David Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
The current debate about the strength of the global economic recovery is pretty much over, at least for now.
In the opening months of 2012, beauty was in the eye of the beholder. Those with a bullish view pointed to some positive short-term momentum in specific economic data (like job growth) while those with a more bearish outlook focused instead on longer-term imbalances (like debt-to-GDP ratios) to justify their caution.
But last week much of the encouraging short-term economic data that the bulls had been relying on swung negative and this triggered an investor stampede into AAA-rated government bonds, driving the bond yields in a select few countries to their lowest levels since the start of the Great Recession.
Here is a summary of the factors that led to this capitulation:
The disappointing U.S. GDP and employment numbers put to rest any argument that the U.S. economy will soon reach “escape velocity”, a three-stage process where fiscal and monetary stimulus spurs business investment which leads to employment and income growth, which fuels increased consumer demand. Instead, stimulus budgets are running dry, business investment is slowing as inventories are now over-stocked, and the modest increase in U.S. consumer spending is being driven by reduced savings rates, not rising incomes. Given the political situation, would it be more appropriate to suggest that the U.S. economy has instead achieved “escapism velocity”?
How timely then that we will hear from Governor Carney and the Bank of Canada (BoC) tomorrow with the next scheduled Policy Announcement. While no move in the BoC’s overnight rate is expected, I will be very interested to read Governor Carney’s commentary on how recent events have affected his prediction that our interest rates would rise more quickly than most were expecting (a view I outlined in detail and disagreed with here and again here). I expect Governor Carney to reiterate his concerns about the dangers of rising household debt levels, but I also think he’ll invoke his previous caveat about weighing interest-rate policy decisions against heightened risks and will soften his call on the timing of rate increases.
Five-year GoC bond yields plunged last week by 25 basis points, closing at 1.07% on Friday. While a decrease in five-year fixed rates is long overdue (gross spreads are now above 2% vs. their long-term average of about 1.65%), the current situation is more complicated. Federal finance minister Jim Flaherty recently indicated that he is uncomfortable with five-year fixed rates below 3%, so larger lenders may use his words as a justification to bank the extra spread (grudgingly, I’m sure).
Variable-rate mortgage borrowers will be interested to know that the bond market has moved from betting on a rate hike before the end of the year to now pricing in the 75% probability of a rate cut. Futures traders remain a fickle bunch and I think a rate cut is still unlikely, but variable-rate borrowers can take comfort in knowing that recent developments have pushed the timing of the next rate increase farther off into the future.
The bottom line: Keep your eye on this Friday’s employment report from Statistics Canada. We’ve had some strong job numbers lately but that trend hasn’t been supported by other economic data. We’ll see which side of that divergence blinks first.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave