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Posted by: Frank Fik
I wish each and every one of you a very Merry Christmas this holiday season. I hope you will be with family and be able to share some special moments and memories. These past 2 years have been nothing less than extraordinary and so I hope you can find time to pause and enjoy family and friend time.
Best wishes for very Happy New Year!
Posted by: Frank Fik
The Bank of Canada has offered only the slightest hint about what it plans to do next. In the statement that accompanied last week’s 50 basis-point increase in the Policy Rate the Bank said it “will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”
That is a softening of the language on pending rate hikes that was used in previous statements, but it gives the Bank some wiggle room to continue with increases or stand pat and wait to see what the economic data shows.
At the same time the Bank wanted to be clear that it has not lost sight of its goal of taming inflation.
“We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians,” the Bank said.
That tone was reinforced by the Bank’s Deputy Governor Sharon Kozicki, in a speech one day after the rate announcement.
“If we are surprised on the upside, we are still prepared to be forceful.”
“But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy,” Kozicki said.
Inflation is running at nearly 7% in Canada and there are early signs it is moderating. The Bank’s trend-setting overnight rate is now at 4.25%. The next rate announcement is set for January 25, 2023.
Published by First National Financial LP
Posted by: Frank Fik
With inflation running at generational highs and interest rates on the rise many debt-strapped Canadians are struggling to reorganize their finances.
A recent survey sponsored by FP Canada (an organization that represents and promotes professional financial planners) suggests “unconscious spending” can be an obstacle to a sound, workable household budget.
Unconscious spending involves purchases that are made out of convenience or habit rather than with a view to budgets and long-term financial plans. The use of credit cards is a central part of the issue.
The online poll indicates 28% of Canadians are using their credit cards more frequently. Depending on their payment habits, credit card interest can be a significant expense. It also shows 21% have increased their use of credit cards to pay for subscription services such as video streaming or cellphones. Many also use credit cards to pay utility bills like electricity and gas. This practice often means consumers aren’t aware of price increases, or new or extra charges.
Other forms of unconscious spending include:
Advice for curbing unconscious spending:
Published by First National Financial LP
Posted by: Frank Fik
BMO Financial Group posted net income of $4.48 billion in its fourth quarter, a sizeable increase from the same time last year thanks in large part to the one-time gain as a result of its acquisition of Bank of the West.
The bank’s fourth-quarter profit rose from $2.16 billion the same time last year, with the increase seeing its earnings per diluted share boosted to $6.51 for Q4 2022 compared with $3.23 last year.
Its net income for the fiscal year rose to $13.54 billion, up from $7.75 billion last year, with provisions for credit losses spiking to $313 million from $20 million in 2021.
Its earnings per diluted share on an adjusted basis were $3.04, lower than analysts’ average expectation of $3.07 (according to Refinitiv) and down from its adjusted profit of $3.33 the previous year.
The bank’s performance came amidst a “rapidly changing macroeconomic environment,” CEO Darryl White said, with its results “supported by targeted investments in technology and talent which delivered award-winning customer and employee experiences.”
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Posted by: Frank Fik
TD Bank reported earnings of $6.7 billion in the fourth quarter, with adjusted earnings up $4.1 billion – a jump of 5%.
That net income came in at $2.18 a share, up from $2.09 a year earlier and surpassing analyst expectations compiled by Refinitiv.
On a yearly basis, the bank posted adjusted net income of $15.43 billion, an increase from $14.65 billion in 2021, with the results helped by a strong fourth quarter in its personal and commercial banking segment.
That division saw net income of $1.7 billion in Q4, an increase of 11% over the same quarter last year, with TD’s US retail segment also recording a significant increase in reported net income in the fourth quarter – by 12% (CAD) to $1.54 billion.
TD president and CEO Bharat Masrani said the results reflected a “strong year” that showed its diversified business model and approach to risk and financial management had paid off.
(Excerpt) Published by:
Posted by: Frank Fik
Scotiabank saw its reported net income fall on a yearly basis in the fourth quarter, although overall it closed out the fiscal year up over 2021.
The banking giant revealed on Tuesday that it took in $2.09 billion in Q4 compared with $2.56 billion during the same period last year, with its $10.17 billion net haul for the fiscal year comparing favourably against the $9.96 billion it reported in 2021.
Adjusted earnings per share (EPS) for the year were also up over 2021, at $8.50 compared with $7.87, while adjusted EPS for the quarter were higher than expected – $2.06, against analysts’ average expectations of $2, according to Refinitiv data.
Scotiabank’s Canadian banking division saw a 15% increase in adjusted earnings over 2021, with significant growth in residential mortgages (14%) and business banking loans (21%), in addition to lower provisions for credit losses, helping account for that improvement.
The bank said that “challenging market conditions” had seen declines in assets under management, with capital markets also bearing the brunt of that changing climate.
Its international banking segment posted a “strong rebound” in adjusted earnings this year, Scotiabank said, with adjusted earnings ($2.45 billion) up 32% over 2021.
Each of Canada’s other Big Six banks – TD, Royal Bank of Canada, CIBC, Bank of Montreal and National Bank – are set to release their own fourth-quarter and full-year results in the coming week.
Published by:
Fergal McAlinden the current Canada News Editor for Canadian Mortgage Professional,
Posted by: Frank Fik
The latest Statistics Canada inflation numbers have given some market watchers hope that the Bank of Canada will slow or, perhaps, even pause interest rate increases.
The Consumer Price Index, or “headline inflation”, held steady from September to October at 6.9% on a year-over-year basis. Lower food price inflation off-set higher gasoline prices. Another welcome sign showed core inflation, which factors out volatile items like food and fuel, slowed in October to 5.3%, year/year, down from 5.4% in September. The Bank of Canada uses the core inflation reading when making its interest rate decisions.
However, those numbers will likely come as cold comfort to homeowners and homebuyers who have faced some sharp, inflationary increases.
StatsCan reports mortgage interest costs jumped by 11.4% in October – the biggest y/y increase since February 1991 (11.7%). Property taxes also rose sharply, climbing 3.6% compared to 1.5% a year ago.
StatsCan’s “homeowners’ replacement cost index’, which relates to the price of new homes, dipped to 6.9% in October, down from 7.7% in September. This measure has been declining since May (11.1%).
Statistics Canada offers a simple, plain-language explanation of how housing, or “shelter costs” fit in to the inflation calculation here.( https://www150.statcan.gc.ca/n1/daily-quotidien/221116/dq221116a-eng.htm)
Looking ahead to December 7th and the BoC’s last interest rate announcement for the year, most analysts expect one more 25 to 50 basis-point increase.
Published by First National Financial LP
Posted by: Frank Fik
The news on the economy, inflation and the future of interest rates has been mixed over the past week or so. Most of the recent analysis has centered on employment.
Market watchers were surprised by the latest job numbers which shot up by 108,000 in October. The unemployment rate did not move however, holding at 5.2%, as the number of people looking for work went up. Wages are also increasing.
Normally these would be considered good things, signs of a strong and growing economy. But in times of high inflation they create a paradox: more jobs at higher wages means more consumers spending more money, thereby increasing demand in an economy that does not have enough supply, and further driving inflation.
It is the situation that Tiff Macklem, Governor of the Bank of Canada wants to reverse.
“The labour market is very tight,” says Macklem. “That’s a symptom of an economy that can’t keep up … can’t produce all the goods and services Canadians want to buy.”
Increasing interest rates is the Bank’s key way to make that happen.
Inflation figures due this week could offer some clues to what the Bank will do next. But, for now, the bias is toward more interest rate increases.
“We do think we still need to raise rates a little bit further,” Macklem told CBC News. “How far, we will see.”
Published by First National Financial LP
Posted by: Frank Fik
The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 50 basis points today to 3.75% and signalled that the policy rate would rise further. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates.
Most market analysts had expected a 75 bps hike in response to the disappointing inflation data for September. Headline inflation has slowed from 8.1% to 6.9% over the past three months, primarily due to the fall in gasoline prices. However, the Bank said that “price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”
In his press conference, Governor Tiff Macklem said that the Bank chose to reduce today’s rate hike from 75 bps last month (and 100 bps in July) to today’s 50 bps because “there is evidence that the economy is slowing.” When asked if this is a pivot from very big rate increases, Macklem said that further rate increases are coming, but how large they will be is data-dependent. Global factors will also influence future Bank of Canada actions.
“The Bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023 and then return to the 2% target by the end of 2024.”
The press release concluded with the following statement: “Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.”
Reading the tea leaves here, the fact that the Bank of Canada referred to ‘increases’ in interest rates in the plural suggests it will not be just one more hike and done.
Monetary Policy Report (MPR)
The Bank of Canada released its latest global and Canadian economies forecast in their October MPR. They have reduced their outlook across the board. Concerning the Canadian outlook, GDP growth in 2022 has been revised down by about ¼ of a percentage point to around 3¼%. It has been reduced by close to 1 percentage point in 2023 and almost ½ of a percentage point in 2024, to about 1% and 2%, respectively. These revisions leave the level of real GDP about 1½% lower by the end of 2024.
Consumer price index (CPI) inflation in 2022 and 2023 is anticipated to be lower than previously projected. The outlook for CPI inflation has been revised down by ¼ of a percentage point to just under 7% in 2022 and by ½ of a percentage point to about 4% in 2023. The outlook for inflation in 2024 is largely unchanged. The downward revisions are mainly due to lower gasoline prices and weaker demand. Easing global cost pressures, including lower-than-expected shipping costs, also contribute to reducing inflation in 2023. The weaker Canadian dollar partially offsets these cost pressures.
The Bank is expecting lower household spending growth. Consumer spending is expected to contract modestly in Q4 of this year and through the first half of next year. Higher interest rates weigh on household spending, with housing and big-ticket items most affected (Chart below). Decreasing house prices, financial wealth and consumer confidence also restrain household spending. Borrowing costs have risen sharply. The costs for those taking on a new mortgage are up markedly. Households renewing an existing mortgage are facing a larger increase than has been experienced during any tightening cycle over the past 30 years. For example, a homeowner who signed a five-year fixed-rate mortgage in October 2017 would now be faced with a mortgage rate of 1½ to 2 percentage points higher at renewal.
Housing activity is the most interest-sensitive component of household spending. It provides the economy’s most important transmission mechanism of monetary tightening (or easing). The rise in mortgage rates contributed to a sharp pullback in resales beginning in March. Resales have declined and are now below pre-pandemic levels (Chart below). Renovation activity has also weakened. The contraction in residential investment that began in the year’s second quarter is projected to continue through the first half of 2023, although to a lesser degree. House prices rose by just over 50% between February 2020 and February 2022 and have declined by just under 10%. They are projected by the Bank of Canada to continue to decline, particularly in those markets that saw larger increases during the pandemic.
Higher borrowing costs are affecting spending on big-ticket items. Spending on automobiles, furniture and appliances is the most sensitive to interest rates and is already showing signs of slowing. As higher interest rates work their way through the economy, disposable income growth and the demand for services will also slow. Past experience suggests that the demand for travel, hotels, restaurant meals and communications services will be impacted the most. Household spending strengthens beginning in the second half of 2023 and extends through 2024. Population growth and rising disposable incomes support demand as the impact of the tightening in financial conditions wanes. For example, new residential construction is boosted by strong immigration in markets that are already particularly tight.
Governor Macklem and his officials raised the prospect of a technical recession. “A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth” in the first half of next year, the bank said in the MPR.
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Posted by: Frank Fik
Since interest rates started climbing back in March there has been a lot said about declining home prices in Canada. Broadly speaking, market watchers have been forecasting a 20% to 25% drop – from the February peak – in the average price by the end of this year.
Those are dramatic numbers, but they are deceiving. When it comes to housing, simple averaging is good for making broad comparisons over an extended period of time. But simply dividing the total value of home sales by the number of homes sold lacks the nuance needed properly measure the state of the market.
The average price is influenced by the number of sales, but also by the composition of those sales. That is: the type, location and price of the homes sold.
In a recent note, CMHC Deputy Chief Economist, Patrick Perrier, points out that the seasonally adjusted average MLS price for the entire country fell by 15.6% between February and August of this year. He also points out that lower-priced properties made up a growing proportion of total sales during that period.
At the height of the pandemic detached, single family homes were a leading driver of sales. But, since interest rates started to climb, lower-priced condominiums have become more popular. Perrier says, that change in the composition of the market could account for more than half of the 15.6% price drop mentioned above. That would mean that the real weakening of prices is actually closer to 7%.
The MLS Home Price Index, used by the Canadian Real Estate Association, accounts for market composition. It put the price decline at 7.4%. The Teranet House Price Index also tracks market composition. It showed a 2.4% decline between July and August.
Published by First National Financial LP