Month: September 2010
27
Sep
Economic Highlights September 2010
Posted by: Kimberly Walker
Canada 2011: The Hangover
North American & International Economic Highlights
Not surprisingly, the Canadian recovery didn’t play out as advertised. While we did see a spike late last year
and early 2010, the momentum has faded lately, largely as a result of a strong C$ and a softening US
economy. Growth in the second half of the year will be only a fraction of the Bank of Canada’s July Monetary
Policy Report forecast. Early 2011 doesn’t look promising either, which should prompt major revisions in
October’s MPR, forcing the Bank of Canada to defer further tightening.
Exports Will Underperform
Our pared-down outlook for the Canadian economy comes partly as a result of the downbeat export picture.
The second quarter of 2010 provided insights into what lies ahead for Canadian trade. Despite the terms of
trade remaining elevated by historic standards, that hasn’t prevented the current account balance from diving
into red ink.
The Canadian dollar shoulders much of the blame for the disappointing trade performance in the second
quarter. The loonie’s appreciating trend over the last decade has helped shrink our exporters’ market share in
the US from around 20% in 2001 to under 15% today. So much so, that Canada hasn’t been able to fully
capitalize on the American inventory restocking boom in this recovery, with some of that foregone benefit
going to countries taking advantage of their more competitive currencies.
And with sub-2% US growth expected over the second half of this year and first half of 2011, it’s clear that
Canadian exports won’t play a prominent role in the next phase of this recovery. Look for Canada’s trade
sector to underperform the domestic economy this year and next.
Fiscal Withdrawal and the Labour Market
With all hopes resting on the domestic economy, which sectors could be the white knight for Canada next
year? Certainly not the government. The withdrawal of fiscal stimulus next year should limit growth in real
government spending to roughly 1%, the smallest contribution from the public sector to the overall economy
in 14 years. But the impact of fiscal withdrawal runs deeper, and will also negatively impact economic activity
through another channel, namely the labour market.
Note that the public sector accounted for no less than 10% of all jobs created in the economy during the
recovery versus less than 1% in other recoveries. And the construction industry, spurred in part by stimulus
money, single-handedly added a quarter of all jobs since the recovery started, with growth of 10% versus
negative growth at this stage in previous recoveries. Altogether, these two sectors have had a hand in spurring
more than a third of all jobs created in this recovery. And those jobs are relatively high quality (higher-paid)
which explains the significant jump in our employment quality index since early 2010.
With fiscal withdrawal, and the housing market losing ground, the economy will be unable to replace that
sizable contribution from public sector and construction jobs. And it’s unlikely that the new jobs created in
2011 would be of the same high quality—limiting the upside potential in personal income.
Consumers Limited by Wealth Effect
In addition to the cooler labour market, there will be other sources that may act as a drag on consumer
spending next year. It’s no secret that house prices have been falling recently, but less noted is that the
performance of the housing market is already approaching levels seen during the recession. Even a modest 5%
additional drop in average price in 2011, on top of the 6% it already shed from its peak, will lead to a negative
wealth effect of $10 bn, stripping growth in consumer spending by more than a full percentage point.
The same goes for consumer credit, which has been a very important source of consumer spending. Consumer
credit, of which an estimated 30% goes towards direct consumption, is mimicking recessionary trends on a
month-to-month basis. Softness in consumer credit, partly due to supply factors, down from 6% annualized in
the first half of 2010 to 3.5% in the coming 12 months, will also limit consumers’ appetite. Together, the
negative wealth effect from housing and reduced use of credit will pare enough purchasing power from
consumers to limit growth in consumer spending to under 3% next year.
Recent Improvement in Business Investment Will Not Last
While business investment has seen a strong rebound recently, mainly in machinery and equipment, this
bounce is typical of recoveries. We have indeed seen the same trajectory in previous recoveries and in all cases,
the upswing didn’t last long, because most of the improvement at this stage of the cycle is related to
replacement, rather than expansion. With capacity utilization now at only 76%, a number that is inconsistent
with a sustained expansion in investment, don’t expect a significant boost to business fixed investment in
coming quarters.
Business investment in inventories will likely see a similar fate. Relative to past recoveries, inventory restocking
has been brisk thus far, and with the inventory-to-sales ratio still above the pre-recession average the
contribution of inventories in the coming quarters is set to be minimal.
After a two-quarter burst in output late last year and early this year, Canada got a reality check in Q2. The
legacy of the Great Recession won’t disappear overnight. Excess capacity, fiscal withdrawal, de-leveraging, and
a more cautious consumer will weigh on GDP for some time. While the domestic economy will fare better than
exports next year, it will be less than spectacular with softness in virtually all categories, leaving growth for
2011 at a meagre 1.9%.
Two years after the recession, Canada is facing a global economy that still has a hangover from past excesses,
and its local economy has already used up much of the juice from stimulus. The Bank of Canada will, at some
point, resume normalizing interest rates next year, but at a very slow pace, given the slow growth, soft
inflation picture.
spending next year. It’s no secret that house prices have been falling recently, but less noted is that the
performance of the housing market is already approaching levels seen during the recession. Even a modest 5%
additional drop in average price in 2011, on top of the 6% it already shed from its peak, will lead to a negative
wealth effect of $10 bn, stripping growth in consumer spending by more than a full percentage point.
The same goes for consumer credit, which has been a very important source of consumer spending. Consumer
credit, of which an estimated 30% goes towards direct consumption, is mimicking recessionary trends on a
month-to-month basis. Softness in consumer credit, partly due to supply factors, down from 6% annualized in
the first half of 2010 to 3.5% in the coming 12 months, will also limit consumers’ appetite. Together, the
negative wealth effect from housing and reduced use of credit will pare enough purchasing power from
consumers to limit growth in consumer spending to under 3% next year.
Recent Improvement in Business Investment Will Not Last
While business investment has seen a strong rebound recently, mainly in machinery and equipment, this
bounce is typical of recoveries. We have indeed seen the same trajectory in previous recoveries and in all cases,
the upswing didn’t last long, because most of the improvement at this stage of the cycle is related to
replacement, rather than expansion. With capacity utilization now at only 76%, a number that is inconsistent
with a sustained expansion in investment, don’t expect a significant boost to business fixed investment in
coming quarters.
Business investment in inventories will likely see a similar fate. Relative to past recoveries, inventory restocking
has been brisk thus far, and with the inventory-to-sales ratio still above the pre-recession average the
contribution of inventories in the coming quarters is set to be minimal.
After a two-quarter burst in output late last year and early this year, Canada got a reality check in Q2. The
legacy of the Great Recession won’t disappear overnight. Excess capacity, fiscal withdrawal, de-leveraging, and
a more cautious consumer will weigh on GDP for some time. While the domestic economy will fare better than
exports next year, it will be less than spectacular with softness in virtually all categories, leaving growth for
2011 at a meagre 1.9%.
Two years after the recession, Canada is facing a global economy that still has a hangover from past excesses,
and its local economy has already used up much of the juice from stimulus. The Bank of Canada will, at some
point, resume normalizing interest rates next year, but at a very slow pace, given the slow growth, soft
inflation picture.
Canada 2011: The Hangover
Not surprisingly, the Canadian recovery didn’t play out as advertised. While we did see a spike late last year
and early 2010, the momentum has faded lately, largely as a result of a strong C$ and a softening US
economy. Growth in the second half of the year will be only a fraction of the Bank of Canada’s July Monetary
Policy Report forecast. Early 2011 doesn’t look promising either, which should prompt major revisions in
October’s MPR, forcing the Bank of Canada to defer further tightening.
Exports Will Underperform
Our pared-down outlook for the Canadian economy comes partly as a result of the downbeat export picture.
The second quarter of 2010 provided insights into what lies ahead for Canadian trade. Despite the terms of
trade remaining elevated by historic standards, that hasn’t prevented the current account balance from diving
into red ink.
The Canadian dollar shoulders much of the blame for the disappointing trade performance in the second
quarter. The loonie’s appreciating trend over the last decade has helped shrink our exporters’ market share in
the US from around 20% in 2001 to under 15% today. So much so, that Canada hasn’t been able to fully
capitalize on the American inventory restocking boom in this recovery, with some of that foregone benefit
going to countries taking advantage of their more competitive currencies.
And with sub-2% US growth expected over the second half of this year and first half of 2011, it’s clear that
Canadian exports won’t play a prominent role in the next phase of this recovery. Look for Canada’s trade
sector to underperform the domestic economy this year and next.
Fiscal Withdrawal and the Labour Market
With all hopes resting on the domestic economy, which sectors could be the white knight for Canada next
year? Certainly not the government. The withdrawal of fiscal stimulus next year should limit growth in real
government spending to roughly 1%, the smallest contribution from the public sector to the overall economy
in 14 years. But the impact of fiscal withdrawal runs deeper, and will also negatively impact economic activity
through another channel, namely the labour market.
Note that the public sector accounted for no less than 10% of all jobs created in the economy during the
recovery versus less than 1% in other recoveries. And the construction industry, spurred in part by stimulus
money, single-handedly added a quarter of all jobs since the recovery started, with growth of 10% versus
negative growth at this stage in previous recoveries. Altogether, these two sectors have had a hand in spurring
more than a third of all jobs created in this recovery. And those jobs are relatively high quality (higher-paid)
which explains the significant jump in our employment quality index since early 2010.
With fiscal withdrawal, and the housing market losing ground, the economy will be unable to replace that
sizable contribution from public sector and construction jobs. And it’s unlikely that the new jobs created in
2011 would be of the same high quality—limiting the upside potential in personal income.
Consumers Limited by Wealth Effect
In addition to the cooler labour market, there will be other sources that may act as a drag on consumer
spending next year. It’s no secret that house prices have been falling recently, but less noted is that the
performance of the housing market is already approaching levels seen during the recession. Even a modest 5%
additional drop in average price in 2011, on top of the 6% it already shed from its peak, will lead to a negative
wealth effect of $10 bn, stripping growth in consumer spending by more than a full percentage point.
The same goes for consumer credit, which has been a very important source of consumer spending. Consumer
credit, of which an estimated 30% goes towards direct consumption, is mimicking recessionary trends on a
month-to-month basis. Softness in consumer credit, partly due to supply factors, down from 6% annualized in
the first half of 2010 to 3.5% in the coming 12 months, will also limit consumers’ appetite. Together, the
negative wealth effect from housing and reduced use of credit will pare enough purchasing power from
consumers to limit growth in consumer spending to under 3% next year.
Recent Improvement in Business Investment Will Not Last
While business investment has seen a strong rebound recently, mainly in machinery and equipment, this
bounce is typical of recoveries. We have indeed seen the same trajectory in previous recoveries and in all cases,
the upswing didn’t last long, because most of the improvement at this stage of the cycle is related to
replacement, rather than expansion. With capacity utilization now at only 76%, a number that is inconsistent
with a sustained expansion in investment, don’t expect a significant boost to business fixed investment in
coming quarters.
Business investment in inventories will likely see a similar fate. Relative to past recoveries, inventory restocking
has been brisk thus far, and with the inventory-to-sales ratio still above the pre-recession average the
contribution of inventories in the coming quarters is set to be minimal.
After a two-quarter burst in output late last year and early this year, Canada got a reality check in Q2. The
legacy of the Great Recession won’t disappear overnight. Excess capacity, fiscal withdrawal, de-leveraging, and
a more cautious consumer will weigh on GDP for some time. While the domestic economy will fare better than
exports next year, it will be less than spectacular with softness in virtually all categories, leaving growth for
2011 at a meagre 1.9%.
Two years after the recession, Canada is facing a global economy that still has a hangover from past excesses,
and its local economy has already used up much of the juice from stimulus. The Bank of Canada will, at some
point, resume normalizing interest rates next year, but at a very slow pace, given the slow growth, soft
inflation picture.
ORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
By Benjamin Tal and Krishen Rangasamy
21
Sep
Fixed Versus Variable Rate
Posted by: Kimberly Walker
With Fixed Rates At All Time Lows Now Is A Better Time Than Ever For Canadians To Think Fixed Rate Mortgages At Street Capital!
Canadians are at their highest debt load ever, second only to the U.S. out of the G7 countries.
Now is the right time to consolidate your clients debts and give them the security they need.
*Canadian households carry the second highest debt load relative to what we own of the G7 countries, according to a report from Scotia Capital. The first place belongs to households in the U.S.
“On household leverage, we’re not so bad – compared to the worst example in the developed world,” economists Derek Holt and Gorica Djeric said Thursday.
In the second quarter of 2010 the average amount of debt carried by Canadians was about 20 per cent of the value of everything they owned, compared to about 26 per cent for the U.S. in the first quarter in 2010.
Debt included mortgages, credit cards and lines of credit and the assets measured included homes, cars and financial assets.
Canada’s leverage ratio jumped when the federal government “liberalized the mortgage insurance sector” in spring 2007, hit a plateau in late 2008 to 2009 and has recently begun marching upwards again, according to the report.
“The result is that Canadian households are slightly more leveraged than U.K. households, and significantly more leveraged than households in Japan, Germany, France and Italy,” said the authors.
“We only look good compared to the U.S., and that may well not last,” said the authors, noting the ratio in Canada is expected to increase as debt rises and home prices soften.
The authors acknowledged that home ownership could potentially skew studies comparing debt and wealth in G7 countries. But said looking at debt as a percentage of total assets essentially neutralizes that effect.
Kul Bhatia, professor of economics with the University of Western Ontario, cautioned against giving too much weight to any activity that took place during the recession.
“Those were extraordinary times, with all kinds of things happening in the economy and the job front and the housing market and so you really cannot say very much looking at these numbers.”
Compared to the rest of the G7 countries, the Canadian economy came through the recession relatively unscathed and has better economic prospects, he said.
“If that happens then this household debt would not be a matter of concern. So the best thing is to wait and watch and see how the Canadian economy fares in the next few quarters.”
While the economy continues to improve Canadians are not proving to be frugal.
On Monday, Statistics Canada reported that in the second quarter of 2010 Canadians had racked up $1.48 trillion in household debt, up 6.9 per cent or an increase of $96 billion from the same time last year.
The same day the Canadian Payroll Association said that 59 per cent of Canadians are stretching their pay to the limit and expect they would be in financial difficulty if their pay was cut or delayed by one week.
15
Sep
Canadians Live Paycheque to Paycheque
Posted by: Kimberly Walker
Industry News
The recession may be officially over, but six in 10 Canadians are still surviving from paycheque to paycheque, a national survey showed Monday.
Fifty-nine percent of Canadian workers say they would be in financial trouble if their paycheque was delayed by just a week – the same proportion as last year when the economy was still mired in a downturn, according to a poll of 2,766 people by the Canadian Payroll Association.
The survey comes as the OECD warned that record high debt levels have left many Canadians vulnerable “to any future adverse shocks.” Also Monday, a Statistics Canada report showed household net worth fell 0.6% in the second quarter, largely due to falling stock markets. Liabilities of households increased, meantime, led by mortgages and consumer credit.
Canada remains a debt nation, owing partly to a flurry of home-buying in this year. Eight in 10 Canadians in the poll say their first or second priority if they were to win a $1-million lottery would be to pay off their debt – an 11% increase from last year, “indicating that more Canadians are concerned about their debt load than they were a year ago,” the survey said.
Click here to read the full article in The Globe and Mail.
10
Sep
Yester Year’s Bad News
Posted by: Kimberly Walker
|
YESTERYEAR’S BAD NEWS Vancouver Sun and Province headlines: |
Average Price |
Today’s Price |
|
1974 “Realtors prowling like hungry tigers-We are not likely to see the high prices again |
$54,000 |
$925,000 |
|
1983 Real Estate prices will never recover |
$110,000 |
$925,000 |
|
1987 After the October crash “We are headed straight into a depression” |
$230,000 |
$925,000 |
|
1990 787 banks closed in the US. Prices were 35% off San Diego. New York was bankrupt (yet the Reichmans made $500 million) |
Up 400 percent in San Diego |
Up 400 percent in San Diego |
|
1995-2000 “No one will ever buy a leaky condo again” |
$105,000 |
$425,000 |
10
Sep
Canada’s economic growth 2010
Posted by: Kimberly Walker
Canada’s economic growth expected to continue in 2010: RBC Economics
After rapid gains in the early part of the year, Canada’s economy slowed in the second quarter and is expected to rebound only modestly over the second half of the year, according to the latest Economic Outlook report from RBC Economics.
RBC slightly pared back its 2010 forecast, expecting GDP growth of 3.3 per cent which is down from 3.6 per cent projected last quarter.
“While Canada’s second quarter growth put real GDP close to its pre-recession high, concerns in the U.S. and nervousness about the health of the global economy are weighing on the
outlook for the second half of the year,” said Craig Wright, senior vice-president and chief economist, RBC.
RBC forecasts that the economy will continue to grow and that the output gap will be completely eliminated by mid-2012. The labour market has recovered 94 per cent of the jobs lost during the recession and the unemployment rate is expected to decline to 7.3 per cent by the end of 2011, from the 8 per cent that prevailed the second quarter of this year.
9
Sep
Bank of Canada Hike Rates
Posted by: Kimberly Walker
Bank of Canada hikes rates, sees slower recovery
(Reuters)By Louise Egan
OTTAWA (Reuters) – The Bank of Canada raised its benchmark interest rate for a third consecutive time on Wednesday and sounded surprisingly hawkish despite predicting a more gradual than expected economic recovery.
The central bank nudged its overnight rate target up 25 basis points to 1 percent and, contrary to most economists’ expectations, did not signal a pause for its next decision in October. It said rates remained “exceptionally stimulative” but kept all options open due to doubts about the U.S. and global recoveries.
“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook,” it said in a statement.
The Canadian dollar jumped to a session high against the U.S. currency, touching C$1.0369 to the U.S. dollar, or 96.44 U.S. cents from C$1.0486 to the U.S. dollar just before the announcement.
Short-term money market rates and bond yields also jumped. The yield on the rate sensitive two-year Canadian government bond rose to 1.377 percent from 1.266 percent just before the news.
“Generally it’s a very upbeat statement, it’s a little more hawkish than I anticipated,” said Derek Burleton, Deputy Chief Economist at TD Bank Financial Group. “This will cast some uncertainty about whether the bank will pause at the next fixed announcement date.”
The Bank of Canada has raced ahead of its Group of Seven peers in raising borrowing costs after the global financial crisis. It lifted its policy rate on June 1 from an all-time low of 0.25 percent and raised rates again on July 20.
The U.S. Federal Reserve, by contrast, has raised the prospect of further easing and counterparts in Europe and Japan are likewise far from ready to tighten monetary policy.
CLOSE CALL
Markets had seen Wednesday’s rate hike as a close call because of rising fears of another U.S. economic downturn. Twenty-five out of 41 forecasters in a Reuters poll had predicted a hike. Most analysts also expected the bank to hold rates steady in October and December and possibly longer as it tracks developments elsewhere.
After the rate announcement, markets were pricing in an about a 68 percent probability the bank would leaves rates unchanged in October based on yields on overnight index swaps, according to a Reuters calculation.
“As it stands right now, our official call was for the Bank to remain on hold for the next few meetings, but that’s obviously something we have to review in light of the statement and as economic figures roll in the weeks ahead,” said Doug Porter, deputy chief economist at BMO Capital Markets.
The Bank of Canada said the 1 percent rate is “consistent with achieving the 2 percent inflation target in an environment of significant excess supply in Canada.”
The language was similar to that used in its last rate announcement on July 20. But the bank omitted any reference to weighing any further rate hikes “against domestic and global economic developments.”
U.S. TO BLAME
It acknowledged that the economic recovery was losing slightly more steam than it had anticipated just six weeks ago. Second quarter growth disappointed at a 2 percent annual rate versus the bank’s 3 percent projection. The bank will revise its official forecasts next month.
It blamed the weaker economy in the United States, which buys three-quarters of Canadian exports, for the tepid rebound in Canada. High U.S. unemployment is holding back spending by individuals and businesses, it said.
While exporters may take a beating, the bank sounded upbeat on domestic consumer spending and business investment.
“Going forward, consumption growth is expected to remain solid and business investment to rise strongly,” it said.
Most recent U.S. data have dampened fears of a double-dip recession but the recovery there is still wobbly, making it uncertain whether the U.S. Federal Reserve will see fit to take further action to drive down already rock-bottom borrowing costs.
The European Central Bank kept euro zone rates at a record low of 1 percent for the 16th month running last week and extended its program offering liquidity to banks.
The Bank of Japan stood pat on monetary policy on Tuesday but set the stage for possible easing next month.
Canada’s commodity exporting economy has been more akin to that of Australia, which hiked rates 150 basis points between October and May but has since moved to the sidelines. http://ca.news.finance.yahoo.com/s/08092010/6/finance-bank-canada-hikes-rates-sees-slower-recovery.html
8
Sep
Bank of Canada expected to hike then pause on rates
Posted by: Kimberly Walker
Bank of Canada expected to hike then pause on rates
Bloomberg · Wednesday, Sept. 8, 2010
Bank of Canada Governor Mark Carney will probably raise borrowing costs today for a third and final time this year before pausing to gauge the strength of the economic recovery, economists said.
Fourteen of 20 economists surveyed by Bloomberg News expect Mr. Carney to raise the bank’s policy interest rate by a quarter point to 1% in a decision to be released at 9 a.m. ET. Economists forecast Mr. Carney will keep the rate at that level until April, according to a separate survey.
Policy makers may be unwilling to tighten policy further as Canada’s economy expanded more slowly than anticipated in the second quarter, and as the U.S. proposes additional stimulus amid signs of renewed weakness. Mr. Carney may also signal greater risks to its projections from weakness outside Canada.
“The bank will position itself for a slower growth scenario,” said Marc Rouleau, a fund manager at Standard Life Investments in Montreal who helps manage $18-billion in fixed-income assets.
The bank’s June 1 increase, which was followed by another on July 20, was the first among Group of Seven countries after last year’s global recession. Canada has recovered from the slump faster than the U.S., having already returned to pre- recession levels of employment. Carney has said the current 0.75% rate still provides “considerable monetary stimulus.”
The bank has also warned the risks to its projections are elevated, and that future rate increases are not “pre- ordained.” Last month, diminishing prospects for U.S. growth sent global stocks tumbling and prompted the Federal Reserve to signal the possibility of adding monetary stimulus.
Canadian investors have pared bets over the past month that Mr. Carney will increase lending rates. The yield on December 2010 bankers’ acceptances contract, the most actively traded contract, has fallen to 1.14%, from 1.29% a month ago and a 2010-high of 2.02% on April 21. The contracts have settled an average of about 20 basis points above the central bank’s overnight target since 1992, Bloomberg data show.
The Canadian economy, after growing at an annualized 5.8% pace in the first quarter, slowed in the April-June period to a 2% rate — a full percentage point below the central bank’s prediction. As well, employers cut workers in July for the first time this year and the core rate of inflation, which is closely watched by the bank, unexpectedly slowed to 1.6% in July.
Canada “remains on sounder footing than the U.S., but all eyes are focused on U.S.,” said Anil Tahiliani, a fund manager at McLean & Partners Wealth Management in Calgary, Alberta, in an e-mail. “We expect after this small increase of 0.25%, the BOC will go on hold since the economy is starting to slow and global economic concerns take front stage.”
Earnings for Standard & Poor’s/TSX Composite Index companies that have released results since July 12 have dropped 4.3% from a year ago, pulled down by Manulife Financial Corp., Canada’s largest insurer, which on Aug. 5 reported a $2.4-billion loss that was more than double forecasts.
U.S. President Barack Obama is proposing to expand tax relief for businesses and boost federal spending on transportation to help bolster the economy. In Milwaukee on Sept. 6, Obama called for US$50-billion in the first of a six-year program to fix roads and railways.
The U.S. Federal Reserve moved Aug. 10 to shore up the recovery, deciding to reinvest principal payments on mortgage assets it holds into long-term Treasuries. Policy makers put a US$2.05-trillion floor on the Fed’s securities holdings to prevent money from draining out of the financial system.
Fed Chairman Ben S. Bernanke said in an Aug. 27 speech that while the “preconditions” for stronger growth year are in place, the Fed was prepared to embark on more stimulus, such as asset purchases, if needed.
Mr. Carney may want to avoid providing too much direction to investors given uncertainty over the economic outlook, said Eric Lascelles, chief economics and rates strategist with Toronto- Dominion Bank. Canada’s GDP report showed domestic demand remains buoyant, led by investments from businesses such as Potash Corp. of Saskatchewan Inc. and Suncor Energy Inc.
“I don’t think this is the sort of thing where the market is going to come out and say, ‘Well, they are pausing with absolute certainty in October,’” said Mr. Lascelles, chief economics and rates strategist with Toronto-Dominion. “I suspect the bank does want to keep those options open.”
7
Sep
Favourable U.S. data suggests Canadian rate increase
Posted by: Kimberly Walker
Favourable U.S. data suggests Canadian rate increase
Paul Vieira, Financial Post · Monday, Sept. 6, 2010
OTTAWA • What a difference a week makes in gauging the state of the Canadian economy.
At the start of last week, few market players believed the Bank of Canada would raise its benchmark rate on Wednesday as concern over its largest trading partner, the United States, mounted. The U.S. economy was believed to be on the verge of flirting with a double-dip recession, given the spate of weak economic data traders had grown accustomed to over the summer.
But two key U.S. pieces of August data released last week — the ISM manufacturing index and non-farm payrolls — were better than expected and suggested the North American economic recovery, while sluggish, marches on and is in no real danger of falling into an abyss. This helped trigger a “vicious” sell-off in bonds, in which investors piled in because of fears of a severe economic slowdown.
The result: The probability that Mark Carney, the Bank of Canada governor, will raise interest rates by 25 basis points, to 1%, increased to slightly more than 60% on Friday from less than 50% as of late August.
The good-looking U.S. data “tipped the scale heavily” toward a rate hike, said Douglas Porter, deputy chief economist at BMO Capital Markets.
Also playing a role was Canadian GDP data for the second quarter, which on the surface appeared tepid — 2% annualized growth, well below the rapid pace recorded in previous quarters. But analysts say the Canadian economy is stronger than the second-quarter headlines indicated, with final domestic demand still advancing at a robust pace. Plus, much of the second-quarter drag was from so-called “import leakage,” in which gains in imports — as firms acquired productivity-enhancing equipment at the fastest pace since 2005 — outstripped exports. Income data also showed wages and salaries grew “a very solid” 4.8% annualized in the three-month period, according to economists at Moody’s Analytics.
“Although growth slowed more than expected in the second quarter, the cause of this slowing does not suggest that there has been significant deterioration in the economy’s overall health,” said John Clinkard, chief Canadian economist at Deutsche Bank.
“Given the surge of investment in new machinery and equipment in the second quarter, that [means] business confidence is strong,” Mr. Clinkard said.
Still, much doubt remains about the health of the United States. The Bank of Canada’s economic outlook, released just two months ago, now appears too optimistic given recent trends. It expected the economy to reach its full potential late next year, but that could be pushed out further with weaker economic indicators in the United States and Canada. Plus, recent data suggest inflation, which ultimately drives the bank’s rate decisions, poses no threat as the key core rate — which strips out volatile-priced items — has slowed for two straight months.
These factors are driving analysts to scale back expectations for rate hikes for the remainder of 2010 and into 2011, predicting the Bank of Canada will pause for a while to see where all the economic dust settles. For instance, Bank of Nova Scotia chief economist Warren Jestin now envisages the central bank moving its benchmark rate no higher than 1.75% next year, or 50 basis points below previous forecasts.
Last week’s U.S. data may have put to rest fears of a double-dip recession, “but we are also tracking a U.S. economy that is nowhere near the pace it needs to be at this stage of the business cycle,” said Avery Shenfeld, chief economist at CIBC World Markets. The United States still requires “easy monetary policy and a softening in next year’s planned fiscal tightening if it is going to stay out of trouble.”
Even with positive jobs and manufacturing data, the week ended with a bit of a reality check for the U.S. economy with figures showing growth slowing in the service sector, which accounts for 80% of U.S. output.
The U.S. Federal Reserve is expected to refrain from rate hikes for a while — well into 2011, according to most analysts — with the U.S. economy still in a lacklustre state. The Bank of Canada, then, won’t want to raise rates too aggressively ahead of the Fed or risk the Canadian dollar appreciating to levels that start to take a bite out of economic output.
In fact, speculation is that the Fed would inject further liquidity, through another round of securities purchases, before considering a rate hike. But senior Fed policymakers remain divided on that need, with Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, describing fears of deflation and a double-dip recession as “alarmist.”
In addition, Mr. Lockhart said that, despite all the worry, the U.S. economy remained on a “gradual recovery track.”
Read more: http://www.financialpost.com/news/Favourable+data+suggests+Canadian+rate+increase/3487100/story.html#ixzz0yqQg7dlu
3
Sep
Cottage v. mutual fund: Which is better?
Posted by: Kimberly Walker
Cottage v. mutual fund: Which is better?
In one of the hottest real estate markets in history, where would your money have grown faster?
Ted Rechtshaffen
Globe and Mail Update Published on Friday, Sep. 03, 2010 6:00AM EDT Last updated on Friday, Sep. 03, 2010 6:35AM EDT
Last week I wrote about four reasons to sell your cottage now.
There was a great deal of feedback, much of it related to the family values and lifetime of memories that a cottage can provide. To that I say – “To those who love their cottage, I salute you!” My personal philosophy with clients is that all decisions need to be based on what is important to you, and that the financial piece is simply a tool to support achieving those goals.
Having said that, last week I touched mostly on the non-financial aspects of the own versus rent a cottage discussion.
From a purely financial perspective, I would strongly argue that the investment markets are better place for your money. Even in one of the best real estate markets in history, cottage investment has underperformed an average mutual fund (and I believe that you could do much better than investing in mutual funds, but that is another article).
The example I will use came from a reader who said: “My cottage purchased 18 years ago for $125,000 is now worth over $400,000. I’m sure this is a better return than your investing clients realize.”
The Cottage as an Investment
On the surface, turning $125,000 into $400,000 in 18 years is a 7.1 per cent return before taxes (there will be capital gains taxes on the cottage, assuming it is not the owners principal residence).
However, the real return on owning a cottage must factor in the upkeep costs. Between property taxes and annual upkeep I have assumed 1.8 per cent of the value of the cottage a year. This number is different depending on the property and location, but I would argue that for most the number is in the 1.25 per cent to 2.5 per cent a year range. For the purpose of simplicity, I simply deducted these 18 years of costs from the final price. This is being a little generous to the cottage argument, as it doesn’t take into account inflation.
To compare investments properly, you also need to be able to realize your gains. For a cottage this requires a sale. Between real estate commissions, legal work and some extra funds to prepare the cottage for sale, I have assumed 7 per cent of the sale price goes towards expenses. I assumed 1 per cent extra costs on the purchase price.
Now the actual pretax return on the cottage after expenses drops to 5.1 per cent. It is the equivalent of the original investment of $125,000 plus 1 per cent in costs, growing to $294,500 today (after all costs were stripped out).
Investing in a Mutual Fund
I assumed the investment alternative was a mutual fund (with all expenses included) that has been around for roughly 18 years.
Below is a list of four funds that were rated two-star and three-star (out of five) by GlobeFund, that meet the criteria:
Acuity High Income Fund – 3 stars – 6.8 per cent since inception 18 years ago
CIBC Dividend Growth – 3 stars – 7.57 per cent since inception 19 years ago
Co-Operators Fixed Income – 3 stars – 6.34 per cent since inception 18 years ago
Invesco Canadian Balanced – 2 stars – 7.32 per cent since inception 18 years ago
A better performer is RBC Canadian Dividend (rated 4 stars), which actually returned 11.36 per cent over the past 17 and a half years, but I won’t use this as an example.
So instead of buying the cottage 18 years ago for $125,000, you could have put those funds in the Invesco Canadian Balanced fund. After 18 years this would have grown to $415,400.
To be more tax efficient, you could have purchased the CIBC Dividend Growth fund, and it would have been worth $432,175.
In either case, after costs, you would have an extra $120,000 to $137,000 in your pocket today (pre tax) by purchasing an average performing mutual fund than by owning this particular cottage over the past 18 years.
With that $120,000+, you could have paid for some very nice cottage vacations over the past 18 years, and still had enough money to buy a couple of nice cars to take you there and back.
Just imagine what would have happened if the real estate market hadn’t been on fire. You might have been able to buy a cottage with the extra cash from investing in mutual funds.