Bank of Canada leaves rates unchanged - TD Economics

TD Economics

 Bank of Canada leaves rates unchanged, dovish tone maintained

• The Bank of Canada held its benchmark overnight rate at 1.00% today, as was widely expected. Its communiqué was broadly consistent with the diminished outlook seen in September’s interest rate announcement and silences any debate about rate cuts.
• The Bank reiterated that that several downside risks in the last MPR have been realized, and there has been a generalized retrenchment in risk-taking across global markets.
• It expects the euro area to experience a brief recession. Its base-case outlook also assumes the euro-area debt crisis will be contained, while acknowledging this outcome has significant downside risks.
• As for the U.S., the Bank expects weak real GDP growth through the first half of 2012, before strengthening thereafter, in line with our own forecast.
• Growth in emerging markets is expected to “moderate to a more sustainable pace”, and combined with recent declines in commodity prices are expected to “dampen global inflationary pressures”.
• The Bank did update its headline growth numbers that will be fleshed out in more detail in tomorrow’s Monetary Policy Report, stating that it now expects Canadian GDP growth to post a 2.1% pace in 2011, 1.9% in 2012, and 2.9% in 2013. That outlook is weaker than the last MPR in July, and is remarkably in line with our own forecast.
• The Bank predicts core inflation will be slightly softer than previously envisaged, implying it views the recent acceleration in core inflation as temporary.
• The Bank characterizes growth as having rebounded in Q3, but underlying momentum has slowed and is expected to remain modest through the middle of next year, as a less favourable external environment affects Canada through financial, confidence and trade channels. Domestic demand is expected to remain the principal driver of growth, although “modest” consumer spending and “solid” business investment are both expected to be more subdued than before.

Key Implications

• Today’s communiqué essentially reiterated the more dovish tone of September’s rate announcement. It is also consistent with our call for the Bank of Canada to leave interest rates unchanged until the first quarter of 2013.
• The Bank reminded markets that Canada has a target rate near historic lows, a well-functioning financial system and considerable monetary policy stimulus. This should quiet any talk of rate cuts, which markets had started to price in during the worst of the recent market turmoil. However, in removing any reference to the withdrawal of monetary stimulus, markets have initially interpreted the statement as more dovish.
• All told, today’s statement confirms our view that given the downgraded global growth outlook, and greater economic slack in the Canadian economy than previously expected, interest rates will need to remain accommodative for quite some time. Our Bank of Canada call implies a flat overnight rate for over two years – an unprecedented situation which underscores the fragility of the economic recovery.

Leslie Preston, Economist

416-983-7053

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

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TD Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

United States

•    European leaders are meeting in Brussels this weekend to try and come up with a plan to restore market confidence and secure the future of the common currency. But those hoping for a grand bargain are likely to be disappointed.

•    The real challenge is deeper than European policymakers have publicly acknowledged: how do you restore confidence in a union of countries that, with few exceptions, are highly indebted and relatively uncompetitive? A successful solution must involve the reform of European institutions themselves, as well as an understanding among member states over the responsibilities they hold to themselves and to each other.

•    The U.S. financial system, and the broader economy, will remain at risk as long as doubts linger over Europe’s future. Although the economic recovery has proven stronger than many had feared, the risk is that troubles in Europe throw it off course.

 

Canada

•    Europe’s debt crisis has had a severe impact on Canadian financial markets in recent months.

•    In addition to double-digit declines in equity markets and the Loonie, increasing concerns about counterparty risk and contagion effects have led to increased interbank funding costs.

•    Fortunately, the escalation in financial volatility has not yet led to significant downgrades to the Canadian economic outlook, but a key risk lies in whether or not European leaders can contain the crisis.

•    If control is lost, a systemic European banking crisis could spread to Canada and lead to an economic and financial environment similar to that of 2008 during the fall of Lehman Brothers -- but unlike 2008, both households and governments are too indebted to spend their way out of a full-scale financial crisis.

 

 

Webcasts:

 

Canada:  https://www.brainshark.com/tdeconomics/vu?pi=zGPz13Z8N3z1sQYz0

 

 

United States:  https://www.brainshark.com/tdeconomics/vu?pi=zGNzEa2MPz1sQYz0

 

October 18, 2011 - Residential Market Update

 

 

 

Ginette Nason Account Manager Golden Horseshoe T: 905.630.2794 E: ginette.nason@firstnational.ca         Residential Market Update     Canada Mortgage Bonds         Our Partners      Canada Housing 5 yr : 1.88%         Market Commentary   Bond yields today are roughly where they were a week ago but there has been plenty of volatility over the intervening period. Last week yields were pushed higher by in-line or better than expected economic data in Canada (Manufacturing Sales Growth, Trade Balance) and the US (Retail Sales Growth, Initial and Continuing Jobless Claims, Trade Balance), together with a sense of optimism that the European debt crisis will be resolved and/or that concerted steps there would be taken to protect the banking system. Generally speaking, "good" economic news tends to push bond yields higher as market participants are less interested in the safety bonds provide. Notwithstanding last week's developments, yields have come back down today as worse than expected economic data in the US and a clarification from Germany that a once-and-for-all solution to Europe's debt crisis will not be forthcoming and that markets should expect such crisis to extend into next year. In all, these developments present the global economy in better shape than what we thought at the start of the week, and the rise in rates reflects that change. Are you going to CAAMP? Use your Wizard Rewards dollars towards your CAAMP registration. Simply go to the conference site conference site,follow the steps and select Rewards as your method of payment. Don't wait, register now! The CAAMP offer expires Friday, October 28 2011. Early bird registration is Friday,October 21 2011.       Financing Tips   Canadian homeowners look for new property within two years of purchasing their first home. Ontario was the province with the highest percentage of repeat buyers at 71% moving on to a larger or more luxurious home. Post client home financing is key to keeping up a relationship for repeat business. In this case clients want more. Sooner! So keep in touch.     unsubscribe | privacy policy | disclaimers © First National Financial LP 100 University Avenue, North Tower, Suite 700, Toronto, Ontario M5J 1V6. First National is licensed under the Mortgage Brokers, Lenders and Administrators Act 2006 (Ontario) Licence No. 10514

 

National Housing Data Release

 

TD Economics

 

Data Release: See-saw pattern in sales and price activity continues

• Seasonally adjusted, month-over-month resale housing activity increased in September by 2.7%.  So far in 2011, sales hit their peak in January.  If we use this as a benchmark, sales are down by 2.6% in September. 
• Listings moved up M/M by 0.2% in September.  The increase in sales outweighed the greater number of listings, resulting in a higher sales-to-listing ratio.  The ratio now stands at 0.528, the highest reading of this measure in six months.  Even with the upward movement noted of late suggesting tighter conditions, the sales‑to‑listing ratio remains in balanced territory. 
• Unsold inventory needs approximately 6.1 months to completely exhaust – an estimate that has held steady so far this year. 
• On the price front, the national average residential resale price decreased M/M in September by 0.4%.  With the decrease, the national price tally rests at roughly $361K.  However, on a year-over-year basis, prices remain up by a significant 8.1%.
• For the Greater Toronto market, both resale prices and sales followed the national trend; sales were up M/M by 5.2%, but prices were up by -0.6%.  For the Greater Vancouver market, sales were up by 2.4%, but prices were down by -3.7%.  With the month's developments, the average resale price in Toronto sits at $469K, whereas in Greater Vancouver, the number sits at $757K.

 

Key Implications

• Several factors appear to have clipped the wings on resale activity this year, including: (1) new mortgage eligibility rules; (2) a wave of economic uncertainty emerging in recent months; and (3) a growing saturation of the first-time home buyer category.  Helping cushion the impact of these negative forces has been the persistence of low mortgage rates.
• While sales have receded so far this year, the same cannot be said for prices.  However, this outcome is largely expected as there is usually a lag between sales weakness and the corresponding price adjustment.  Still, it is important to stress that the significant price gains being recorded in British Columbia are skewing the national statistic.  If we strip away this province's outsized performance from the national total, the year-to-date price gain becomes more moderate at 4-5%.
• Going forward, we anticipate a tug-of-war action to take hold in the Canadian real estate market between low interest and mortgage rates and only modest economic, income and employment growth.  With both push and pull momentum, we expect both prices and sales to hold fairly steady, relative to current levels, over the next year.

 

Sonya Gulati, Economist

416-982-8063

 

 

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

 

 

The Incredibly Shrinking Variable Discount

October 17, 2011

The Incredibly Shrinking Variable Discount

Just weeks ago you could find variable-rate mortgages at prime – 0.80% (P-.80%) or better. Consumers thought they were here to stay, but the tables turned…fast.

Economic troubles and lender profit motives have shrunken variable discounts beyond expectations. Banks are now commonly quoting prime rate, for example, with little discounting.

Once the last few holdout lenders with P-.50% disappear, discounted variables could move towards P-.25%…or worse. Some lenders even suggest that prime or prime plus could be the new normal.

Meanwhile, aggressive brokers are selling five-year fixed rates at 3.25% or less. That’s an unusually low 50 basis point premium to a variable. A spread that tight doesn’t come around often, and it makes you rethink all of the research suggesting variables are the way to go.

Popular research indicates that people have saved money on variable-rate mortgages:

• 88.6% of the time:
• Source: Floating Your Way to Prosperity, 2001, Moshe Milevsky, PhD; Study period: 1950-2000
• 90.1% of the time:
• Source: Moving Mortgages, 2008, Moshe Milevsky, PhD; Study period: 1950-2008
• 83% of the time:
• Source: Variable Rate Roller Coaster Still Hard to Beat, 2011, Douglas Porter and Benjamin Reitzes, BMO; Study period: 1975-2011

Odds like that make some people question the sanity of going fixed.

But there’s a little more to the story.

While variables have cost less than 5-year fixed mortgages a majority of the time in the past, favourites don’t win every game.

More importantly, assumptions are key when it comes to rate studies. Two important factors have impacted the research quoted above:

1. A multi-decade bias towards falling rates
2. Use of posted rates (instead of discount rates)

“Interest rates have been trending downward for two decades,” BMO Capital Markets Senior Economist Benjamin Reitzes told us in a recent interview. By default, he says, that’s tilted the table more in favour of variables than it otherwise would be.

Looking ahead, rates are no longer able to drop over one percent. The most we can realistically hope for is an extended period of horizontal rate movement. (The BoC can still cut rates slightly, but the European and American crises and sub-2% core inflation won’t delay hikes forever.)

As a result, Reitzes says, "Going forward, borrowers won't see the same advantage to variable rates as they have in the past 25 years”

The second factor that’s largely ignored when citing rate research is the actual mortgage rates used for backtesting. Each of the three studies above uses posted rates in their historical analysis.

Reitzes states that this practice distorts the results somewhat. "Discounts off posted rates were not as prevalent historically.” Nowadays, however, “Most people get a (rate) discount if they are credit-worthy borrowers.”

That matters, because the rate discount you get obviously impacts the likelihood of your mortgage outperforming other options.

Here’s an example.

• If you look at data from 1970 to 1995, the average difference (spread) between 5-year fixed and variable rates was 126 basis points.*
• The average difference today is roughly 50 basis points.

That’s a remarkable 76 basis points lower than historical rate spreads. That makes a huge difference in research conclusions.

If you theoretically backtested with the same spreads as today (i.e., 25 bps off prime for variables and 204 bps off posted for 5-year fixeds), you’d find that fixed rates outperform considerably more often.

According to Milevsky, “…The historical probability of doing better with the floating rate mortgage…hovered around 70% to 80%” when the borrower used deep discount rates (based on a 1965-2000 study period).

Using today’s discounts, that 70-80% drops to just 53%, based on our findings from 1970 to 2006. (Obviously today's spreads would not have applied historically but, as Milevsky maintained in his research above, that is beside the point.)

In other words, the fixed/variable decision would have been a coinflip, based on today’s spreads.

(Click to enlarge)

This isn’t meant to imply that fixed rates now have an insurmountable edge. If the Bank of Canada drops rates unexpectedly, a variable could easily beat all other terms over the next five years.

A variable may also prevail for other reasons. See:

• The Fixed/Variable Mortgage Conundrum
• IDEAS for Choosing Fixed or Variable

That said, if the BoC’s next rate move is up (which is the highest probability outcome, say economists), the boring old 5-year fixed could certainly outperform. That’s true even when compared to a variable with payments set at the 5-year fixed rate. (We’ll post a scenario like this soon.)

The nice part is this: If you go fixed and variables end up winning, you’ll likely be out far less money than in most prior years.

---

* Data source: Bank of Canada. (We chose 1970-1995 because 1970 is as far back as we have clean 5-year fixed rate data, and 1995 was before rate discounting started taking off. Yes, people actually used to pay posted rates.)

Note: If you’re already in a discounted variable, the conclusions drawn here may not apply to you. For guidance on locking in, always consult a mortgage professional.

---

Rob McLister, CMT

Posted at 12:38 AM in Mortgage Tips & Advice | Permalink

 

 

 

 

The European Debt Crisis could save you money on your mortgage

The European debt crisis could save you money on your mortgage! This European sovereign debt crisis could lead to substantial interest savings on your existing mortgage. The liquidity concerns that the European banks face (similar to the US Banks in the fall of 2008) has created a unique situation, where short term money (variable rate mortgages) become more expensive and where longer term money (US and Canada bonds) become less expensive hence lower fixed rate mortgages. Fixed rate mortgages are at an all time low. Since 1975, 83% of the time Canadians would have been better off choosing a variable rate mortgage, I believe we are now in the 17% zone. If you are locked into a fixed rate mortgage at a rate that is higher than 3.75% or currently in a variable mortgage but will be up for renewal in the next 24 months we need to sit together and explore the substantial savings that are possible even with any mortgage penalties. Call or email today and let’s work together and start the savings. Interested in what our current rates are?  Visit our website at http://www.rightmortgagetips.com/.  While there sign up for our Rate Advisor to receive rates to your email on a weekly basis. Visit our blog and follow twitter to stay up to date with economic  forecasts from the media and our lending partners. We always offer no obligation, no cost mortgage reviews.  Regards, Lisette Amalfi, AMP Mortgage Broker/Owner Mortgage Alliance Oac Mortgages Phone: 905-529-1199 Toll Free: 877-529-1199 Fax: 905-628-7917 Follow us on Twitter We Blog Our Website

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First National's Market Update

Rates in the bond market ended last week considerably higher than where they opened, as optimism in the second half of the week outweighed some of the pessimism that presented itself on Monday and Tuesday. All told, the five year market moved about 15bps higher over the past week.

In the early part of the week, concerns about a Greek default and subsequent contagion remained the dominant theme in markets, but a trifecta of better than expected US employment reports that beat (modest) expectations (ADP Private Payrolls on Wednesday, Initial Jobless Claims on Thursday, and Non-farm Payrolls on Friday) gave cause for optimism that a double dip recession is not a certainty. A strong Canadian jobs report for September also added to the positive sentiment.

Additionally, plans emerged out of Europe that governments were going to undertake certain efforts to avoid a default by any member nations, but also a concrete plan to support the banking system if such an event were to take place.

In all, these developments present the global economy in better shape than what we thought at the start of the week, and the rise in rates reflects that change.

  

Lisette Amalfi, AMP

Mortgage Broker/Owner

Mortgage Alliance Oac Mortgages

Phone: 905-529-1199

Toll Free: 877-529-1199