Although Europe continues to stagnate economically, hopes for an improving global economy were bolstered by improving factory activity numbers in the US and China.  As the two largest economies in the world, any positive economic data from these countries benefits the economies of most nations.  

On Wednesday, the Bank of Canada released the latest policy statement which indicated that economic growth is lower than expected and will remain so well into 2014.   The policy statement, for the first time in a long time, did not mention potentially increasing interest rates.  Inflation remains below the 2% core inflation target that the central bank watches closely and should stay within the target range for 18 months or longer.   This greatly reduces the potential for an increase to the prime rate before the end of the year.  Although conditions may change, it now looks like the prime rate will remain at 3.0% until the middle of 2014.

The Canadian dollar dropped over $0.01 over the past two days in response to the announcement by the Bank of Canada.   Lower than expected economic growth and the decreased prospect for higher interest rates caused a reduced demand for the loonie.   Although this significant decline in the value of the dollar was unexpected this soon, this may prove to provide a buying opportunity for sellers of the US dollar or non-residents looking to lock in a good price on the loonie.

Fixed term mortgage rates remain very low and the current spreads indicate that there is potential for an increase of 0.15% to 0.25% to 5 year term rates.  However, the current mortgage market is fairly competitive as bond yields are starting to slowly come down.   Since most lenders like to be very competitive in time for the spring buying season, we may see a return to the “rate wars” that popped up a few times in 2012.   If this happens, each lender will come out with a “special” rate that has a number  of conditions in order to qualify.  These “special” rate programs may be good deals for a few clients but the reduced flexibility rarely ends up being beneficial to the majority of clients.

Jason McLean
jason@garibaldimortgage.com

Comment (4)

Positive economic numbers from the US continue to stoke optimistic views on the US economy for the coming years.  In the US, jobless claims are at a 5 year low and housing starts are at a 5 year high.

This positive news, along with December numbers showing that inflation is not a concern at present, have buoyed consumer confidence.   All these factors point to the beginning of a sustainable economic recovery for Canada’s largest trading partner.  Despite the potential cloud of the debt ceiling deadline on March 1^st, it appears that the US economy will continue to pick up speed for the rest of the year and beyond.     The debt ceiling is the legislated maximum US national debt amount that is about to be surpassed on March 1^st, unless both US political parties can come to some agreement

on increasing the debt limit.    If the debt limit is not increased, the US will have to decide which bills to pay first and which ones to ignore for the time being.  This would definitely adversely affect the growth prospects for the US but the most likely scenario is that an agreement will be reached just in time to avert a crisis, as was seen with the fiscal cliff scenario.

 

Currently, the Canadian dollar moves higher with every positive economic news item coming out of the US.  This is due to the US being our largest trading partner and our economy is very dependent on the US economy.    As the US economy continues to gain strength, the Canadian dollar will stop moving higher relative to the US dollar on positive US economic news.   This will likely start to be seen when the US Federal Reserve stops the current stimulus measures that are increasing US dollar liquidity and maintaining low rates.    We may not see this trend in the next year but it should occur in 2014.

Meanwhile, the Canadian dollar continues to be a strong global currency and it should maintain values above par for the short-term.

 

Bond yields in Canada continue to creep up which is causing upward pressure on fixed term mortgage rates.  Excellent rates are still available for most terms, but do not be surprised to see increases of 0.15% to 0.25% for the ever popular 5 year terms over the next two months.  Even if these increases do occur, rates still remain near historic lows and people should be aware of how low rates actually are at present.

 

Jason McLean

jason@garibaldimortgage.com

Comment (3)

The European Central Bank left interest rates unchanged as the European economy showed very minor improvements with overall weakness expected to continue for the rest of 2013.  Inflation in Europe also appears to be a non-concern for the remainder of the year.

China’s improving manufacturing numbers for December are encouraging for commodity rich nations, such as Canada.  As China begins the climb back up to double digit economic growth, this will contribute to the strength of the Canadian dollar.   Other commodity rich nations, such as Australia, Russia, Brazil and a number of developing nations will also see economic benefits in China’s resurgence.

In the US, markets seem to be satisfied with the temporary budget and tax solutions that were reached early in the year.   However, the prospect of more debates over the impending debt ceiling deadline in around two months will temper expectations for aggressive growth.    It must be noted that after years of negative to neutral growth, the market is excited to see consistent positive economic growth, even if it is relatively mediocre compared to the high-flying days that preceded the crash in 2008.

Canada’s economy continues to be one of the more stable performers in the world.   Despite some housing concerns, commodity demand remains strong and increasing performances by Chinese and US economies should keep our economy on the right track.    The Canadian dollar should stay relatively high for the remainder of 2013, with most volatility being caused by the US budget/tax debates that will crop up throughout the year.  The Bank of Canada will likely keep the Prime rate unchanged for most of 2013 and until inflation begins to be a concern, there should be no reason for any central bank moves.

Bond yields has been creeping up over the past few weeks and some lender have started to increase longer term fixed rates (4 year terms and longer) by 0.05% to 0.15%.  There may be additional increases of up to 0.25% over the next month if this trend continues.

Jason McLean
jason@garibaldimortgage.com

Comment (6)

Happy New Year!

As we start the new year, I think this is a good time to look at what 2013 holds in store for our currency, interest rates, and the economies of the world.

Europe will continue to struggle economically for 2013, and although the worst seems to be in the past, the potential for additional turmoil remains.  Greece, Italy, and Spain are still weak points in the European economy and their recoveries should be watched closely.   If the US recovery gains momentum, the potential for increased exports from Europe provides hope for a faster European recovery.

China appears to have turned the corner and is expected to lead the major economies in growth over the next year.  As one of the two largest world economies, this is positive news for the global economy and especially commodity based economies such as Canada.

The fiscal cliff in the US has dominated the business news for the past month as US politicians demonstrated that the two parties are still not able to work together for the common good of the nation.

Although a last minute short-term solution was enough to make the markets happy, the large fiscal cliff has been replaced with a number of slightly smaller “fiscal drop-offs”.    Political bickering will continue as debt-ceiling limits, expiring tax cuts, and government spending restrictions come up for debate over the next year.    Last minute solutions to these deadlines will probably be found although both parties will wring out the maximum amount of drama possible from each situation.  Since the US economy represents about 25% of the global economy, a great deal depends on the continued momentum of the US recovery.  

Fixed term interest rates should remain relatively stable over the next year.  We may see increases of up to 0.50% depending on a number of factors but 5 year terms should still be available at less than 3.65% by the end of the year.  Even if the fixed rates do increase slightly, they will still be near historic lows and should entice buyers to jump into the market.  Existing mortgages coming up for renewal in 2013 will definitely see a huge reduction in interest rates compared to the rates that were obtained 4 to 5 years ago.

The Prime rate will likely see an increase of 0.25% by the end of 2013, with a slight possibility of a 0.5% increase, and the differential from Prime for variable rate mortgages will likely maintain the status quo.  The days of Prime less 0.90% are a distant memory as current variable rate mortgages are ranging from Prime less 0.30% to Prime plus 0.30%. This low spread between variable rates and fixed rates  and drive more consumers to take the fixed option.

The Canadian dollar will see continued volatility in value against the US dollar in 2013.  As the US economic/political debates continue, weekly movements of half a cent to two cents will probably be the norm.  The Canadian dollar should gain strength from improving Chinese and US prospects and will likely range between $0.98 and $1.04 for most of the year.  However, the regular large movements in the value will provide opportunities for spot trades by those looking to take advantage of the volatility.
Jason McLean
jason@garibaldimortgage.com

Comment (1)

The North Pole is humming with activity as Santa Claus and his workforce continue to finalize preparations to ensure success on their busiest day of the year.    Demand for gifts continues to increase which caused Santa to make some changes over the past year.   Investments in technology, including obtaining North Pole specific web domain addresses and advanced computer training for the elves, have streamlined the allocation of appropriate gifts according to the “naughty or nice” master list.  With this increased efficiency, Santa now has additional elf labor available to address manufacturing demands and the threat of needing to outsource some manufacturing has subsided.   Mrs. Claus has been taking public relations/business administration courses online and has started an initiative to make “old-fashioned” toys more popular through social media campaigns.  This is meant to reduce the demand for high cost technological gifts that have become a burden for Santa and his crew as they try and keep up.    Selling the idea that imagination and goodwill are more desirable than the latest techno gadget seems to be an uphill battle but it is a battle that Santa considers important if he is to continue his historical success.   Santa has also introduced new initiatives to collect the excess cookie and milk offerings and direct them to homeless shelters and others in need, which should provide for an increase in Christmas spirit.   Although Santa and the other residents of the North Pole appear to have tremendous obstacles that must be overcome for success to be achieved, it must be remembered that Santa considers his bottom line to be measured in the currency of goodwill, friendship and love.

Although Santa will likely be unreachable for the rest of 2012, I am going to be in town and available to answer your calls.
 
Have a great holiday season!!
 
Jason

Comment (4)