record high
· Dow +130.43
· Dollar continued upwards +.12c to $ $99.56
· Oil -$1.73 to $124.23US per barrel
· Gold -$.80US to $883.70US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
TSX soars to new record thanks to RIM, EnCana
David Friend The Canadian Press
Two of Canada's most valuable companies have helped lift the Toronto stock market above its previous record high, set 10 months ago just before the credit crunch took the life out of many investments.
But some economists suggest the gains could wash away in the foreseeable future.
Both Research In Motion, the maker of the famed BlackBerry portable device, and oil and gas giant EnCana Corp. drove the market skyward yesterday. The two stocks were heavily traded, with RIM shares up eight per cent and EnCana ahead six per cent. Both stock jumps were motivated by corporate announcements, with EnCana saying it will divide itself into two companies, one focused on the oilsands and another concentrating on natural gas.
RIM investors gave its stock a boost after the company unveiled the new BlackBerry Bold smartphone, which has a wider array of functions aimed at the business market.
The two companies' combined weight pushed the TSX at the end of the day to 14,666.07, above a high of 14,625.76 set last July.
It was the third attempt the Toronto stock market has made at returning to the heights it left when the U.S. subprime mortgage mess surfaced. Last Thursday, the TSX just missed the benchmark despite a record-high closing price for crude oil.
The increase will likely evaporate somewhat if the two companies can't sustain their charge as the week progresses, said Fred Ketchen, a manager of equity trading at Scotia Capital. "We're going to give back some of these gains somewhere along the way,'' Ketchen said. "But if I keep looking out, I don't see the demand for energy backing off any time soon.''
Much of the momentum has been caused by strength in resource stocks, which represent about one-third of the market capitalization of the TSX. The energy sector has climbed 40 per cent since January while the price for crude oil rose above $125 US.
Monday, May 12, 2008
Financial Update
· TSX fell -86.80 as profit-taking cooled the energy sector even though oil prices hit
another record high
· Dow -120.90
· Dollar recovered over a full cent +1.12c to $ $99.44
· Oil continues upward +$2.27 to $125.96US per barrel breaking new records daily
· Gold recovered another+$3.90US to $884.50US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
TSX could break out into record territory this week; then what?
By Malcolm Morrison, The Canadian Press
TORONTO - The Toronto stock market is poised to break through its old closing high set last July during the week as commodity stocks, particularly oil, run ahead.
As it was the TSX came within a whisker of moving past the 14,625.76 level last Thursday thanks to yet another in a string of record high closes for crude.
The market then pulled back Friday, at the end of a week of sharp gains, largely fuelled by energy stocks, that saw the TSX up 1.77 per cent for the week.
Breaking past that July record represents a stunning 20 per cent surge in the index since hitting its most recent low Jan. 21 - but some analysts are uncomfortable with how narrowly based the advance has been.
"Obviously it's being supported by the resource sector yet again, which is basically the story for the past three or four years," said Andrew Pyle, investment adviser at Scotia McLeod in Peterborough, Ont.
"I mean, if you look at the divergence between the S&P 500 and the TSX, that gap has widened and widened in relation to the strength we've seen in resources and obviously that's what's pulling the TSX higher now."
The energy sector has roared ahead 40 per cent since January while the base metals sector jumped 29 per cent as crude oil jumped from about US$90 a barrel to the US$125 mark.
The gold sector hasn't done so well, down about four per cent as bullion slipped away from the US$1,000 an ounce level.
This is the third time the TSX has tried to break above that 14,626 level and Pyle thinks this will be equally unsuccessful since "there is no underlying fundamental reason for the TSX to break above a new record high."
In fact, he said "there are a lot of reasons for this index to buckle and to experience a sharp pullback like we have seen in the past."
For one thing, he points to weakening economic conditions which should curb oil prices.
"Things work for the lag," he said.
"Oil at $120 doesn't show up tomorrow morning in terms of European Gross Domestic Product numbers, it'll show up in the summer, in July and August and demand factors alone will be enough to pull oil back."
But Pyle also pointed to a healthier U.S. dollar, which has been mending in particular since the U.S. Federal Reserve signalled last month that the long string of interest rate cuts are over.
"And I think if people start to really accept that the U.S. dollar recovery is real - it might be very slow - that to me is the death knell for commodities near term," he said.
"Near term, if the dollar recovery is perceived as real, I think commodities have to fall back here and when I look at the TSX again, it's very thinly based and I would say right now there's a lot more risk to the TSX today at these levels than there was last year when we were looking at record highs in July."
At least at that point, most sectors were participating in the run up.
A notable exception to the charge ahead this time has been the financial sector, up only about six per cent since late January. Share prices in banks really only started to improve after mid-March when JPMorgan Chase picked up rival investment bank Bear Stearns, with the backing of the U.S. Federal Reserve.
"But even if financials hold ground here, and we get this split, financials doing OK, resources falling back, there's not enough weight in financials to keep this index from falling back," said Pyle.
"There's not going to be enough support... to push this index far into new record territory in my opinion."
Pyle's advice to investors if the TSX can't stage a convincing breakthrough past the 14,626 level is beware.
"I think you have to seriously look at a more defensive position going into the summer because you could be looking at a 10 per cent correction in the index."
In the meantime, "don't be greedy. If you're up, this has been great, look at a nice move of 2,000 points on the TSX, that's helped people a lot. Don't blow it. Don't have that in vain, take some of it off the table."
another record high
· Dow -120.90
· Dollar recovered over a full cent +1.12c to $ $99.44
· Oil continues upward +$2.27 to $125.96US per barrel breaking new records daily
· Gold recovered another+$3.90US to $884.50US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
TSX could break out into record territory this week; then what?
By Malcolm Morrison, The Canadian Press
TORONTO - The Toronto stock market is poised to break through its old closing high set last July during the week as commodity stocks, particularly oil, run ahead.
As it was the TSX came within a whisker of moving past the 14,625.76 level last Thursday thanks to yet another in a string of record high closes for crude.
The market then pulled back Friday, at the end of a week of sharp gains, largely fuelled by energy stocks, that saw the TSX up 1.77 per cent for the week.
Breaking past that July record represents a stunning 20 per cent surge in the index since hitting its most recent low Jan. 21 - but some analysts are uncomfortable with how narrowly based the advance has been.
"Obviously it's being supported by the resource sector yet again, which is basically the story for the past three or four years," said Andrew Pyle, investment adviser at Scotia McLeod in Peterborough, Ont.
"I mean, if you look at the divergence between the S&P 500 and the TSX, that gap has widened and widened in relation to the strength we've seen in resources and obviously that's what's pulling the TSX higher now."
The energy sector has roared ahead 40 per cent since January while the base metals sector jumped 29 per cent as crude oil jumped from about US$90 a barrel to the US$125 mark.
The gold sector hasn't done so well, down about four per cent as bullion slipped away from the US$1,000 an ounce level.
This is the third time the TSX has tried to break above that 14,626 level and Pyle thinks this will be equally unsuccessful since "there is no underlying fundamental reason for the TSX to break above a new record high."
In fact, he said "there are a lot of reasons for this index to buckle and to experience a sharp pullback like we have seen in the past."
For one thing, he points to weakening economic conditions which should curb oil prices.
"Things work for the lag," he said.
"Oil at $120 doesn't show up tomorrow morning in terms of European Gross Domestic Product numbers, it'll show up in the summer, in July and August and demand factors alone will be enough to pull oil back."
But Pyle also pointed to a healthier U.S. dollar, which has been mending in particular since the U.S. Federal Reserve signalled last month that the long string of interest rate cuts are over.
"And I think if people start to really accept that the U.S. dollar recovery is real - it might be very slow - that to me is the death knell for commodities near term," he said.
"Near term, if the dollar recovery is perceived as real, I think commodities have to fall back here and when I look at the TSX again, it's very thinly based and I would say right now there's a lot more risk to the TSX today at these levels than there was last year when we were looking at record highs in July."
At least at that point, most sectors were participating in the run up.
A notable exception to the charge ahead this time has been the financial sector, up only about six per cent since late January. Share prices in banks really only started to improve after mid-March when JPMorgan Chase picked up rival investment bank Bear Stearns, with the backing of the U.S. Federal Reserve.
"But even if financials hold ground here, and we get this split, financials doing OK, resources falling back, there's not enough weight in financials to keep this index from falling back," said Pyle.
"There's not going to be enough support... to push this index far into new record territory in my opinion."
Pyle's advice to investors if the TSX can't stage a convincing breakthrough past the 14,626 level is beware.
"I think you have to seriously look at a more defensive position going into the summer because you could be looking at a 10 per cent correction in the index."
In the meantime, "don't be greedy. If you're up, this has been great, look at a nice move of 2,000 points on the TSX, that's helped people a lot. Don't blow it. Don't have that in vain, take some of it off the table."
Friday, May 9, 2008
Financial Update
Canadians need to know more about finances says Flaherty
· TSX surged +236.46 to 14,606 to finish close to a record high set last July
· Dow +52.43
· Dollar down almost a full cent-.98c to $ $98.32
· Oil continues upward +$.16 to $123.69US per barrel breaking new records
· Gold recovered+$10.90US to $882.10US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
Eric Beauchesne, Canwest News Service Published: Thursday, May 08, 2008
OTTAWA -- Canadians need to know more about how to handle their personal finances, Finance Minister Jim Flaherty said Thursday in a speech in Washington, in which he linked the global financial crisis to a need for increased financial literacy among households.
Mr. Flaherty also said that he plans to introduce new regulations this spring for certain "complex" debt securities.
"There are many causes to the financial turmoil and financial literacy is certainly one aspect,"
Mr. Flaherty told an International Conference on Financial Education, the theme of which was Taking Financial Literacy to the Next Level: Important Challenges and Promising Solutions.
"Something that is an obvious benefit to society - the ability of citizens to own their own home has -- through improper disclosure and complex investments -- led to global financial turmoil," he said in a reference to the subprime crisis in the United States.
That crisis, which erupted last summer, resulted in part from households being encouraged by lenders to take on mortgages they couldn't afford, and then those lenders in turn bundling those mortgages into complex securities, billions of dollars of which were sold to financial institutions around the world, some of which in turn sold them to individual investors.
"Clearly, some of the flaws of our financial system have bubbled to the surface," Mr. Flaherty said in the text of his speech, which was closed to the media.
"We are today witnessing the consequences of a lack of disclosure and awareness," he said. "The recent volatility underscores the importance of investors understanding exactly what they are buying."
Mr. Flaherty said the new regulations would focus on debt securities called principal-protected notes that guarantee the invested principal.
"As these products grew more varied and complex, it became clear that the old disclosure rules were no longer adequate," Mr. Flaherty said.
Canada is also tightening its oversight of the financial services industry after the banks lost billions of dollars on investments in asset-backed commercial paper when the market in this country for $32-billion of the subprime tainted securities collapsed last summer.
While government regulators and financial institutions trying to deal with the crisis have focused on the failure of financial institutions -- including credit rating agencies -- to understand what they were rating, buying and selling, Mr. Flaherty said that in today's world individuals also need to have a better understanding of the array of increasingly complex financial products available to them, ranging from bank accounts to credit cards to mortgages.
And he said that includes the worker setting up a bank account, the family trying to make ends meet while saving for a first home, the senior who - in a world of Internet banking and automated bank machines - is susceptible to scams and fraud, and the investor who should be aware of the risks, returns or benefits of compounding interest rates.
"The range of financial products on the market is rapidly expanding, and the complexity of such products can make it difficult for the average investor to fully understand the risks, the fees and the potential returns," he said.
Yet, he noted that financial literacy is seldom at the core of any school curriculum even though youth have more financial dealings than ever before, using debit and credit cards and online banking, and having cell phone contracts.
"The irony should not be lost on anyone ... ," he said, adding that financial literacy is an essential skill that should be developed early in life
· TSX surged +236.46 to 14,606 to finish close to a record high set last July
· Dow +52.43
· Dollar down almost a full cent-.98c to $ $98.32
· Oil continues upward +$.16 to $123.69US per barrel breaking new records
· Gold recovered+$10.90US to $882.10US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
Eric Beauchesne, Canwest News Service Published: Thursday, May 08, 2008
OTTAWA -- Canadians need to know more about how to handle their personal finances, Finance Minister Jim Flaherty said Thursday in a speech in Washington, in which he linked the global financial crisis to a need for increased financial literacy among households.
Mr. Flaherty also said that he plans to introduce new regulations this spring for certain "complex" debt securities.
"There are many causes to the financial turmoil and financial literacy is certainly one aspect,"
Mr. Flaherty told an International Conference on Financial Education, the theme of which was Taking Financial Literacy to the Next Level: Important Challenges and Promising Solutions.
"Something that is an obvious benefit to society - the ability of citizens to own their own home has -- through improper disclosure and complex investments -- led to global financial turmoil," he said in a reference to the subprime crisis in the United States.
That crisis, which erupted last summer, resulted in part from households being encouraged by lenders to take on mortgages they couldn't afford, and then those lenders in turn bundling those mortgages into complex securities, billions of dollars of which were sold to financial institutions around the world, some of which in turn sold them to individual investors.
"Clearly, some of the flaws of our financial system have bubbled to the surface," Mr. Flaherty said in the text of his speech, which was closed to the media.
"We are today witnessing the consequences of a lack of disclosure and awareness," he said. "The recent volatility underscores the importance of investors understanding exactly what they are buying."
Mr. Flaherty said the new regulations would focus on debt securities called principal-protected notes that guarantee the invested principal.
"As these products grew more varied and complex, it became clear that the old disclosure rules were no longer adequate," Mr. Flaherty said.
Canada is also tightening its oversight of the financial services industry after the banks lost billions of dollars on investments in asset-backed commercial paper when the market in this country for $32-billion of the subprime tainted securities collapsed last summer.
While government regulators and financial institutions trying to deal with the crisis have focused on the failure of financial institutions -- including credit rating agencies -- to understand what they were rating, buying and selling, Mr. Flaherty said that in today's world individuals also need to have a better understanding of the array of increasingly complex financial products available to them, ranging from bank accounts to credit cards to mortgages.
And he said that includes the worker setting up a bank account, the family trying to make ends meet while saving for a first home, the senior who - in a world of Internet banking and automated bank machines - is susceptible to scams and fraud, and the investor who should be aware of the risks, returns or benefits of compounding interest rates.
"The range of financial products on the market is rapidly expanding, and the complexity of such products can make it difficult for the average investor to fully understand the risks, the fees and the potential returns," he said.
Yet, he noted that financial literacy is seldom at the core of any school curriculum even though youth have more financial dealings than ever before, using debit and credit cards and online banking, and having cell phone contracts.
"The irony should not be lost on anyone ... ," he said, adding that financial literacy is an essential skill that should be developed early in life
Thursday, May 8, 2008
Financial Update
Canada's slowing economy is starting to take a toll on homeowners.
· TSX -42.77 losing some of Tues’s 140 pt gain
· Dow -206.48 also losing previous days small gain
· Dollar still bouncing -.41c to $ $99.30 losing almost half of Tues 1c gain
· Oil continues upward +$1.69 to $123.53US per barrel breaking new records
· Gold -$6.40US to $869.60US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
Toronto Star
Ellen Roseman
"Defaults are rising in certain parts of the country," said Peter Vukanovich, president of Genworth Financial Canada, which insures mortgages against default.
Which parts of the country?
"Here in Ontario and in Quebec," he replied.
The Canadian real estate market is healthier than in the United States, where prices are falling and many homeowners are facing foreclosure.
Still, there's a concern that some homeowners in Canada may not keep up their mortgage payments if they lose their jobs.
"We're monitoring losses and making sure the lending is responsible," Vukanovich said.
Homebuyers are required to buy mortgage insurance if their down payment is less than 20 per cent of the purchase price.
Mortgage insurance protects lenders when borrowers fall behind and properties have to be sold at a loss.
Canada Mortgage and Housing Corp., a federally owned Crown corporation, is the largest provider.
Genworth, owned by General Electric Co., is the largest private-sector mortgage insurer.
In its 2006 budget, the federal government opened the mortgage insurance market to more competition.
With competition came innovation. Mortgage insurance providers started underwriting loans with no down payments and with amortizations of up to 40 years.
"The longer amortizations and the 100 per cent loan-to-value products have been relatively popular," Vukanovich said.
But what if Canada's economy flattens out? How will this affect highly leveraged buyers?
It's not only CMHC, Genworth and other mortgage insurers on the hook if there's a rash of defaults.
Taxpayers will also be liable for losses.
Few people know that Ottawa guarantees 100 per cent of CMHC-insured mortgages and 90 per cent of privately insured mortgages (up to $200 billion).
Because of the federal guarantee, mortgage insurers don't have to carry capital on their books to match their potential risks.
In recent months, the finance department has been holding secret talks with mortgage industry players.
"We consult on a regular basis on a wide variety of issues," said a finance spokesperson.
While Ottawa won't confirm the discussions, mortgage lenders know they're going on.
"The degree of risk that's involved with 40-year mortgages and no down payments is certainly of some concern to the finance department," said Don Drummond, chief economist with TD Bank Financial Group.
"It definitely creates a riskier environment."
Here's how the risk could play out.
Suppose you bought a home in the Toronto area last year, borrowing the whole purchase price and opting for a 40-year payback. Your mortgage insurance premium added another 3.5 per cent to the loan amount.
Suddenly, you lose your job or have your hours cut back. Or this happens to your spouse.
Within a few months, you can no longer cover mortgage payments.
You think about selling. But you can't make money because you have no equity and 99.9 per cent of your payments are interest, not mortgage principal.
So, you wait for the lender to take over your house under a power of sale.
Our mortgage lenders are strict about checking credit scores and making sure borrowers don't take on too much debt.
But there's a sky-high bill to shoulder if a slowing economy results in mortgage defaults.
It's time for Ottawa to talk openly about cutting back its mortgage insurance guarantee to adapt to a climate of looser lending.
· TSX -42.77 losing some of Tues’s 140 pt gain
· Dow -206.48 also losing previous days small gain
· Dollar still bouncing -.41c to $ $99.30 losing almost half of Tues 1c gain
· Oil continues upward +$1.69 to $123.53US per barrel breaking new records
· Gold -$6.40US to $869.60US
Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html
Toronto Star
Ellen Roseman
"Defaults are rising in certain parts of the country," said Peter Vukanovich, president of Genworth Financial Canada, which insures mortgages against default.
Which parts of the country?
"Here in Ontario and in Quebec," he replied.
The Canadian real estate market is healthier than in the United States, where prices are falling and many homeowners are facing foreclosure.
Still, there's a concern that some homeowners in Canada may not keep up their mortgage payments if they lose their jobs.
"We're monitoring losses and making sure the lending is responsible," Vukanovich said.
Homebuyers are required to buy mortgage insurance if their down payment is less than 20 per cent of the purchase price.
Mortgage insurance protects lenders when borrowers fall behind and properties have to be sold at a loss.
Canada Mortgage and Housing Corp., a federally owned Crown corporation, is the largest provider.
Genworth, owned by General Electric Co., is the largest private-sector mortgage insurer.
In its 2006 budget, the federal government opened the mortgage insurance market to more competition.
With competition came innovation. Mortgage insurance providers started underwriting loans with no down payments and with amortizations of up to 40 years.
"The longer amortizations and the 100 per cent loan-to-value products have been relatively popular," Vukanovich said.
But what if Canada's economy flattens out? How will this affect highly leveraged buyers?
It's not only CMHC, Genworth and other mortgage insurers on the hook if there's a rash of defaults.
Taxpayers will also be liable for losses.
Few people know that Ottawa guarantees 100 per cent of CMHC-insured mortgages and 90 per cent of privately insured mortgages (up to $200 billion).
Because of the federal guarantee, mortgage insurers don't have to carry capital on their books to match their potential risks.
In recent months, the finance department has been holding secret talks with mortgage industry players.
"We consult on a regular basis on a wide variety of issues," said a finance spokesperson.
While Ottawa won't confirm the discussions, mortgage lenders know they're going on.
"The degree of risk that's involved with 40-year mortgages and no down payments is certainly of some concern to the finance department," said Don Drummond, chief economist with TD Bank Financial Group.
"It definitely creates a riskier environment."
Here's how the risk could play out.
Suppose you bought a home in the Toronto area last year, borrowing the whole purchase price and opting for a 40-year payback. Your mortgage insurance premium added another 3.5 per cent to the loan amount.
Suddenly, you lose your job or have your hours cut back. Or this happens to your spouse.
Within a few months, you can no longer cover mortgage payments.
You think about selling. But you can't make money because you have no equity and 99.9 per cent of your payments are interest, not mortgage principal.
So, you wait for the lender to take over your house under a power of sale.
Our mortgage lenders are strict about checking credit scores and making sure borrowers don't take on too much debt.
But there's a sky-high bill to shoulder if a slowing economy results in mortgage defaults.
It's time for Ottawa to talk openly about cutting back its mortgage insurance guarantee to adapt to a climate of looser lending.
Tuesday, May 6, 2008
Financial Update
Central bank plays down recession threat
· TSX -5.94
· Dow -88.66
· Dollar +.56c to $ $98.67US
· Oil +$3.65 to $119.97US per barrel
· Gold +16.20US to $872.30US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
As other countries pump cash into their credit systems, the Bank of Canada is standing on the sidelines
May 03, 2008 Julian BeltrameThe Canadian PressThe Bank of Canada sat on the sidelines yesterday as the United States and Europe stepped up efforts to loosen tight credit conditions, a further indication that Canada's top banker believes the country's economic woes were not the same as south of the border.
Bank governor Mark Carney appeared relatively upbeat about Canada's economic prospects at two appearances before parliamentary committees this week, highlighting the country's "strengths'' and describing credit conditions as superior to those in the United States and Europe.
Yesterday, the U.S. Federal Reserve acknowledged the global credit crisis was not yet over, saying it will work with European central banks on the issue and announcing a boost in the emergency reserves it supplies to U.S. banks to $150 billion US in May, up from the $100 billion it supplied in April.
But in a statement, the Canadian central bank noted that while it had rolled over $2 billion in purchase and resale agreements with Canada's chartered banks on Tuesday, it was not injecting more or new money into the system.
"The Bank of Canada has not offered the specific types of facilities covered by these central bank announcements because markets and institutions in Canada have not been affected in the same way nor to the same extent as elsewhere,'' it said in a statement.
Carney's sanguine comments this week -- no recession and no inflation -- appeared directed at countering what the central bank likely considers overly pessimistic views propagated by analysts, the media and opposition politicians, especially after Statistics Canada reported gross domestic product had contracted by 0.2 per cent in February.
Bank of Montreal's Doug Porter pointed out that Canadians have had it far better than their American cousins, and will continue to experience superior economic prospects for some time.
The number of people working in Canada is at a record 63.9 per cent, while in the U.S. it has dropped to 62.6 per cent, he said.
As well:
Retail sales are up 6.8 per cent so far this year in Canada, compared to 2.9 per cent in the U.S.
Housing starts are up 3.7 per cent in Canada, versus down 29 per cent in the United States
And Canadian auto sales are up 6.1 per cent; American sales are down 7.7 per cent this year.
Part of the despair about the economy, said Porter, is related to analysts and Canadians putting too much weight on one indicator -- real gross domestic product growth -- which has been misleading in an era of rising exports values and falling import prices.
· TSX -5.94
· Dow -88.66
· Dollar +.56c to $ $98.67US
· Oil +$3.65 to $119.97US per barrel
· Gold +16.20US to $872.30US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
As other countries pump cash into their credit systems, the Bank of Canada is standing on the sidelines
May 03, 2008 Julian BeltrameThe Canadian PressThe Bank of Canada sat on the sidelines yesterday as the United States and Europe stepped up efforts to loosen tight credit conditions, a further indication that Canada's top banker believes the country's economic woes were not the same as south of the border.
Bank governor Mark Carney appeared relatively upbeat about Canada's economic prospects at two appearances before parliamentary committees this week, highlighting the country's "strengths'' and describing credit conditions as superior to those in the United States and Europe.
Yesterday, the U.S. Federal Reserve acknowledged the global credit crisis was not yet over, saying it will work with European central banks on the issue and announcing a boost in the emergency reserves it supplies to U.S. banks to $150 billion US in May, up from the $100 billion it supplied in April.
But in a statement, the Canadian central bank noted that while it had rolled over $2 billion in purchase and resale agreements with Canada's chartered banks on Tuesday, it was not injecting more or new money into the system.
"The Bank of Canada has not offered the specific types of facilities covered by these central bank announcements because markets and institutions in Canada have not been affected in the same way nor to the same extent as elsewhere,'' it said in a statement.
Carney's sanguine comments this week -- no recession and no inflation -- appeared directed at countering what the central bank likely considers overly pessimistic views propagated by analysts, the media and opposition politicians, especially after Statistics Canada reported gross domestic product had contracted by 0.2 per cent in February.
Bank of Montreal's Doug Porter pointed out that Canadians have had it far better than their American cousins, and will continue to experience superior economic prospects for some time.
The number of people working in Canada is at a record 63.9 per cent, while in the U.S. it has dropped to 62.6 per cent, he said.
As well:
Retail sales are up 6.8 per cent so far this year in Canada, compared to 2.9 per cent in the U.S.
Housing starts are up 3.7 per cent in Canada, versus down 29 per cent in the United States
And Canadian auto sales are up 6.1 per cent; American sales are down 7.7 per cent this year.
Part of the despair about the economy, said Porter, is related to analysts and Canadians putting too much weight on one indicator -- real gross domestic product growth -- which has been misleading in an era of rising exports values and falling import prices.
Monday, May 5, 2008
Financial Update
Interest rates set to climb back, taking resource stocks with them
· TSX +214.47 finished the week much stronger
· Dow +48.20
· Dollar -1.18c to $ $98.11US
· Oil -$0.94 to $112.56US per barrel
· Gold -13.90US to $848.90US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html
TORONTO, May 5 /CNW/ - CIBC (CM: TSX; NYSE) - "Unrelenting pressure" on food and energy prices will reverse the direction of interest rates in the next 12 months, and lift energy and materials stocks to new record highs, notes a CIBC World Markets report.
"While the bank of Canada may still have one more (rate) cut up its sleeve, markets will be surprised at how rapidly the Bank is compelled to take back those easings," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets in his monthly Canadian Portfolio Strategy Outlook report.
"We expect to see at least 100 basis points of tightening" by the end of next year.
Because rising interest rates make bond yields less attractive, Mr. Rubin is paring back the bond weighting in his model portfolio to "neutral" from "overweight". That frees up funds to take a slightly overweight stance in equities, with emphasis on energy and materials stocks.
Mr. Rubin's increased weighting in energy stocks reflects supply struggles and surging demand that he predicts will push oil to US$130 a barrel and natural gas to US$13 per Mn BTUs in 2009.
"We remain wary of near-term market volatility. But the strength of the resource market, particularly energy, and a gradual recovery in the U.S.
economy should see the TSX justify our equity weighting," says Mr. Rubin.
Mr. Rubin's "overweight" stance in materials is tied to the strength of emerging markets where infrastructure developments are driving demand for metals and other resources, and rising income levels and meat consumption are pushing up global agricultural prices.
"An expected return to a global supply deficit in 2009 has led us to upgrade our forecast for copper prices," says Mr. Rubin. "In comparison to the other metals, the golds haven't shone of late. But the pullback there should prove temporary, given the prospect for further dollar weakness and continuing inflation jitters, fuelled by rising oil and food prices.
"Agricultural commodity and chemical producers, along with purveyors of needed infrastructure or crop improvements like irrigation and biotech firms offer the greatest potential positive leverage to global food supply troubles.
Profits in the agricultural chemicals sector are expected to nearly triple this year."
While those sectors are winners, Mr. Rubin says companies that "rely heavily on grain, oil, or other commodities as inputs face increasing costs and thus weaker profits." As a result, he has cut a half percentage point of weighting in the consumer staples group, which includes both food retailers and processors.
He has also shed weight in the utilities sectors where dividend yields are likely to prove less attractive in a rising interest rate environment. "In addition, rising carbon abatement costs could also reduce future profit growth, especially for coal-dependent power generators."
Mr. Rubin's end of 2009 forecast of 16,200 for the TSX, versus 1,475 for the S&P 500, points to the globally leveraged Canadian market continuing to outperform the S&P 500 for at least another year, aided by continuing strength in energy and materials stocks.
"We now expect TSX earnings to rise by an above-trend 16 per cent this year. That should easily surpass the consensus estimate of a 10 per cent rise in S&P 500 earnings, marking the fourth consecutive year of better earnings growth north of the border.
"Beyond the positive effect of triple-digit crude, US$4/lb copper and US$1,000/tonne potash on the energy and materials groups, profit expectations have also been upgraded for info tech and more modestly for key industrial producers like the rails. Alternatively, financial sector earnings are expected to fall modestly for the first time since 2002. That compares with expectations just three months ago for a near-double-digit gain for the sector.
The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/psmay08.pdf
Thursday, May 1, 2008
Financial Update
Stock markets rack up solid advance as US Fed decreases overnight rate by 25 bps
· TSX +109.94 recovering nearly half of Tuesdays slide
· Dow -11.81 despite data showing the U.S. economy still registering some growth during
the first quarter while GM handed in a quarterly loss that was less than expected. ($3.3b)
The Fed's failure to deliver an unequivocal statement that the worst was over for the economy
caused investors to sell their best performers.
· Dollar +.47c to $ $99.29US
· Oil -2.17 to $113.46US per barrel contributing to plummeting sales of sport utility vehicles and
pickups and GMs huge quarterly loss
· Gold -11.40US to $862.80US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html <http://www.bankofcanada.ca/en/rates/bonds.html>
“Wall Street believes this could well wrap up the Fed's rate cuts unless the economy threatens to fall into a worse slump than currently expected. Fed said it stood ready to “act as needed to promote sustainable economic growth and stability.” That phrase was seen as a signal that the Fed is as worried about weak growth as it is about the risk of higher inflation.”
Let the talk of Fixed Rate Mortgages begin again!!
________________________________
Fed cuts interest rates by a quarter point
MARTIN CRUTSINGER The Associated Press
April 30, 2008 at 2:37 PM EDT
WASHINGTON — The United States Federal Reserve has cut a key interest rate by a quarter-point, a smaller move than the aggressive easing it undertook earlier this year.
The Fed action, announced Wednesday after a two-day regular meeting, pushed the federal funds rate down to 2 per cent, its lowest level since late 2004. It marked the seventh consecutive rate cut by the central bank since it began easing credit conditions last September to combat the growing threat of a recession brought on by a deep housing slump and credit crisis.
The rate cut will mean lower borrowing costs throughout the economy as banks reduce their prime lending rate, the benchmark for millions of consumer and business loans.
The Fed move was in line with expectations.
The Fed devoted portions of its statement to both the threats of weakness and the threats that inflation could pose, likely reflecting the debate inside the central bank.
There were two dissents from the move, with both Richard Fisher, president of the Dallas regional Fed bank, and Charles Plosser, head of the Philadelphia Fed, arguing that the central bank should make no change in rates.
The central bank is walking a tightrope, trying to jump-start economic growth while also confronting the risk that if it overdoes the credit easing it could make inflation worse down the road.
Many economists believe the country has fallen into a recession. However, the government reported Wednesday that the overall economy, as measured by the gross domestic product, managed to eke out a 0.6 per cent growth rate in the January-March quarter, barely in positive territory.
On the overall economy, Fed Chairman Ben Bernanke and his colleagues said in their statement explaining the decision that “economic activity remains weak” with subdued spending by businesses and households.
“Financial markets remain under considerable stress and tight credit conditions and deepening housing contractions are likely to weigh on economic growth over the next few quarters,” the Fed officials said.
While saying the central bank expected inflation to moderate in coming months, the Fed statement said that “uncertainty about the inflation outlook remains high,” adding that it would be necessary to “continue to monitor inflation developments carefully.”
The quarter-point move followed a string of more aggressive rate cuts ranging from a half-point to three-fourths-point in the first three months of this year as the central bank was battling to stabilize financial markets roiled by multibillion-dollar losses caused by rising mortgage defaults.
That turmoil claimed its biggest victim on March 16 when Bear Stearns came to the brink of bankruptcy and the Fed stepped forward with a $30-billion (U.S.) line of credit to facilitate a sale of the country's fifth largest investment bank to JP Morgan Chase.
However, credit markets, while not back to normal, have stabilized and many analysts believe the worst may be over — although they caution that this forecast could prove too optimistic if the housing slump deepens further, causing even more mortgage defaults than now expected.
Before the Fed made its first rate cut in September, the funds rate had stood at 5.25 per cent.
While many economists believe the country is in a recession, the expectation is that it will be a short one ending this summer. If that turns out to be correct, the Fed may hold rates steady for the rest of this year with the next move being a rate increase some time next year when the economy is on sounder footing.
· TSX +109.94 recovering nearly half of Tuesdays slide
· Dow -11.81 despite data showing the U.S. economy still registering some growth during
the first quarter while GM handed in a quarterly loss that was less than expected. ($3.3b)
The Fed's failure to deliver an unequivocal statement that the worst was over for the economy
caused investors to sell their best performers.
· Dollar +.47c to $ $99.29US
· Oil -2.17 to $113.46US per barrel contributing to plummeting sales of sport utility vehicles and
pickups and GMs huge quarterly loss
· Gold -11.40US to $862.80US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html <http://www.bankofcanada.ca/en/rates/bonds.html>
“Wall Street believes this could well wrap up the Fed's rate cuts unless the economy threatens to fall into a worse slump than currently expected. Fed said it stood ready to “act as needed to promote sustainable economic growth and stability.” That phrase was seen as a signal that the Fed is as worried about weak growth as it is about the risk of higher inflation.”
Let the talk of Fixed Rate Mortgages begin again!!
________________________________
Fed cuts interest rates by a quarter point
MARTIN CRUTSINGER The Associated Press
April 30, 2008 at 2:37 PM EDT
WASHINGTON — The United States Federal Reserve has cut a key interest rate by a quarter-point, a smaller move than the aggressive easing it undertook earlier this year.
The Fed action, announced Wednesday after a two-day regular meeting, pushed the federal funds rate down to 2 per cent, its lowest level since late 2004. It marked the seventh consecutive rate cut by the central bank since it began easing credit conditions last September to combat the growing threat of a recession brought on by a deep housing slump and credit crisis.
The rate cut will mean lower borrowing costs throughout the economy as banks reduce their prime lending rate, the benchmark for millions of consumer and business loans.
The Fed move was in line with expectations.
The Fed devoted portions of its statement to both the threats of weakness and the threats that inflation could pose, likely reflecting the debate inside the central bank.
There were two dissents from the move, with both Richard Fisher, president of the Dallas regional Fed bank, and Charles Plosser, head of the Philadelphia Fed, arguing that the central bank should make no change in rates.
The central bank is walking a tightrope, trying to jump-start economic growth while also confronting the risk that if it overdoes the credit easing it could make inflation worse down the road.
Many economists believe the country has fallen into a recession. However, the government reported Wednesday that the overall economy, as measured by the gross domestic product, managed to eke out a 0.6 per cent growth rate in the January-March quarter, barely in positive territory.
On the overall economy, Fed Chairman Ben Bernanke and his colleagues said in their statement explaining the decision that “economic activity remains weak” with subdued spending by businesses and households.
“Financial markets remain under considerable stress and tight credit conditions and deepening housing contractions are likely to weigh on economic growth over the next few quarters,” the Fed officials said.
While saying the central bank expected inflation to moderate in coming months, the Fed statement said that “uncertainty about the inflation outlook remains high,” adding that it would be necessary to “continue to monitor inflation developments carefully.”
The quarter-point move followed a string of more aggressive rate cuts ranging from a half-point to three-fourths-point in the first three months of this year as the central bank was battling to stabilize financial markets roiled by multibillion-dollar losses caused by rising mortgage defaults.
That turmoil claimed its biggest victim on March 16 when Bear Stearns came to the brink of bankruptcy and the Fed stepped forward with a $30-billion (U.S.) line of credit to facilitate a sale of the country's fifth largest investment bank to JP Morgan Chase.
However, credit markets, while not back to normal, have stabilized and many analysts believe the worst may be over — although they caution that this forecast could prove too optimistic if the housing slump deepens further, causing even more mortgage defaults than now expected.
Before the Fed made its first rate cut in September, the funds rate had stood at 5.25 per cent.
While many economists believe the country is in a recession, the expectation is that it will be a short one ending this summer. If that turns out to be correct, the Fed may hold rates steady for the rest of this year with the next move being a rate increase some time next year when the economy is on sounder footing.
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