GLOBAL CAUTION

Bank of Canada raises policy rate on the strong domestic economy but cautious about global events
RBC ECONOMICS RESEARCH - DAILY ECONOMIC UPDATE – June 1, 2010

The Bank of Canada boosted the overnight rate by 25 bps to 0.50% this morning, hinting that further reductions in amount of stimulus are forthcoming but providing no concrete timetable for additional rate increases. While the domestic economy is performing in line with the Bank's forecast, the external environment remains volatile, with the Bank pointing to tensions in Europe and the continued deleveraging across the global economy as likely to "temper the pace of global growth." "Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the Bank said. Additionally, the Bank highlighted that, even with today's rate increase, there remains "considerable monetary stimulus in place.”

The Bank also announced that it is re-establishing its standard operating framework for implementing monetary policy. The 50 bps operating band for the overnight rate was re-established.

The economy posted a solid 6.1% annualized growth rate in the first quarter of 2010 building on an already impressive 4.9% increase in the fourth quarter of 2009. The solid gains during these two quarters provided strong evidence that the stimulative monetary and fiscal measures helped to pull the Canadian economy out of the recent slump. The 0.6% gain in March’s GDP indicated strong momentum late in the first quarter setting up for the strength to be maintained in the second quarter. The surge in payrolls in April also corroborates this view with a smaller, but still positive, report for May expected on Friday, June 4, 2010.

While the global environment presents risks to Canada's economic outlook, the strength in the domestic economy and a core inflation rate that is only marginally below the 2% target took precedence in today's rate decision. Furthermore, the statement indicates that the strength of the domestic economy will see the Bank continue to reduce the amount of stimulus, although the statement did not provide clear guidance about the pace of interest rate increases. So far, the Bank assesses that the effects of external events on Canada's economy have "been limited." On balance, the statement supports our view that the Bank views domestic economic conditions as strong enough that the ultra-low level of interest rates is no longer needed and that the recovery can withstand a gradual rise in interest rates going forward. To that end, we expect that the Bank will raise the policy rate to 1.5% in 2010 and that the tightening will continue in 2011 as the Bank moves the policy rate closer to neutral by the time Canada's output gap is eliminated.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

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POINTING TO A RATE HIKE

Canadian growth best in ten years
Paul Vieira, Financial Post
Published: Monday, May 31, 2010

The Canadian economy posted better-than-expected growth in the first three months of 2010, marking the best quarterly performance in over a decade, Statistics Canada reported Monday -- and all but cementing the likelihood of a Bank of Canada rate hike this week.

Strong domestic demand and a robust manufacturing sector helped the Canadian economy record annualized growth of 6.1% for the first quarter, the strongest three-month showing since 1999. This followed a stellar 2009 fourth-quarter performance, of 4.9% annualized (although revised down from 5%).

The expectation was for a 5.8% expansion for the first quarter. The 6.1% gain in output marks the third straight quarter of positive growth after the recession, which lasted three quarters. Further, the first-quarter result is just over double the growth the U.S. economy produced for the first three months of 2010, of 3%.

"While there are some questions on the sustainability of the rebound, there is simply no question that the early stages of Canada's recovery exceeded even the most optimistic expectations," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Analysts suggest this pace of growth can't last. However, they said the strong handoff from first quarter to second quarter likely means annualized growth of roughly 3.5% to 4% for the three-month period ending June 30.The first-quarter bump was helped by a stronger-than-expect March result, of a gain of 0.6%.

In early trading, the Canadian dollar had gained nearly a cent, to trade in the US95.9¢ range.

The consensus as of late last week was that the Bank of Canada would raise its key benchmark rate on Tuesday, by 25 basis points to 0.50%, given the stronger-than-expected domestic economy. The first-quarter result all but cements that view.

The solid gains over the fourth quarter of 2009 and the start of 2010 "provide strong evidence" and the near-zero interest rates, combined with a dollop of fiscal stimulus, "have helped pull the Canadian economy out of its recent recession," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "With the monthly numbers showing strong momentum late in the first quarter, the Bank of Canada will take reassurance that this strength is likely to be sustained near term. This suggests an environment where the Bank of Canada will continue to withdraw stimulus from the system."

There was a belief the central bank could hike its target rate by 50 basis, but market uncertainty due to developments in Europe might cause the central bank to hold back.

Production grew faster in the first quarter of 2010 than in the fourth quarter of 2009, and inventory levels rose after being drawn down in all four quarters of 2009. Residential investment increased for a fourth consecutive quarter, as did consumer spending on goods and services. Export and import volumes both rose for a third consecutive quarter, with growth in imports outpacing growth in exports in the first quarter.

First-quarter strength was broad-based with domestic demand at the top of the list. Consumer spending, up 4.4% annualized, and residential investment, up 23.6%, contributed the most to economic growth. Meanwhile, business investment grew by 0.9% following a 9.8% decline in the previous quarter, led by a 7.6% gain in investment in machinery and equipment. Economists at Toronto-Dominion Bank note that non-residential construction is one component of GDP yet to head down the road of recovery.

The goods-producing component of the economy expanded 2.7% in the first quarter, led by a 4.2% gain by manufacturing. The manufacturing sector was able to post this gain even though the Canadian dollar traded mostly above the US90¢ mark in early 2010.

This is the latest in a string of Canadian economic data that have been consistently surprised to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank's preferred 2% target.

The sterling fundamentals prompted the Bank of Canada last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July.

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ACT NOW TO SAVE!

House prices to hit record this year, but rate of increase to slow, Scotiabank says
Eric Lam, Financial Post
Published: Wednesday, March 24, 2010

Canadian home prices will reach a record high this year, but those expecting the sky-high house price increases of the past decade to continue will be disappointed, a Bank of Nova Scotia real-estate expert said yesterday. "It's time to reset price expectations for the Canadian housing market," Adrienne Warren, senior economist with Scotiabank, said at a real-estate conference in Toronto. "This was an exceptional decade for pricing." Looking at the past 50 years, prices on average rose between 2% and 2.5% each decade. But prices rose an average of 5.2% between 2000 and 2009, she said, which led to the current elevated pricing conditions. As for this year, Ms. Warren still anticipates a strong spring sales market as consumers try to take advantage of rock-bottom interest rates before an expected rate hike by the Bank of Canada in the summer.

TIK TOK TO RATE HIKE

Clock ticking for interest rate hikes
Garry Marr, Financial Post
Published: Friday, February 12, 2010

It's probably time to start the countdown on interest rates going up.

The Bank of Canada only pledged -- conditionally -- to keep its record-low lending rate until the end of the second quarter, so that leaves us with slightly more than four months before the housing market falls apart. At least that's what some national magazines and economists predict will happen when rates start to rise.

"Some people say they could go up in April, but I don't buy that," says Benjamin Tal, senior economist with CIBC World Markets and one of the more sane voices out there. He predicts a pullback in housing, but not the collapse we've seen in the United States.

So, what do you do in the face of this inevitable march of interest-rate hikes coming our way, likely at the Bank of Canada's first meeting in July?

"I think people will start locking in their rates very soon and that's already happening," says Mr. Tal, referring to the variable-rate crowd that has mortgages tied to prime. "The five-year [fixed] rate [mortgage] will be moving [up] well ahead of the bank rate in anticipation of an increase."

While locking in is extremely tempting in this market -- given a five-year mortgage is as low as 3.8% -- a floating-rate mortgage can be had for almost half that. Vince Gaetano, a vice-president of Monster Mortgage, said he's seeing variable rates for as low 30 points off prime, or 1.95%.

The problem for many Canadians who negotiated variable-rate mortgages in the past year, and still don't want to lock in, is they are stuck in contracts that have them paying a rate as much as 100 basis points (one percentage point) above prime. The reason they call it a five-year term is because that's the length of the contract.

But Mr. Gaetano says just break that mortgage. If you are in a variable-rate contract, the penalty is three payments. To go from a contract that is 100 basis points above prime to one that is 30 points below, could have you recoup your money in less than a year.

"There is a large amount of people refinancing to take advantage of these variable rates. We've seen a full-point comeback in the borrower's favour. We'll never see 1.95% ever again," says Mr. Gaetano.

One option for consumers who can't make up their minds is to apply to the bank for a new mortgage and have the financial institution hold the rate for as much 120 days.

"There will be a credit bureau check on your name and it could lower your credit score if you don't use money," says Mr. Gaetano, referring to the potential pitfalls of looking elsewhere for a new rate.

The reality is most consumers, once they have their mortgage, stay put and wait for renewal. The banks have a loyalty record that would make any industry drool. According to the Canadian Association of Accredited Mortgage Professionals, 93% of borrowers who renew on schedule stay with the same lender. Even among those who renew early, 81% stay with same financial institution.

As you consider where to go next with your mortgage, you should remain open to switching financial institutions if it saves you money. Sometimes there are costs, but the potential savings from a better rate can offset those costs.

Martin Beaudry, vice-president of ING Direct Canada, says his company will now hold your rate for 120 days by just applying online. You don't even need to fill out a full mortgage application. ING holds the rate on any term, or even the spread between a variable-rate and prime, which is now 20 basis points.

"There is no downside, but less than half of people take advantage of rate guarantees. People deal with renewals less than 30 days before the maturity date," says Mr. Beaudry.

Most banks will guarantee you a rate 90 days in advance of your mortgage coming due. Why wait until the last minute and why stay with same institution if you are not getting best rate going?

Dusty wallet Having trouble making ends meets because of property taxes? If you are a senior citizen, some jurisdictions will allow you to forgo the payments with the amount owing attached as a lien on the house. Make sure to check the interest rate they charge on that money owed or your heirs could be left with a lot less house -- if you care about that.

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NEWS KIDS BUYING THE BLOCK

'New kids' fuelling recovery
Average resale price set to rise to $470,000
Marty Hope, Calgary Herald
Published: Saturday, January 23, 2010

Pent-up demand for resale housing that bubbled to the surface midway through 2009 will continue to be a factor this year, says the new president of the Calgary Real Estate Board.

In her inaugural address to the city's real estate industry, Diane Scott said sales, prices and listings will continue to increase as the local economy and consumer confidence rebounds from the recession.

It's the "new kids on the block" -- the 25-to 34-year-olds who helped fuel the recovery in the latter half of last year -- that will continue to fuel the 2010 market, she said.

Scott, who is broker/owner of Royal LePage Solutions Inc., said the average price of detached homes within Calgary's city limits will likely move up slightly more than six per cent this year to $470,000.

At the same time, Scott predicted there will be 17,000 resale homes changing hands, an increase of 17 per cent -- while the number of new listings will likely rise to 25,0000, up from nearly 22,500 in 2009.

The average price of condos will also likely climb this year, going to $296,000 from a year-end average of $283,734 in 2009, said Scott.

Sales will likely grow by 10.6 per cent to 7,000, she said, predicting that listings will likely increase to 10,750 this year, up from 10,323 last year.

"Single-family resale prices will again outpace condos in 2010, as equity gains from pre-2006 will enable move-up buyers to afford more," said Scott, a 30-year veteran of Calgary's real estate industry. "Consequently, the price gap between single-family homes and condominiums will continue to widen for the short term."

For young buyers, low mortgage rates and relatively low prices provided the impetus to get into home ownership, said Scott, who opened her real estate business last February.

"Affordability has been the silver lining in last year's housing market, even in the face of slowing wage growth," she said.

For the previous two years, first-timers had been pretty much shunted to the sidelines until the market turnaround in 2009.

From having a maximum buying power of about $250,000, families found that with the mortgage rates slipping to 50-year lows, their buying power went as high as $375,000, said Scott.

"In two years, (the market) has gone from sizzle to fizzle to simmer -- and today, the market has entered a more balanced and stable condition," she said.

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RESALE HOUSING MARKET

2009 2010
Single-detached homes*
-Sales 14,440 17,000
-Listings 22,459 25,000
-Average price $442,327 $470,000
Condominiums*
-Sales 6,328 7,000
-Listings 10,323 10,750
-Average price $283,734 $296,000
Towns
-Sales 3,943 4,500
-Listings 8,502 8,000
-Average price $352,704 $364,000
- Metro