Canada's recession resilience (article below)
• TSX +31.98 as stable commodity prices helped energy and gold shares hold their own against weak financial issues.
• DOW -82.99
• Dollar -.24c to 80.65USD
• Oil +$.30to $48.85US per barrel
• Gold -$9.80 to $892.50USD per ounce
• Canadian 5 yr bond yields +.02bps to 1.89. Four weeks ago it was 1.94. The spread today vs the Merix Quick Close 5 year rate is 1.80%.
• http://www.financialpost.com/markets/market_data/money-yields-can_us.html
There will be lots of information coming out today. Bank of Canada governor Mark Carney will be explaining (maybe vaguely) the reasons for the BoC rate drop and expectations we should have for the future, quantitative easing (printing money), and how this will all affect the Canadian economy. Here is an article from the Financial Post that expands on this. Keep an eye on this as it will affect bond rates/yields which could affect mortgage rates.
Terence Corcoran: Quantitative schemes at the Bank of Canada
Posted: April 22, 2009, 9:17 PM by Ron Nurwisah
Terence Corcoran, central banks
On Thursday we will learn what the Bank of Canada will do next to stimulate the economy, how it will apply the now famous “quantitative easing” phase of its ongoing effort.
The bank is already giving away money, setting an overnight rate of 0.25% — “virtually zero,” as former governor John Crow says in his commentary. At the chartered banks, astute mortgage borrowers can almost lock in less than 2% for the next year, assuming borrowers are willing to take a flyer on current Governor Mark Carney’s statement that it will not be changing rates again for the next year.
With mortgages going for next to nothing, you might expect house sales to be climbing. But they are not, at least not yet — an indication that there is more to getting an economy moving than monetary policy and interest-rate manipulation. Nor has there been much to show from the deficit spending extravaganzas announced by Ottawa and the provinces.
And so now the Bank of Canada is apparently set to announce the next phase in its attempt to kick start borrowing and lending. The bank has already bought up more than $30-billion in various securities from private institutions over the last six months in an attempt to ease credit pressures in some markets. But it has done so carefully without creating excess monetary stimulus that would risk future inflation. This next phase will be different, “unconventional,” according to a Bank of Canada description.
Until now, no Canadian central banker has ever used the words “quantitative easing.” Only in the last few weeks has the Bank of Canada issued quick definitions of the phrase. What is quantitative easing? It’s the bank’s “purchase of financial assets through creation of central bank reserves.” The result is twofold. First, the new reserves are also known as “printing money.” The reserves provide the chartered banks with new ability to increase their lending to business and households. Second, by buying financial securities, the Bank of Canada would be increasing the supply of money to a particular market, thereby driving down the interest rates on those securities. If the bank were to buy 10-year corporate bonds, for example, then 10-year bond rates should decline.
So that’s the theory. Quantitative easing is supposed to do two things: increase the money supply via chartered bank expansion of lending and reduce longer-term interest rates in areas of the market the Bank of Canada usually has no influence over. The other technique, called “credit easing,” also involves buying private market securities, but in a way that does not necessarily increase the money supply and the risk of inflation.
In its monetary report on Wednesday, the Bank is expected to more precisely identify how, when and even if it will start engaging in the business of buying up financial securities so as to drive down longer-term interest rates and increase the money supply beyond the rates of increase already taking place.
The risks in this next phase are numerous. As John Crow reports, eventually the big run up in the Bank’s assets has to stop and the process will have to be reversed. The financial securities will have to be sold back into the market.
Running around with mop, pail and squeegee to scoop up the excess monetary stimulus will require a degree of central bank fortitude that does not always come easy. The political pressure on central bankers to become what Mr. Crow calls “team players” in keeping growth up at the risk of higher inflation could weaken their resolve. In an odd note on this subject, the Bank of Canada’s recent Q & A says that “if a profound disagreement were to occur between the Bank and the government, the Minister of Finance could issue a written directive to the Governor ... This would most likely result in the Governor’s resignation.”
That’s never happened, adds the bank, perhaps hopefully.
Another uncertainty is that the quantitative and credit easings may not work. The credit markets and the economies of the world are stalled due to lack of confidence and a market belief that the investment climate is still too risky. The cause of the risk is not interest rates or lack of ready cash or liquidity.
There is no absolute proof of this, but investors are likely holding back due to growing concern over government involvement in the economy, especially from the United States, the most crucial drag on the Canadian economy. The Obama administration is setting itself up as controlling manager and chief lever-puller of the banking and financial system, the auto industry and the energy markets. No amount of quantitative easing or stimulus activity in Canada can overcome that drag.
Canada's recession resilience
The Globe and Mail Report on Business RICHARD BLACKWELL
April 23, 2009
The International Monetary Fund's report yesterday said the world is in the deepest recession in 70 years. That's pretty depressing. Did they have any good news?
The IMF's world economic outlook was a discouraging read, but there was a little positive news about Canada.
For one thing, the report noted that Canada has had just three recessions since 1960, far fewer than most other countries. (New Zealand has had 12, Switzerland and Italy have each had nine.)
The report also said that many countries have been in economic decline for a long time, while ours is relative recent. Ireland's economy has been shrinking for almost two years, for example, and Denmark has been in recession for five quarters. Canada only fell into recession in the last quarter of 2008.
Still, the IMF notes that worldwide recessions prompted by financial crises are more severe and the recovery is slower than other downturns.
We hear a lot about the shift from full-time employment to part-time, but are there other measures of the quality of jobs available?
CIBC World Markets does an interesting analysis of the job market that looks at the "quality" of jobs. When full-time employment shrinks and the number of part-time jobs grows - as it has recently - the quality of the job market decreases.
Similarly, when self-employment increases as regular jobs disappear, quality declines.
Still, while both those considerations have contributed to a decline in job quality, there is another factor that has offset the effects, CIBC says. Because so many job cuts have been among low-paying jobs (often held by younger workers), and high-paying positions have been relatively immune, the overall quality of employment has not changed much, the economists say.
That's not much comfort to those who are unemployed, but it is one other way of looking at the job picture in a macro light.
I understand that hourly workers at GM, Chrysler and Ford do not pay directly into their company pension plans. Does this mean they can also contribute to their own RRSPs, and effectively have two pensions?
The hourly auto workers are subject to the same rules as everyone else, which means they have a "pension adjustment" to their RRSP contribution limits, related to the value of the contributions the company makes to their defined-benefit plans.
This means that any worker's annual RRSP contribution room will be reduced considerably, depending on how much the employer puts into the pension. The adjustment depends on the total going into the plan - it doesn't matter who makes contributions.
Many workers with defined-benefit plans have some room for RRSP contributions, but it is often very limited.
Thursday, April 23, 2009
Financial Update for April 22, 2009
Financials, energy issues power TSX higher
• TSX +121.02 solid gains spurred by stronger oil prices and optimistic comments from U.S. Treasury Secretary Timothy Geithner, while Teck Cominco soared 37% on news it had deferred billions in debt payments.
• DOW +127.83
• Dollar +.15c to 80.89USD
• Oil +$.63 to $46.51US per barrel
• Gold -$4.80 to $882.40USD per ounce
• Canadian 5 yr bond yields -bps to 1.87. Four weeks ago it was 1.86. The spread today between the 5 yr quick close and the bond yield is -1.82
• http://www.financialpost.com/markets/market_data/money-yields-can_us.html
What the rate cut means for mortgages
Garry Marr, Financial Post
The latest rate cut means consumers buying a house can borrow for as little as 3% interest on their loan if they are willing to buy into the Bank of Canada's statement Tuesday that it won't be changing rates until June, 2010.
If you don't believe the bank will hold steady on its promise, you can lock into five-year, fixed-rate mortgages for as low as 3.85% on a discounted basis -- the lowest rate in Canadian history.
But all of that may amount to nothing when it comes to soothing a Canadian housing market in which new construction has fallen below 200,000 on an annualized basis for the first time in seven years. March existing-home sales were off 13.7% from a year ago.
"What is 25 basis points among friends? It's really nothing," said Benjamin Tal, senior economist with CIBC World Markets. "This is not something that is going to change the course of the market. It only helps at the margin."
Mr. Tal did say mortgage refinancings have risen dramatically in the past few months as Canadians who might have borrowed at 5.75% just over two years ago are ready to eat any interest rate penalty because a five-year rate mortgage is now so low.
The penalty to break an existing mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.
Mr. Tal says while there is not much lower for variable-rate mortgages to go, the gap between short-term money and long-term money is still significant enough that the temptation is not to lock in.
"You might do better the first two years [of a five-year mortgage] but not the remaining three. I'm convinced long-term interest rates will rise. I can see [long-term] rising 200 basis points. These are emergency rates and at some point this emergency will end," says the economist.
John Turner, the director of mortgages at the Bank of Montreal says he's never seen anything like what is going on in today's market.
"There is a possibility of another drop," says Mr. Turner. "But does your tummy feel good about something that has a higher possibility of going up than going down any further."
He is convinced these lower rates will boost the housing market. The 13.7% decline in home sales in March was the smallest year over year decline in six months. "I think there is a segment of the market that couldn't afford a home before," said Mr. Turner.
Don Lawby, chief executive of Century 21 Canada, said while rates are declining, banks are getting tighter with how they hand out credit.
"If you are self-employed, the banks are demanding more documentation. Appraisals are getting harder too. It's not what you bought the house for but what it's appraised for," said Mr. Lawby, who also heads up a mortgage broker business. "There is not a lot of subprime out there for people with any credit problems in their history."
Quantitative easing Q&A with the BoC
FP Posted: April 21, 2009, 10:16 PM by Alia McMullen
With interest rates now at a record low 0.25%, theBank of Canada has provided definitions of quantitative easing and credit easing on its website.
What happens when the policy interest rate approaches zero?
"The traditional monetary policy instrument used by central banks to stabilize the economy and maintain price stability is the policy interest rate. When the policy rate moves towards zero, a central bank may consider using other tools to provide stimulus to the economy and achieve its inflation objective. This can include consideration of so-called 'unconventional' monetary measures such as quantitative easing and credit easing."
What is quantitativeeasing?
"Quantitative easing is the purchase by a central bank of financial assets through creation of central bank reserves. As a result, the price of the purchased assets (which can include government securities or private assets) rises and the yield on the assets falls. The expansion of reserves available to commercial banks also encourages them to increase the supply of credit to households and businesses.
In economic terminology, quantitative easing uses 'unsterilized' funding; in other words, the reserves of the central bank are increased to finance asset purchases."
What is credit easing?
"Credit easing is the targeted purchase by a central bank of private sector assets in certain credit markets which are important to the functioning of the financial system. The goal of credit easing is to reduce risk premiums and improve liquidity and trading activity in specific markets so that credit will flow and demand in the economy will expand.
Credit easing can be done on a 'sterilized' basis; in other words, there is no need to increase central bank reserves in order to undertake credit easing. If undertaken on an unsterilized basis, this amounts to combining credit easing with quantitative easing."
• TSX +121.02 solid gains spurred by stronger oil prices and optimistic comments from U.S. Treasury Secretary Timothy Geithner, while Teck Cominco soared 37% on news it had deferred billions in debt payments.
• DOW +127.83
• Dollar +.15c to 80.89USD
• Oil +$.63 to $46.51US per barrel
• Gold -$4.80 to $882.40USD per ounce
• Canadian 5 yr bond yields -bps to 1.87. Four weeks ago it was 1.86. The spread today between the 5 yr quick close and the bond yield is -1.82
• http://www.financialpost.com/markets/market_data/money-yields-can_us.html
What the rate cut means for mortgages
Garry Marr, Financial Post
The latest rate cut means consumers buying a house can borrow for as little as 3% interest on their loan if they are willing to buy into the Bank of Canada's statement Tuesday that it won't be changing rates until June, 2010.
If you don't believe the bank will hold steady on its promise, you can lock into five-year, fixed-rate mortgages for as low as 3.85% on a discounted basis -- the lowest rate in Canadian history.
But all of that may amount to nothing when it comes to soothing a Canadian housing market in which new construction has fallen below 200,000 on an annualized basis for the first time in seven years. March existing-home sales were off 13.7% from a year ago.
"What is 25 basis points among friends? It's really nothing," said Benjamin Tal, senior economist with CIBC World Markets. "This is not something that is going to change the course of the market. It only helps at the margin."
Mr. Tal did say mortgage refinancings have risen dramatically in the past few months as Canadians who might have borrowed at 5.75% just over two years ago are ready to eat any interest rate penalty because a five-year rate mortgage is now so low.
The penalty to break an existing mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.
Mr. Tal says while there is not much lower for variable-rate mortgages to go, the gap between short-term money and long-term money is still significant enough that the temptation is not to lock in.
"You might do better the first two years [of a five-year mortgage] but not the remaining three. I'm convinced long-term interest rates will rise. I can see [long-term] rising 200 basis points. These are emergency rates and at some point this emergency will end," says the economist.
John Turner, the director of mortgages at the Bank of Montreal says he's never seen anything like what is going on in today's market.
"There is a possibility of another drop," says Mr. Turner. "But does your tummy feel good about something that has a higher possibility of going up than going down any further."
He is convinced these lower rates will boost the housing market. The 13.7% decline in home sales in March was the smallest year over year decline in six months. "I think there is a segment of the market that couldn't afford a home before," said Mr. Turner.
Don Lawby, chief executive of Century 21 Canada, said while rates are declining, banks are getting tighter with how they hand out credit.
"If you are self-employed, the banks are demanding more documentation. Appraisals are getting harder too. It's not what you bought the house for but what it's appraised for," said Mr. Lawby, who also heads up a mortgage broker business. "There is not a lot of subprime out there for people with any credit problems in their history."
Quantitative easing Q&A with the BoC
FP Posted: April 21, 2009, 10:16 PM by Alia McMullen
With interest rates now at a record low 0.25%, theBank of Canada has provided definitions of quantitative easing and credit easing on its website.
What happens when the policy interest rate approaches zero?
"The traditional monetary policy instrument used by central banks to stabilize the economy and maintain price stability is the policy interest rate. When the policy rate moves towards zero, a central bank may consider using other tools to provide stimulus to the economy and achieve its inflation objective. This can include consideration of so-called 'unconventional' monetary measures such as quantitative easing and credit easing."
What is quantitativeeasing?
"Quantitative easing is the purchase by a central bank of financial assets through creation of central bank reserves. As a result, the price of the purchased assets (which can include government securities or private assets) rises and the yield on the assets falls. The expansion of reserves available to commercial banks also encourages them to increase the supply of credit to households and businesses.
In economic terminology, quantitative easing uses 'unsterilized' funding; in other words, the reserves of the central bank are increased to finance asset purchases."
What is credit easing?
"Credit easing is the targeted purchase by a central bank of private sector assets in certain credit markets which are important to the functioning of the financial system. The goal of credit easing is to reduce risk premiums and improve liquidity and trading activity in specific markets so that credit will flow and demand in the economy will expand.
Credit easing can be done on a 'sterilized' basis; in other words, there is no need to increase central bank reserves in order to undertake credit easing. If undertaken on an unsterilized basis, this amounts to combining credit easing with quantitative easing."
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