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Canada’s Central Bank is Headed by a Comedian
Canada’s Central Bank is Headed by a Comedian
Yet Another Delusional Bubble Blower
Canada is home to one of the most egregious housing and credit bubbles in the world – a legacy of its former central bank governor Mark Carney, who is now blowing a similarly dangerous bubble in the UK as governor of the Bank of England. For some background information on this, see:
Carney’s Legacy: Canada’s Credit and Housing Bubble
Mark Carney: If There is a Bubble, It’s Not Our Fault
After having slashed interest rates to the bone in Canada and instigating a mortgage credit and consumer lending boom that has inter alia led to one third of Canadians complaining that they can no longer sleep properly due to worries about their huge debt loads, Mr. Carney is now presiding over this in the UK:
The BoE’s current base rate is the lowest since the central bank was founded in the late 17th century – click to enlarge.
Stephen Poloz picked evidently up where Carney left off. While the data on Canada’s housing bubble are plain as day to anyone with a set of eyes and an IQ temperature above 80, the comedian who has become Mr. Carney’s replacement as governor of the Bank of Canada somehow just can’t see it. This is highly reminiscent of Ben Bernanke’s frequent denials in 2006 that there was a housing bubble in the US, even as the bubble became so freaking obvious one literally had to be in a coma not to see it. From a tweet by Forex Live in December last year:
…click on the above link to read the rest of the article…
Canadian house prices 35% overvalued, Economist magazine says
Cheap borrowing costs are driving up prices in markets around the world
In a survey of housing costs around the world, the Economist magazine says Canada’s housing prices are 35 per cent overvalued when compared to Canadian incomes.
Against the level of Canadian rents, housing prices come in 89 per cent overvalued, according to the Economist housing index.
- Overvalued housing prices and how to read them: Don Pittis
- Face it, Canada’s housing market could fall like oil
In calling Canadian house prices out of kilter, the Economist joins voices such as Bank of Canada governor Stephen Poloz, ratings agency Fitch and even the International Monetary Fund, in pointing out that the rise of house values is out of sync with Canadian incomes.
Of the 26 markets surveyed, the magazine found seven where housing prices are more than 25 per cent overvalued.
Belgium leads the pack, with house prices 50 per cent overvalued relative to income. But also highlighted are Australia, France, Britain and Sweden.
Too cheap to borrow
The Economist puts the blame on “ultra-loose” monetary policy. Mortgage rates are at historic lows around the world.
Cheap borrowing has encouraged consumers to jump in and buy, driving demand and pushing prices higher.
The result is a bubble, as housing prices rapidly outpace both consumer incomes and rental costs.
In Canada, housing prices have risen steeply in the past decade, with the hot markets of Toronto and Vancouver seeing increases of 7.8 per cent and 7.1 per cent respectively in the past year.
…click on the above link to read the rest of the article…
Eh is not OK: Canada’s Jobs Begin to Unravel
Eh is not OK: Canada’s Jobs Begin to Unravel
Canada’s employment stats for February were not what most expected – there was a huge jump in full time jobs. Most commentators tried to put a positive spin on this but I have to disagree. Canada’s labour market is struggling and the outlook for the near future isn’t looking any better.
The chart below is what the Bank of Canada tracks as a measure of the broader health of the labour market. As you can see aggregate hours (the sum of all hours worked by full time and part time employees) have been flat over the past year.
What limited strength exists in the labour market comes from two unsustainable sources: construction and the public sector.
What’s worrisome is the impact of oil prices in Alberta. As per Macquarie, half of the gains in construction employment across Canada occurred in Alberta, a province where construction activity is likely to retreat. As you can see in 1986 in the months following the decline in oil, Alberta’s construction industry employment fell by 17%. A similar decline in coming months would mean nearly 50K in construction job losses in Alberta.
…click on the above link to read the rest of the article…
Bank of Canada’s Wilkins: Economy still below potential
Bank of Canada’s Wilkins: Economy still below potential
OTTAWA (Reuters) – The Canadian economy is still operating below its potential, a senior Bank of Canada official said on Tuesday, pointing to slack in the labor market and calling the recent sharp drop in oil prices a “setback.”
In some of the first remarks by a Bank of Canada policymaker since a shock interest rate cut last month, Senior Deputy Governor Carolyn Wilkins laid out the reasons for the surprise move, reiterating that the bank thought it would take too long to close the output gap if it did not act.
Wilkins said measures of slack in the labor market were showing greater unused capacity than broader economic measures.
“There is no doubt that the Canadian economy has room to grow,” Wilkins said in a speech.
Still, Wilkins expressed confidence that with a stronger U.S. economy, a lower Canadian dollar and an accommodative monetary policy, the Canadian recovery was on track.
“We’ll get there and it will be a very good thing for Canada,” she said.
…click on the above link to read the rest of the article…
How Much Longer Can Central Banks Push Bonds to Absurdity?
How Much Longer Can Central Banks Push Bonds to Absurdity?
Central banks around the world have fallen all over each other lowering their benchmark interest rates. On Tuesday, the Reserve Bank of Australia was the latest, cutting its cash rate to an all-time low of 2.25%. It didn’t mince words: “A lower exchange rate is likely to be needed to achieve balanced growth in the economy.” A rare admission of escalating the currency war. The Aussie dollar immediately swooned.
Two weeks ago, the Bank of Canada suddenly cut its overnight interest rate by 25 basis points. Other central banks have chimed in. Japan’s rate has been at zero for years. “Negative deposit rates” have infected a number of central banks, including the ECB.
In this environment, the Fed is talking about raising rates from zero to next to zero, but the markets are not following its hints and are trying to force it to back off.
Ten-year government bond yields in Japan and Germany dropped closer to zero, before bouncing off in a sharp rally to 0.39% and 0.31% respectively. This is called the “Japanification of Germany.”
Back in August 2013, when 10-year JGBs still yielded around 0.8%, I wrote, Why I’m Deeply Worried About Japan – And Why Betting On The Collapse Of JGBs Is A Horrible Idea, which has become a leitmotif. Japan’s fiscal situation has deteriorated since, but JGBs have risen and yields have dropped, with shorter maturities sporting “negative” yields. JGB shorts have been kneecapped. Inflation is 2.4% as measured by the all-items index, and 3.1% for goods. Financial repression has become the rule.
…click on the above link to read the rest of the article…
Is Canada Headed For Another Recession? Eight Troubling Signs
Is Canada Headed For Another Recession? Eight Troubling Signs
A string of dire economic news since the beginning of 2015 has many observers worried about whether Canada could be on the brink of another downturn, but economists say it’s too soon to mention the “R-word.”
One month in, layoffs seem to be the dominant theme — the second-largest in Canadian history at Target and many more in the battered oil sector.
The Bank of Canada shocked Canadians with a surprise interest rate cut and the loonie has fallen to levels not seen since the Great Recession of 2008-2009.
The news pouring in about the end of last year has been a bit worrisome. The economy shrank in November — and that was before oil prices reached their current lows, something the central bank has determined is decidedly bad for the Canadian economy. Job creation estimates were also revised last month, and job growth for 2014 was slashed by a third, suggesting further underlying weakness in the labour market.
Canada’s situation doesn’t appear on the path to improving any time soon, with oil prices expected to remain low for the remainder of the year. In its rate decision, the Bank of Canada said the cut was insurance — but insurance against what?
…click on the above link to read the rest of the article…
‘Welcome Signs Of Cooling’ In Canada’s Overvalued Housing Markets: IMF
‘Welcome Signs Of Cooling’ In Canada’s Overvalued Housing Markets: IMF
Canada’s housing markets will cool this year, leading to a more “balanced” economy — one that is not as dependent on growing consumer debt, the International Monetary Fund says.
In a report released Friday, the IMF estimated house prices are overvalued by 7 to 20 per cent, with “significant regional differences” in the amount of overvaluation.
That’s a somewhat lower estimate than the Bank of Canada, which recently estimated house prices to be as much as 30 per cent overvalued in some markets.
“Canada’s housing market rebounded in 2014, fueled by low and declining interest rates, although there are some welcome signs of cooling especially in overheated markets,” the IMF report stated.
“Welcome” because the IMF sees risk to Canada in growing household debt. The organization is worried that the country’s economy continues to rely too heavily on consumer debt, and that the kind of debt Canadians are taking on is riskier than it used to be.
…click on the above link to read the rest of the article…
Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk
Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk
Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July.
On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system” [Is Canada Next? Housing Bubble Threatens “Financial Stability”].
Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel (WTI last traded at $47.85). “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity.
In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.
…click on the above link to read the rest of the article…
Canada GDP shrinks, stirring talk of another rate cut
Canada GDP shrinks, stirring talk of another rate cut
OTTAWA (Reuters) – Canada’s economy unexpectedly shrank by 0.2 percent in November, prompting market talk that the Bank of Canada will cut interest rates in March for the second time in six weeks.
Analysts had expected no growth from October. The month-on-month decline was the largest since a 0.4 percent drop in December 2013.
Gross domestic product shrank on weaker manufacturing, mining and oil and gas extraction, Statistics Canada said on Friday.
Last week the central bank shocked markets by lowering its key interest rate to counter plunging oil prices that have cut economic growth in this oil-exporting country and the value of the Canadian dollar.
“The data in hand do support the Bank of Canada’s very bearish interpretation of the impact of lower oil on the Canadian economy,” said Bill Adams, economist at PNC Financial Services Group.
“If economic data remain this weak in early 2015, it could justify another rate cut from the Bank of Canada at either the March or April rate decisions,” Adams said.
The central bank is due to make an interest rate announcement on March 4 and market operators have priced in a 76 percent chance of another cut then.
…click on the above link to read the rest of the article…
Canada’s RBC and BMO move to cut prime rates
Canada’s RBC and BMO move to cut prime rates
TORONTO (Reuters) – Royal Bank of Canada, the country’s biggest lender, said on Tuesday it would cut its prime lending rate by 15 basis points, becoming the first of Canada’s big banks to trim borrowing costs nearly a week after the central bank stunned markets with a rate cut.
Bank of Montreal BMO.TO, Canada’s fourth-largest bank, quickly followed suit.
The moves by RBC RY.TO and BMO take their prime rates to 2.85 percent from 3 percent, effective Wednesday, the banks said.
Canada’s biggest banks, which also include Toronto-Dominion Bank TD.TO, Bank of Nova Scotia BNS.TO, Canadian Imperial Bank of Commerce CM.TO and National Bank of Canada NA.TO, have come under fire for not immediately cutting their lending rates after the central bank’s rate cut.
By not passing on the full rate cut to borrowers, the banks can protect their net interest margin, which boosts profits.
Typically, once one bank cuts its prime rate, the others follow in order to remain competitive with borrowers.
The Bank of Canada surprised markets with its Jan. 21 decision to cut overnight borrowing costs by a quarter of a percentage point, to 0.75 percent, to counter the effects of cheaper oil on economic growth and inflation.
Blame Oil: Opportunistic thinking amid the oil price collapse
Blame Oil: Opportunistic thinking amid the oil price collapse
The wisdom of Winston Churchill, who once quipped that you should never let a good crisis go to waste, clearly hasn’t been lost on federal Finance minister Joe Oliver, who’s already made considerable hay out of falling oil prices.
Mr. Oliver’s finance department won’t table a budget until April, due to the uncertainty created by lower crude prices, which have thrown the budgeting process into limbo—or at least that’s the claim. Even though commodity prices matter much more to the provinces, which are where oil and gas royalties accrue, Mr. Oliver knows a gift horse when he sees it. Ottawa’s oil price assumptions are hardly relevant enough to most federal revenue projections to necessitate such a delay, but so it goes. If eventually it turns out the promised budget surplus will turn into a deficit or provincial transfer payments will need to be cut, it’s safe to say that oil will be the first place Mr. Oliver looks when it comes time to assign blame.
Over at the Bank of Canada, the same type of opportunistic thinking is just as apparent. If lower oil prices can be used as a convenient reason to reshape fiscal policy, why shouldn’t monetary policy follow suit as well? After all, the Bank of Canada has had plenty to say about the country’s oil ambitions in recent years.
…click on the above link to read the rest of the article…
Axel Merk: Why Asset Prices Must Return To Lower Levels
Axel Merk: Why Asset Prices Must Return To Lower Levels
Saying it’s been a busy week and half on the central bank front is perhaps a sizeable understatement.
First, the Swiss National Bank stunned the world (and its brethren central banks) by removing its peg to the Euro. This was quickly followed by Mario Draghi finally making good on his longtime threat of firing QE bazooka, announcing that the ECB will pursue a 60 billion Euro per month easing program for the next 16 months. And amidst all the smoke, the Canadian central bank snuck in a surprise rate cut to its interest rate.
To make sense of both the “Why?” behind these extreme moves, as well as the “What?” in terms of their implications, Axel Merk, founder and Chief Investment Officer of Merk Funds joins us this week.
In his opinion, recent events are exactly the kind the symptoms he’s been expecting as the prime strategy pursued by central banks since 2008 — to force capital into speculative assets — approaches its natural and inevitable denouement. Indeed, he projects the surprises in store for us and the systemic instability we’re beginning to see are just getting started:
Ultimately, central banks are just sipping from a straw in the ocean. I did not invent that term. Our senior economic advisor, Bill Poole, who is the former president of the St. Louis Federal Reserve taught us this: that central banks are effective as long as there is credibility.
What central banks have done is to try to make risky assets appear less risky, so that investors are encouraged or coerced into taking more risks. Because you get no interest or you are penalized for holding cash, you’ve got to go out and buy risky assets. You’ve got to go out and buy junk bonds. You have to go out and go out and buy equities.
…click on the above link to read the rest of the article…
What Does the Bank of Canada Know That We Don’t?
What Does the Bank of Canada Know That We Don’t?
In a totally unexpected move, the Bank of Canada cut the overnight interest rate by 25 basis points on Wednesday. This of course makes me wonder what the Bank of Canada knows that the rest of us don’t! I mean usually the Bank indicates a bias towards cutting interest rates, but this was just out of the blue. It signals that the oil shock on the economy is going to be a lot more significant than anyone expected.
The Canadian dollar dropped vs. the US dollar thanks to the surprise move. Gold and silver prices climbed on safe-haven demand. Canadian bond yields plunged. As per Bloomberg: “’It’s a big shock,’ David Doyle, a strategist at Macquarie Capital Markets, said by phone from Toronto. “They’re going to try to provide the necessary medicine here for the soft landing from slowing debt growth, from slowing investment in the oil sands, and I think they thought it needed some stimulus here.”
No one probably stands to hurt more from plunging oil prices than Alberta.
Energy companies have started cutting capital expenditure, and this means job losses, which means a slowing housing market. In fact, plunging oil prices have seen home sales in Calgary tumble 37% in the first half of January, compared to a year earlier. Prices dropped 1.5%. And active listings soared by nearly 65%.
…click on the above link to read the rest of the article…
Are Central Bankers Losing The Plot: “The SNB Move Signals A Spectacular Loss Of Nerve”
Are Central Bankers Losing The Plot: “The SNB Move Signals A Spectacular Loss Of Nerve”
As we have reiterated very frequently over recent years, the biggest vulnerability in the post crisis environment was that central banks start to make policy errors, by taking activist and precipitous decisions. Thus following on from last year’s error by Norges Bank (and noting that we would not call last week’s SNB decision a mistake, despite the shockwaves that it caused), the Bank of Canada joins that policy error club.
What does not compute, in an eerie mirror image of the Norwegian central bank’s rationale, is for the BoC to
- Slash headline CPI forecasts, while keeping core CPI forecasts around 2.0% (around target), and
- Tweak GDP forecast lower to 2.1% this year but upping the GDP forecast for 2016, and
- Still taking policy action
It signals a spectacular loss of nerve that central bankers should always try and eschew, above all when you have a country like Canada with the worst household debt levels in the developed world, and an overheated housing market.
The as expected cut in 2015 GDP forecast looks optimistic, when one considers that the energy sector accounts for 25% of business investment in GDP terms, and one might suggest that the GDP forecast should be closer to 1.0%, on the basis that there is likely to be a much broader fall-out from the energy sector “stall” (housing, transport, employment to name but a few).
As the evidence on this accumulates through the year, there appears to be considerable risk that the BoC’s forecasts look foolish – primarily in GDP terms, but quite possibly in CPI terms too, if the CAD starts a slide to USD 1.30 and the BoC’s disinflation problem evaporates. At which point memories of the very undistinguished period of Gordon Thiessen’s stewardship of the BoC may come back to haunt it.
But in broader terms, this is symptomatic of the whole mirage of stability that developed world central banks have sort to foster in the post crisis era starting to unravel in a rather disorderly fashion… the ECB’s task tomorrow looks ever more unenviable!
Interest Rate Cut: Bank Of Canada Moves To Stave Off Threat From Sliding Oil Prices
Interest Rate Cut: Bank Of Canada Moves To Stave Off Threat From Sliding Oil Prices
OTTAWA — The looming economic threat of sliding oil prices is forcing the Bank of Canada to unexpectedly cut its trend-setting rate to three quarters of a percentage point from one per cent.
The central bank’s announcement follows the stunning nose dive in crude prices since the summer.
The bank says the price collapse poses considerable uncertainty for economic growth in the oil-producing nation.
It is the first time the bank has moved its overnight rate in either direction in nearly four and a half years.
Most economists had been predicting the bank to stand pat on the interest rate today and hike it late this year or in early 2016.
But the bank says falling oil prices threaten to overshadow signs of economic life spotted outside Canada’s weakening energy sector — such as rising foreign demand, a boost in exports and job growth.
…click on the above link to read the rest of the article…
