· TSX -336.55 to 8504.93
· DOW -332.00 to 7949.09
· Dollar 0.7923 USD
· Oil +.34 to $41.15 per barrel.
· Gold +3.60 to $859.00 USD per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
Canada finds itself in a 'credit deadlock'
Jacqueline Thorpe, Financial Post Published: Tuesday, January 20, 2009
What if the Bank of Canada cut interest rates and nobody borrowed? As the Bank of Canada joins other central banks around the world in slashing interest rates to historic lows, this is the essential conundrum they face.
They may have brought some semblance of normality to credit markets, and harangued banks back into lending, but now borrowers are on strike.
Call it a "credit deadlock," as David Laidler, fellow-in-residence at the C.D. Howe Institute, does, or a shift from "aspirational to desperational" spending, as Goldman Sachs quipped Tuesday, but the fact is people are becoming less willing to borrow and spend, even if the Bank of Canada's benchmark interest rate is now a tantalizing 1%, the lowest policy rate since the Bank of Canada was founded in 1934.
If consumers were getting antsy about spending as house prices and stock prices tanked, they are hardly going to start borrowing and spending if they are now also losing their jobs.
The United States is now well into this consumer deleveraging process as the unemployment rate has risen from a trough of 4.4% to 7.2% in the space of little over a year.
In Canada, the process has only just begun. For a while, it looked like we might be able to skate through the slowdown with just a flesh wound or two but the complete and total collapse in commodity prices has put paid to that notion, as news Tuesday showed.
Manufacturing shipments for November fell 6.4% to $48.4-billion in November as commodity prices plunged. Strip out the price declines and volumes were still down 3% and new orders plummeted 12.9% as U.S. demand froze.
Meanwhile, Suncor Energy Inc. reported its first quarterly loss in 15 years, chopped spending plans for the second time in less than three months, and indefinitely postponed its oil sands expansion plans as oil has cratered to US$39 per barrel from its peak of US$147 in the summer.
We may have a healthier financial system than our G7 colleagues but our G7 colleagues haven't seen their golden goose vaporized in the space of six months.
That goose -- all natural resources combined -- accounted for all the growth in Canada's export earnings from 2004 to 2008 (non-resource exports slumped 17% on the back of a strong dollar and a drop in auto sales) half the value of the S&P/TSX until the third quarter of 2008 (up from 20% in 2003); and half the growth in business investment from 2003 to 2006.
The goose has not been a big jobs or GDP generator on its own since it is so capital intensive, but the boost to national income from the longest and steepest commodity boom in the post-war period has been phenomenal, stoking profits and the Canadian dollar which have been recycled back to consumers in the form of tax cuts, lower import prices and higher disposal income. That in turn has boosted jobs and income growth all down the pipeline.
Canadians were not afraid to take on ever-increasing debt under this rosy scenario.
But it has all vanished now. A report from BMO Capital markets Tuesday said many commodities such as copper and zinc are now trading below their average operating costs, let alone their all-in costs.
As we wait for other sectors to pick up the slack, the job losses will mount and the opposite, negative dynamic will take hold.
That is not to say the rate cuts will have no impact at all. They will help the banks, which dutifully passed on the cuts through a drop in prime lending rates to 3% from 3.5%. Those with variable rate mortgages and lines of credit will benefit.
An FP colleague who renegotiated her mortgage in September says her mortgage rate -- prime, minus 75 basis points -- will fall to an astonishingly low 2.25%. But she is not about to go out and run up her line of credit. People in general will try to cut back their debt and shy from fresh borrowing.
And while the Bank of Canada forecasts growth will rebound to 3.8% in 2010 from a contraction of 1.2% this year, debt workouts are usually long and painful as anyone who has watched them in the corporate sector knows.
Wednesday, January 21, 2009
Tuesday, January 20, 2009
Financial Update for Jan. 20,2009
Bank of Canada lowers overnight rate target by 1/2 percentage point to 1 per cent
· TSX -78.92 to 8841.48
· DOW 8282.22 markets were closed yesterday.
· Dollar 0.7957 USD
· Oil -1.43to $40.87 per barrel.
· Gold -2.80 to $832.20 USD per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.
The outlook for the global economy has deteriorated since the Bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity.
Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand. Major advanced economies, including Canada's, are now in recession and emerging-market economies are increasingly affected. Energy prices have fallen as a result of substantially weaker global demand.
Stabilization of the global financial system is a precondition for economic recovery. To that end, governments and central banks are taking bold and concerted policy actions. There are signs that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize. In addition, considerable monetary and fiscal policy stimulus is being provided worldwide.
Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence. Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis. As policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010.
A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1 per cent in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices. With inflation expectations well-anchored, total and core inflation should return to the 2 per cent target in the first half of 2011 as the economy returns to potential.
Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada's inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.
Information note:
A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report Update on 22 January 2009. The next scheduled date for announcing the overnight rate target is 3 March 2009.
· TSX -78.92 to 8841.48
· DOW 8282.22 markets were closed yesterday.
· Dollar 0.7957 USD
· Oil -1.43to $40.87 per barrel.
· Gold -2.80 to $832.20 USD per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 1/4 per cent.
The outlook for the global economy has deteriorated since the Bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity.
Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand. Major advanced economies, including Canada's, are now in recession and emerging-market economies are increasingly affected. Energy prices have fallen as a result of substantially weaker global demand.
Stabilization of the global financial system is a precondition for economic recovery. To that end, governments and central banks are taking bold and concerted policy actions. There are signs that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize. In addition, considerable monetary and fiscal policy stimulus is being provided worldwide.
Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence. Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis. As policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010.
A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1 per cent in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices. With inflation expectations well-anchored, total and core inflation should return to the 2 per cent target in the first half of 2011 as the economy returns to potential.
Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada's inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.
Information note:
A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report Update on 22 January 2009. The next scheduled date for announcing the overnight rate target is 3 March 2009.
Monday, January 19, 2009
Financial Update for Jan. 19,2009
Interesting article below about banks increasing rates on consumer loans/lines of credit amidst increase pressure from the government to lend more. How will the banks deal with a potential rate cut from the Bank of Canada when they meet shortly…
· TSX +40.79 to 8920.40
· DOW +68.73 pts to 8282.22
· Dollar 0.8069 USD
· Oil +$5.79to $42.30 per barrel.
· Gold -2.60 to $837.20 USD per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
Tight credit starts to bite consumers
TARA PERKINS AND LORI MCLEOD
From Saturday's Globe and Mail
January 16, 2009 at 9:10 PM EST
The credit crunch, which has already squeezed corporate borrowers, is now trickling through to consumers, with higher interest rates and tighter lending terms.
Some borrowers are being notified that rates on their credit lines and cards are going up, and others are having borrowing limits scaled back.
Home buyers taking out a variable-rate mortgage, meanwhile, will find a premium over the prime rate of 70 to 80 basis points, rather than the discount they might have found just six months ago. (A basis point is 1/100 of a per cent.)
While financial institutions in the United States took similar measures last year and banks in Canada have been charging their corporate customers more, the competitive consumer-banking environment in Canada has made it more difficult for Canadian lenders to pass their higher costs along to individual borrowers.
But signs are mounting that financial institutions are going to raise prices on consumer loans, even as the federal government attempts to tackle the thorny issue of credit in its Jan. 27 budget.
Ottawa wants to grease access to credit at reasonable prices to keep the economy churning through the downturn.
The price of bank loans is also likely to hit the spotlight Tuesday, when the Bank of Canada is expected to cut interest rates again.
Banks are under pressure to reduce rates and lend more at a time when they are worried that more borrowers will struggle with their debts, a concern reflected in their increased provisions for troubled loans.
Bank of Montreal is sending letters to customers notifying them of a 1 percentage point increase in interest on lines of credit. The prime rate has been declining in recent months while the cost of borrowing has risen dramatically for all banks, the letters say.
BMO's increase, which affects customers who obtained credit lines before Oct. 15, does not make its products the most expensive in the industry. “From our survey of the market which was confirmed as recently as today, our personal line of credit offering is competitive and in fact favourable compared to some of our major competitors,” a spokesman for the bank said earlier this week. But the move signifies a new willingness among banks to raise rates.
“I think we'll see the rest of the competitors follow suit in some fashion,” said Edward Jones analyst Craig Fehr. “I think this is going to be the first of many product lines that will get repriced.”
The banks, which fund more than half of their loans through deposits, are seeking to loosen the vise grip that lower interest rates have placed on their profits.
“Since the banks depend on deposits for much of their funding, if you reduce prime without being able to reduce deposit rates by the same amount, the margin gets squeezed,” said National Bank analyst Robert Sedran. “Increasing the borrower's spread to prime restores some of that lost profitability. You could see more of that behaviour if interest rates continue to fall.”
Canadian Tire is raising the rate on its Options MasterCard credit cards by 2 percentage points, effective in March. A number of competitors have already raised rates, said spokeswoman Lisa Gibson.
“In this case, just given the economy and so on, we made the decision to raise it,” she said.
Canadian Tire has also reduced the spending limits on accounts that were inactive in order to reduce risk in the company's portfolio, she added. “We also stopped credit limit increases for riskier customers.”
American Express sent letters to a number of Canadians last month informing them the limit on their card had been cut. The company recently tightened some of its criteria, and has increased scrutiny of customer limits in light of the economic environment, said spokeswoman Lauren Dineen-Duarte.
One cardholder, who says she has never missed a payment and has a good job and credit rating, was surprised to receive a form letter from Amex Dec. 24 scaling back her credit limit by more than $16,000.
“These regular reviews are undertaken to protect card members' interests by helping them avoid taking on additional debt that they may not be able to support,” said the letter, which informed the cardholder her limit had been reduced to $1,000.
Ms. Dineen-Duarte said that although “this is an area that is being given increased scrutiny at this time, we have currently only had to take action like reducing credit limits for less than half-a-per-cent of our total card member base.”
She added that Amex carries out its assessments based on the financial information it has on record, including the card holder's spending and payment patterns, and external information it obtains from credit reference agencies.
As Toronto-Dominion Bank chief executive officer Ed Clark pointed out at an industry conference recently, there is new evidence that more Canadian consumers will have trouble repaying their loans. Personal bankruptcies and unemployment are on the rise, and soured loans are expected to follow.
As a result, financial institutions are stepping up efforts to reduce risk in their lending portfolios, and protect profits.
“Will we be able to start to recover, in the lending markets, our cost of lending?” Mr. Clark mused. “I think every bank is trying to do that, but this is a highly competitive market.”
He later added, “We're going through every line of business and saying, ‘Okay, would you make this loan if you assume we're going to have 8 per cent or 9 per cent unemployment?'”
Discounts on variable-rate mortgages, which had become standard during the housing boom but evaporated late last year, are showing no signs of a revival. Lenders are charging about a percentage point above prime on open, variable-rate mortgages with a five-year term. The best current deal is 60 basis points over prime, according to a mortgage broker.
In October, banks and other lenders stopped offering discounts off the prime rate on variable mortgages, and shortly thereafter began charging their mortgage customers a premium over prime.
While rates are historically low, the difference between receiving a discount and paying a premium above prime can translate into a 20-per-cent difference in the biweekly payment amount on a $300,000 variable-rate mortgage.
· TSX +40.79 to 8920.40
· DOW +68.73 pts to 8282.22
· Dollar 0.8069 USD
· Oil +$5.79to $42.30 per barrel.
· Gold -2.60 to $837.20 USD per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices
Tight credit starts to bite consumers
TARA PERKINS AND LORI MCLEOD
From Saturday's Globe and Mail
January 16, 2009 at 9:10 PM EST
The credit crunch, which has already squeezed corporate borrowers, is now trickling through to consumers, with higher interest rates and tighter lending terms.
Some borrowers are being notified that rates on their credit lines and cards are going up, and others are having borrowing limits scaled back.
Home buyers taking out a variable-rate mortgage, meanwhile, will find a premium over the prime rate of 70 to 80 basis points, rather than the discount they might have found just six months ago. (A basis point is 1/100 of a per cent.)
While financial institutions in the United States took similar measures last year and banks in Canada have been charging their corporate customers more, the competitive consumer-banking environment in Canada has made it more difficult for Canadian lenders to pass their higher costs along to individual borrowers.
But signs are mounting that financial institutions are going to raise prices on consumer loans, even as the federal government attempts to tackle the thorny issue of credit in its Jan. 27 budget.
Ottawa wants to grease access to credit at reasonable prices to keep the economy churning through the downturn.
The price of bank loans is also likely to hit the spotlight Tuesday, when the Bank of Canada is expected to cut interest rates again.
Banks are under pressure to reduce rates and lend more at a time when they are worried that more borrowers will struggle with their debts, a concern reflected in their increased provisions for troubled loans.
Bank of Montreal is sending letters to customers notifying them of a 1 percentage point increase in interest on lines of credit. The prime rate has been declining in recent months while the cost of borrowing has risen dramatically for all banks, the letters say.
BMO's increase, which affects customers who obtained credit lines before Oct. 15, does not make its products the most expensive in the industry. “From our survey of the market which was confirmed as recently as today, our personal line of credit offering is competitive and in fact favourable compared to some of our major competitors,” a spokesman for the bank said earlier this week. But the move signifies a new willingness among banks to raise rates.
“I think we'll see the rest of the competitors follow suit in some fashion,” said Edward Jones analyst Craig Fehr. “I think this is going to be the first of many product lines that will get repriced.”
The banks, which fund more than half of their loans through deposits, are seeking to loosen the vise grip that lower interest rates have placed on their profits.
“Since the banks depend on deposits for much of their funding, if you reduce prime without being able to reduce deposit rates by the same amount, the margin gets squeezed,” said National Bank analyst Robert Sedran. “Increasing the borrower's spread to prime restores some of that lost profitability. You could see more of that behaviour if interest rates continue to fall.”
Canadian Tire is raising the rate on its Options MasterCard credit cards by 2 percentage points, effective in March. A number of competitors have already raised rates, said spokeswoman Lisa Gibson.
“In this case, just given the economy and so on, we made the decision to raise it,” she said.
Canadian Tire has also reduced the spending limits on accounts that were inactive in order to reduce risk in the company's portfolio, she added. “We also stopped credit limit increases for riskier customers.”
American Express sent letters to a number of Canadians last month informing them the limit on their card had been cut. The company recently tightened some of its criteria, and has increased scrutiny of customer limits in light of the economic environment, said spokeswoman Lauren Dineen-Duarte.
One cardholder, who says she has never missed a payment and has a good job and credit rating, was surprised to receive a form letter from Amex Dec. 24 scaling back her credit limit by more than $16,000.
“These regular reviews are undertaken to protect card members' interests by helping them avoid taking on additional debt that they may not be able to support,” said the letter, which informed the cardholder her limit had been reduced to $1,000.
Ms. Dineen-Duarte said that although “this is an area that is being given increased scrutiny at this time, we have currently only had to take action like reducing credit limits for less than half-a-per-cent of our total card member base.”
She added that Amex carries out its assessments based on the financial information it has on record, including the card holder's spending and payment patterns, and external information it obtains from credit reference agencies.
As Toronto-Dominion Bank chief executive officer Ed Clark pointed out at an industry conference recently, there is new evidence that more Canadian consumers will have trouble repaying their loans. Personal bankruptcies and unemployment are on the rise, and soured loans are expected to follow.
As a result, financial institutions are stepping up efforts to reduce risk in their lending portfolios, and protect profits.
“Will we be able to start to recover, in the lending markets, our cost of lending?” Mr. Clark mused. “I think every bank is trying to do that, but this is a highly competitive market.”
He later added, “We're going through every line of business and saying, ‘Okay, would you make this loan if you assume we're going to have 8 per cent or 9 per cent unemployment?'”
Discounts on variable-rate mortgages, which had become standard during the housing boom but evaporated late last year, are showing no signs of a revival. Lenders are charging about a percentage point above prime on open, variable-rate mortgages with a five-year term. The best current deal is 60 basis points over prime, according to a mortgage broker.
In October, banks and other lenders stopped offering discounts off the prime rate on variable mortgages, and shortly thereafter began charging their mortgage customers a premium over prime.
While rates are historically low, the difference between receiving a discount and paying a premium above prime can translate into a 20-per-cent difference in the biweekly payment amount on a $300,000 variable-rate mortgage.
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