Financial Update For Oct. 13, 2009

TSX -47.59 Fri closed Mon(Reuters)

• DOW +78.07 +20.86

• Dollar +.71c to 95.76. on Friday-closed Mon

• Oil +.08 +$1.50 to $73.27 US per barrel.

• Gold -$7.60 +$8.200 to $1,056.70USD per ounce

• Canadian 5 yr bond yields +.17bps to 2.81. The spread, based on 5 yr rate of 4.09% is 1.18% after a huge spike in bond yields Friday, at one point being up 44 bps over 2 days, they settled up .17 bps. Four weeks ago the bond yield was 2.54%. RBC has already raised their rates by 35 BP.
• http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us

This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise. Ideally lenders are looking for a *NEW spread between 1.35 and 1.55

Most economists say recession is over and recovery is beginning

By Mae Anderson

NEW YORK — More than 80 per cent of economists believe the recession is over and an expansion has begun, but they expect the recovery will be slow as worries over unemployment and high federal debt persist.

That consensus comes from leading forecasters in a survey by the National Association for Business Economics released Monday.

“The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines,” said association president-elect Lynn Reaser, chief economist at Point Loma Nazarene University.

The forecasters upgraded the economic outlook for the next several quarters, but cautioned that unemployment rates and the federal deficit are expected to remain high through the next year. Forecasters now expect the economy, as measured by gross domestic product, to advance at a 2.9 per cent pace in the second half of the year, after falling for four straight quarters for the first time on records dating to 1947. They expect a three per cent gain in 2010.

Still, the federal deficit has ballooned and the jobless rate is expected to lag behind, as employers remain cautious.

The unemployment rate rose to 9.8 per cent in September from 9.7 per cent, the Labour Department said earlier this month, the highest point in 26 years.

Forecasters expect the unemployment rate to continue to rise, to 10 per cent in the first quarter of next year, before edging down to 9.5 per cent by the end of 2010.

The recession, the worst since the 1930s, has eliminated a net total of 7.2 million jobs.

Worries about unemployment are likely to continue to constrain household spending. Personal consumption spending likely began rising in the second half of this year, but is expected to remain low in 2010. Still, Americans aren’t expected to save as much as they have in past decades. The savings rate is expected to be above the 2 per cent average of the past four years, but below the 9 per cent average in the 1970s and 1980s.

The housing recovery is one bright spot. Forecasters expect 2010 to be the first year since 2005 that the housing sector will contribute to overall growth. Home prices are expected to rise two per cent in 2010, but panellists do not believe that will stifle the housing recovery.

Inflation is expected to remain low due to the weak labour market and other factors. Thus, the association panel — which consists of 44 economists surveyed Sept. 2 through Sept. 24 — expects the federal funds rate to remain at its current record low near zero until late next spring, before a gradual rise begins.

“The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation,” said Reaser.

The Associated Press

Financial Update For Oct. 8, 2009

TSX sees third day of triple-digit gains • Gold hits another all time high• Home sales have now exceeded pre-recession levels

• TSX +101.91 (Reuters) on continuing strength in metals prices and investor confidence that the economic rebound has staying power.

• DOW -5.67

• Dollar -.25c to 94.13. as weakening oil prices and a mixed showing on stock markets dragged the unit lower....

• Oil -$1.31 to $69.57US per barrel. as investors focused on U.S. government data that showed Americans still have little appetite for more petroleum

• Gold +$4.70 to $1,044.40USD per ounce continued its upward climb to close at another record high

• Canadian 5 yr bond yields -.02bps to 2.52. The spread, based on 5 yr rate of 4.09% is 1.57%

• http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us

This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise. Ideally lenders are looking for a *NEW spread between 1.35 and 1.55

Hot housing market expected to cool by November

Reuters
TORONTO -- Low financing costs and pent-up demand helped restore Canadian existing home sales to pre-recession levels, but the red-hot pace will likely peter out before the year is out, a report showed on Wednesday.

The Bank of Canada lowered rates to an all-time low with an aim to cushion the Canadian economy from external shocks. Instead, this aggressive easing has "proved to be more of a trampoline for resale housing markets," Toronto-Dominion Bank economist Pascal Gauthier said.

As of August, 50-60% of pent-up demand has been absorbed, and if the current pace persists, the demand will dry up by November, TD estimated in its Resale Housing Market Outlook. A sharp shift in consumer confidence has contributed to the rebound, combining with low and favourable interest rates that made home ownership affordable for many Canadians.

Between 45,000 and 53,000 potential sales late last year failed to materialize because consumer confidence froze up during the worst of the global financial crisis, TD estimated.

No other Canadian economic indicator in the past few months has recovered as strongly, and in fact, home sales have now exceeded pre-recession levels and matched the lofty volumes of 2007, TD said.

"After plummeting by nearly a third in the second half of last year, the seasonally-adjusted level of sales had climbed back by 61% as of August," the report said.

Overall, TD estimates national existing home sales will rise 2.4% to 445,000 units in 2009 from a year earlier, with the average price climbing 2.1% to $310,000. In 2010, sales are seen rising 2.2% to 455,000 units, while prices jump 5%. But in 2011, TD projects eroding affordability will dampen sales but the average price will still add a modest 2%.

TD also looked at nine Canadian cities and their prospects for existing home sales. All cities coast-to-coast were forecast to show gains from this year to 2010, but then retreat the following year.

On Tuesday, TD released a report that suggested the Bank of Canada could raise interest rates sooner and more aggressively than forecast if real estate strength did not cool.

Financial Update For Oct. 7, 2009

The rate hike heard round the world


Dollar hits one-year high • Gold hits record high • TSX sees triple-digit gain


• TSX +145.35 (Reuters) rose on strong commodities

• DOW +131.50

• Dollar +.93c to 94.38USD rose to its highest level in a year vs the U.S. currency on a string of factors set off by the Reserve Bank of Australia's decision to hike rates to 3.25% from 3%. The first of the Group of 20 central banks to raise interest rates as the global financial crisis eases. Financial markets took it as a signal world economies may be on the path to recovery. Scotia Capital economists said in their view the possibility of Canada following sooner than expected is "precisely nil”

• Oil +$.47 to $70.88US per barrel.

• Gold +$21.90 to $1,039.70USD per ounce The gold sector led the TSX, gaining 5.2%, topping its previous record of $1033.90 of Mar 08

• Canadian 5 yr bond yields +.06bps to 2.54. The spread, based on 5 yr rate of 4.09% is 1.54%

• http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us

This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise. Ideally lenders are looking for a *NEW spread between 1.35 and 1.55

The rate hike heard round the world

Paul Vieira, Financial Post

OTTAWA -- The Reserve Bank of Australia has become the first major central bank to raise interest rates since the financial crisis, citing rising home and stock prices along with the traditional focus on growth and inflation - factors other central bankers are expected to make more prominent as they seek to prevent a repeat of debilitating asset bubbles.

The surprise move by Australian central banker Glenn Stevens was greeted with enthusiasm by markets, as it was interpreted as a sign a global economic recovery was on track. Equities, commodity prices and the Canadian dollar surged on the move, although giving up some gains in later trading.

The Australian rate increase now puts the spotlight on other central banks, such as Canada's, which has been steadfast in setting rates to ensure a 2% inflation target. But inflation in Canada is expected to remain benign until 2011, forecasters say, due to excess manufacturing capacity in the economy and a strong Canadian dollar that will keep a lid on import prices.

The loonie reached a one-year high Tuesday of US94.82¢, before closing at US94.38¢, up 0.93¢ from Monday's close.

"Inflation is not going to be a problem. Consumer spending, and the consumer response to cheap money, however, may be a problem," said Stewart Hall, economist with HSBC Securities Canada.

The consumer response is what might push the Bank of Canada, just like its Australian counterpart. In its decision, Australia's central bank cited solid gains in housing prices and a "significant" recovery in equity markets for raising its benchmark rate 25 basis points, to 3.25%.

"I do get the sense asset prices are going to be play a greater role in the formation of monetary policy," said Michael Gregory, senior economist at BMO Capital Markets. "Because the amount of stimulus is unprecedented, and at emergency levels, removing it won't follow the same rules of thumb."

As a result, he said, central bankers might be looking at new measures to determine when to raise rates. As opposed to looking strictly at inflation and growth, Mr. Gregory said central banks might be forced to pay as much attention to asset prices and credit spreads.

In Australia, the central bank has always paid close attention to housing prices - which are a national obsession and have been on a tear over the past decade - and view them as a guage of the overall strength of the economy.

One of the main debates in the aftermath of the financial crisis is the role central banks should play in averting future meltdowns, and what powers they should be granted to execute this task. By taking on a beefed-up role as overseeing the financial system, central banks would be expected to identify asset bubbles and pop them before they burst. The collapse of the U.S. real estate market, fuelled by low lending rates that attracted less-creditworthy buyers, sparked a credit crisis and global recession.

"The general view before the calamity was that monetary policy was not an effective tool in dealing with asset bubbles," said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.

"But given how much damage was caused by the U.S. housing bubble, the view now is that cleaning up the mess afterward can be far too costly and that monetary policy may need to be responsive to asset prices."

Mr. Alexander was a co-author of a TD report released Tuesday, suggesting the Bank of Canada might be forced to raise rates before it expected should Canada's housing market continue its stellar performance.

Mr. Hall said the Bank of Canada has put itself in a "tiny bit" of a box by indicating it was prepared to keep its key interest rate at 0.25% until June 2010, on the condition that inflation would hit the 2% target in early 2011.

But Mr. Hall said the central bank "would do what it wants to do" should circumstances arise. "It won't get trapped by anything."

The Bank of Canada is set to deliver its next interest-rate on Oct. 20, followed by an updated economic outlook two days later. Analysts will be eyeing the documents closely for any change in tone regarding rates. In the meantime, the Bank of Canada's senior deputy governor, Paul Jenkins, is scheduled to speak in Vancouver Thursday regarding the future "challenges" facing central banking.