April 2010

[Ally]

As the feds pull back, can U.S. housing stand alone?

For months, investors` favorite parlor game has been betting on the timing—and the impact—of the Federal Reserve`s decision to raise its benchmark interest rate from its current near-zero level. But there`s a key sector of the economy where a Fed return to normalcy is set to play out much sooner: housing.

Sales of both existing and new homes fell in February for the third and fourth straight months, respectively. Yet at the end of March the central bank will withdraw a big support under the housing market when it ends its $1.4 trillion program to purchase mortgage-backed securities and housing-agency debt. A month later the federal home-buyer tax credit expires. Some housing watchers fret that one-two punch could send the sector back to the mat.

A growing number of economists, however, believe that a pickup in employment this spring, cheap credit, and a glut of affordable homes will allow housing not only to withstand the removal of government help in 2010 but also to contribute to U.S. annual economic growth for the first time since 2006.

Employment is key to this outlook. Morgan Stanley (MS) economist David Greenlaw forecasts as many as 300,000 new U.S. jobs in March, the biggest monthly increase in four years, because of milder weather, government hiring of temporary workers for the U.S. Census, and a growing economy.

Credit conditions also may be improving. A net 13.2% of banks surveyed by the Fed in January reported that they tightened lending standards on prime mortgages in the fourth quarter. That`s the smallest percentage in three years.

Read the full article here.

 

[Ally]

Spring panic for some homebuyers

Lynne Engelman and Kevin Giddings have less than 120 days to find a home.

The Calgary couple won`t be homeless if they strike out but they will be without a near-record-low five-year mortgage rate. They were pre-approved for the 3.69% guaranteed rate just before all the major banks jacked up their rates last week.

If they had to go to the bank today to borrow, the five-year rate would be more like 4.25% and that figure is expected to rise in the next four months.

"We knew rates wouldn`t continue to be at these all-time lows so I said, `let`s lock in` and hopefully we can find a home," said Mr. Giddings, who financed his first home with a variable-rate mortgage that now has a rate of 1.45%.

Rising interest rates on the long end are just one more catalyst for a spring housing market expected to reach a feverish pitch.

Throw in new mortgage rules that go into effect April 19 which will make it tougher to borrow in some cases, a new harmonized sales tax (HST) in Ontario and British Columbia and a likely Bank of Canada hike in short-term interest rates as well, and buyers are getting panicked.

Read the full article here.

 

[Ally]

Business confidence takes a hold

Canadian companies continue to express confidence that the economic recovery is taking hold, and are preparing to raise prices to offset higher costs and reflect stronger demand, according to a quarterly Bank of Canada survey.

The central bank`s Business Outlook Survey, released Monday, found that while 54 per cent of executives expect inflation between 1 and 2 per cent a year over the next two years, 40 per cent see price growth averaging between 2 per cent – the bank`s target rate – and 3 per cent over that period, twice as large a share as in the previous survey.

The survey indicated firms expect both input and output prices to rise more quickly. In the case of output prices – what companies charge for the products they sell – the "balance of opinion" between the 45 per cent of executives predicting faster price gains than in the past year and the 17 per cent who predicted slower increases was the biggest since the central bank started asking that question in 1998.

The results reinforce reports in recent months indicating inflation and economic growth are both running hotter than the central bank anticipated in its last quarterly forecast, which it will update on April 22. Those data, combined with the fact January to March was the strongest quarter for Canadian job growth in two years, have some economists saying Bank of Canada Governor Mark Carney will raise interest rates from the current rock-bottom levels as soon as early June.

Mr. Carney pledged last April to keep the benchmark rate at 0.25 per cent through the end of June, depending on the outlook for inflation. He is widely expected to use an April 20 rate decision and the forecast two days later to hint at how soon and how aggressively he plans to tighten borrowing costs.

Read the full article here.

 

[Ally]

Multiple-unit building declines

Canadian housing starts eased 1.5 per cent in March, the first decline this year, as builders broke ground on fewer multiple-unit dwellings such as condos.

Housing starts fell to 197,300 units, on a seasonally adjusted annual basis, Canada Mortgage and Housing Corp said Monday. Economists polled by Bloomberg had pegged starts at 205,000 units in the month.

Urban multiple starts fell 15.2 per cent while single-family starts grew 6.9 per cent.

"The chunky nature of the typical condo project tends to suggest that the picture could swing around fairly significantly," said Stewart Hall, economist at HSBC Securities (Canada), adding that there may be some "project saturation in [Ontario`s] multi-dwelling component."

The findings echo a report last week, showing building permits eased due to a lull in multiple-unit activity. Building permits fell for the second month in a row in February, sliding 0.5 per cent to $5.7-billion in the month.

"The moderation in March housing starts was due to a decrease in the volatile multiple starts segment," said Bob Dugan, chief economist at CMHC`s market analysis centre. "Helping to offset this was an increase in singles starts as well as more activity in rural areas."

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[Ally]

Fewer Canadians declaring bankruptcy

Fewer Canadian businesses and consumers declared bankruptcy at the start of the year as the economy improved, with January`s decline marking the biggest drop for that month in two decades.

The total number of insolvencies, which include bankruptcies and proposals, fell 6.7 per cent in January from the previous month, the Office of the Superintendent of Bankruptcy said Monday. Bankruptcies fell 9.4 per cent on a monthly basis.

Over the past decade, insolvencies have tended to be higher in January than in December. This year, however, the drop in insolvencies in January "was the largest decrease recorded for January in 20 years," the office said.

The past year has been marked by an upswing of consumer bankruptcies, with comparably few business bankruptcies.

As the economy starts to grow again, insolvencies are slowing. Insolvencies were 2.7 per cent lower this January than in the same month last year. Consumer insolvencies fell 1.9 per cent from a year earlier while business insolvencies dropped 18.5 per cent.

Read the full article here.

 

[Ally]

U.S. recession`s end still unknown

A panel of U.S. academics that date the beginnings and ends of recessions isn`t ready to declare just yet when this downturn ended.

The National Bureau of Economic Research said Monday that although most barometers show improvements in the U.S. economy, it would be "premature" to pinpoint the end of a recession based on economic data seen so far.

That assessment came after the group of academic economists met at its Cambridge, Mass., headquarters on Thursday to review mountains of economic data.

The panel looks at figures that make up the nation`s gross domestic product, which measures the total value of goods and services produced within the United States. It also reviews incomes, employment and industrial activity.

The economists decided that many of the key economic indicators are "quite preliminary at this time and will be revised in coming months," NBER said. The government often changes its estimates of economic growth , job creation and other important barometers based on more complete information. The panel of academic economists was wary of making a declaration about the end of the recession when key government figures could still be changed.

NBER has already pinpointed the start date of the recession as December 2007. Many private economists believed the recession ended in June or July last year.

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[Ally]

Central bank`s data may hint at rate hikes

The guessing game about when Bank of Canada Governor Mark Carney will start to lift borrowing costs essentially involves two camps.

The main difference between them is each group`s interpretation of Mr. Carney`s year-old "conditional" pledge to keep his benchmark interest rate at a rock-bottom 0.25 per cent through the end of June, depending on the inflation outlook.

For the first camp, the term "conditional" was always exactly that.

What Mr. Carney has called "extraordinary guidance" to markets was never meant to box him into staying on hold any longer than he felt appropriate, they say. So a rate hike before his July 20 decision is and was always in the cards.

When Mr. Carney added the term "expressly" before conditional in a speech last month, he added more fuel to speculation that he`ll start tightening before July.

The second camp argues while Mr. Carney`s commitment was rhetorically conditional, central-bank credibility requires him to stick to it, even though his preferred inflation gauge is already a shade above his 2-per-cent target. For this crowd - which has dwindled - Mr. Carney or a future governor would find it hard to influence markets later on with a similar conditional pledge should he break what they insist was a promise.

Besides, they reason, Mr. Carney could simply start with a bigger, 50-basis-point hike in July instead of the typical 25 basis points and have pretty much the same impact on the economy over the longer haul as he would by moving sooner. (A basis point is 1/100th of a percentage point.)

Read the full article here.

 

[Ally]

There`s no `panic` from exporters this time

As the Canadian dollar hovers near parity with the U.S. currency, exporters are again feeling the pain - but the agony is tempered this time by the experience that was gained when they went through it all 2½ years ago.

Many Canadian executives say they have prepared their companies as well as possible for the current spike in the dollar, thanks to what they learned the last time around. But that doesn`t mean it doesn`t hurt.

"I`m not as panicked as I was a couple of years ago, at this level," said Rob Stenson, chief executive officer of Ag Growth International Inc., a Winnipeg maker of grain handling equipment that is sold in Canada, the U.S. and overseas.

Read the full article here.

 

[Ally]

Riding China`s Balloon Tiger
More than half a century ago, China`s first communist tyrant Mao Zedong said capitalism is nothing but a paper tiger. As visionary as he considered himself to be, the self-deifying dictator could never have thought his successors would ride on a balloon tiger, one that the regime has created and blown up so large that it will burst from the lightest poke. The tiger balloon is officially known as China`s real estate market.

While Chinese communist leaders are loudly celebrating their success in maintaining an 8 percent GDP growth rate, many economists around the world are unanimously predicting that the bubble will burst in 2010. No doubt, the disaster will start from the crash of the housing bubble. The root cause of the coming economic catastrophe is, apparently, the greed of the Chinese communist regime.

The Bubble
It is no secret that China`s housing bubble has reached a tipping point. Published data alone is enough to reveal imminent danger. Housing prices in China`s 70 large and medium-sized cities rose 7.8 percent in December 2009 from the previous year, the fastest increase in 12 months, according to China`s National Bureau of Statistics. In major cities such as Beijing and Shenzhen, the price-rent ratio in 2009 was typically around 1:500, with 1:700 in some regions, representing a 25 percent increase from 2008, and far exceeding the internationally accepted reasonable range of 1:200 to 1:300.

Most Chinese find their income growth rate lagging far behind the pace of the soaring price of housing. The ratio of annual income to the cost of housing in China has reached 1:20, compared to the safety level of 1:6. A report issued by the Chinese Academy of Social Sciences pointed out that 85 percent of Chinese families can`t afford to buy a home.

State-Owned Enterprises as the Bubble Blowers
The rising price of land is a major cause for the increase in the price of housing. For example, in Shanghai in 2009, the cost of land was, on average, 46.7 percent of the housing price.

Read the full article here.

 

[Ally]

The really rich put their money in homes

Property has pipped equities to the title of most popular asset class among the world`s wealthiest individuals, according to a report published today. The survey by Knight Frank of Citi Private Bank`s international high-net-worth clients — those with assets worth more than $10 million (£6.6 million) — showed that the bulk of their portfolios (33 per cent) were invested in property. Equities account for the next-biggest chunk — 24 per cent — followed by cash and bonds, at 17 per cent and 13 per cent, respectively.

The results indicate that even more money could be flooding into bricks and mortar this year — 71 per cent of respondents said they believed that 2010 was a good time to buy, compared with 68 per cent who think that equities are a good purchase.

However, property lagged behind equities and hedge funds in the list of asset classes that the über-rich think will perform best this year: 35 per cent put equities top, followed by hedge funds (25 per cent) and property (21 per cent).

Of those who have invested in property, residential — excluding the investors` own homes — was the favourite, accounting for 50 per cent of a typical property portfolio, compared with 41 per cent invested in commercial property, 5 per cent in agricultural and 4 per cent in funds.

Read the full article here.

 

[Ally]

Canadian dollar finds a solid resting place at parity

Canada`s new-found status as the darling of international investors has finally pushed the dollar back to parity with its U.S. counterpart, where it`s expected to hover for months or even years.

Observers point to Canada`s economy, financial system and fiscal footing as standing out among the Group of Seven, attracting investors to Canadian assets such as stocks, bonds and the currency.

The strong dollar, which closed Tuesday just shy of the $1-for-$1 level at 99.88 U.S. cents after trading earlier a shade above parity, adds pressure on retailers to cut prices to match U.S. levels, makes travel to the United States, Europe and other favourite destinations more affordable for Canadians, and even helps Canada`s National Hockey League teams compete with U.S.-based rivals. At the same time, it causes headaches for Canada`s export-heavy manufacturing industry, in particular companies without hedging strategies.

Regardless, investors see little reason to expect the loonie will drop more than a cent or two any time soon, and some analysts say the currency could keep rising through much of 2011.

"There are few places on Earth which are clean, sound and well-managed on the fiscal and monetary side, and Canada is definitely at the top," along with nations such Switzerland, Norway and Australia, said Sebastien Galy, New York-based senior currency strategist at the French investment bank BNP Paribas.

"If you want to hold assets over the long term, Canada is certainly part of the basket where you`d invest."

Read the full article here.

 

[Ally]

Syncrudes stake tops China`s investments in Canada

It is by far the largest Chinese investment ever made in Canada, and it shows that China is still willing to pay a premium price for energy assets that no one else will match.

Monday, state-owned giant Sinopec Corp. was revealed as the winning bidder for the 9.03% stake in Syncrude Canada Inc. that was put on the market by ConocoPhillips Co. last year. It offered a whopping US$4.65-billion.

The fact that Sinopec put in the highest bid did not come as a shock — the company is already an investor in the oil sands, and it has spent more than $10-billion to buy two Calgary-based companies with largely foreign assets: Addax Petroleum Corp. and Tanganyika Oil Co. Ltd.

But the price tag on the Syncrude stake still surprised onlookers, who did not guess it would fetch that much.

"I think that was quite a strong price and should be taken as a very strong signal of China`s interest [in the oil sands]," said Marc Friesen, an analyst at Versant Partners.

"It shows that the world continues to watch the oil sands and they`re very interested in the development potential of these assets."

Read the full article here.

 

[Ally]

Bullish forecast pegs oil at U.S. $110 by 2013

TORONTO -- First Energy Capital has hiked by US$6 this year`s forecast price for West Texas crude and says oil will crack the US$100 mark once again by 2013.

The investment dealer`s bullish outlook is built on increasing crude oil demand and a market more focused on growth in the developing economies and less on bearish data in the developed world.

First Energy analyst Martin King, in a note Monday, hiked his 2010 price target for West Texas crude to US$83 a barrel, up US$6 from his previous outlook.

"We still love crude oil. Just as we did from the depths of the price despair at the start of 2009 and into 2010, we have been bullish," he said.

"We are becoming increasingly so with this update, and feel there is much more upside to come in the crude oil pricing story for many years into the future."

He expects oil to rise steadily -- to US$87 in 2011 and US$95 in 2012 -- before hitting an average of US$110 by 2013.

Read the full article here.

 

[Ally]

Companies to hike prices as recovery unfolds

OTTAWA -- A record number of Canadian companies plan to hike their prices over the next year, says a Bank of Canada survey - a sign a textbook recovery is unfolding but also a signal to the central bank that inflation expectations are heating up.

Overall, the Bank of Canada`s quarterly business outlook released Monday suggested the recovery is "taking hold," with companies looking to add jobs and boost spending at a quicker rate over the year. Further, a separate survey of senior loan officers indicates credit conditions eased in the first quarter to a level last seen in mid-2007 before the U.S. economy went into a tailspin.

But the survey also indicated price hikes are in the offing, with a greater number of firms believing inflation over the next two years is headed toward the high end of the Bank of Canada`s target range of 1% to 3%.

Talk of inflation and higher prices often triggers concerns, but analysts suggest it should be treated as welcome news this time around.

"It is perfectly natural in a recovery for prices to rise," said Eric Lascelles, chief Canadian economist at TD Securities. "The crunch was characterized by very sharp drops in prices, so it would be natural at a minimum for businesses to aspire to get prices to where they were beforehand."

Read the full article here.

 

[Ally]

Flaherty says loonie rise `relatively orderly`

WINNIPEG, Manitoba -- Canadian Finance Minister Jim Flaherty said on Monday the rise by the Canadian dollar has been "relatively orderly" and businesses have been able to deal with its climb to around parity with the U.S. dollar.

"It`s not been particularly erratic. That gives some comfort, I think, to business in Canada that they can deal with it," he told reporters.

"The strength of the dollar presently to a significant extent reflects the fiscal integrity of the government of Canada. Relatively speaking, we are fiscally strong, our deficit and our debt are relatively small compared to our competitors in the Western industrialized countries."

The Canadian dollar pushed through parity with the greenback briefly last week and touched a near 21-month high of $0.9977 to the U.S. dollar, or US$1.0023, powered by rising commodity prices and an economic rebound that investors expect will soon trigger interest rate hikes.

Read the full article here.

 

[Ally]

Housing starts hit road bump

OTTAWA - Canadian housing starts dipped slightly in March but are clipping along at levels not seen since 2008, a level unlikely to be sustained into the second half, economists said yesterday.

On a monthly basis, housing starts slipped to 197,300 units in March from an upwardly revised annual rate of 200,400 units in February, Canadian Mortgage and Housing Corporation said yesterday. Seasonally adjusted starts for January were also revised up, to 189,000 units.

The March decline was blamed on a sudden drop in the always-volatile multiple-units segment.

Not since October 2008 has the number of annualized starts surpassed 200,000, added BMO Capital Markets economist Robert Kavcic. February starts were previously reported at 196,700 units.

Taken together, he noted, the recent three months` data represent an increase in the first quarter of 8.2%, following gains of 15.2% and 22.1% in the previous two quarters.

Read the full article here.

 

[Ally]

Bank of Canada to raise rates early on June 1, economist predicts

With most agreeing that a rate hike from the Bank of Canada is imminent, the talk now turns to the exact timing and extent of the central bank`s policy changes.

Governor Mark Carney, pictured, made a "conditional" promise to keep the benchmark interest rate at 0.25% through the end of June 2010. However, one way to keep to this expiry date and provide markets with a jolt would be an initial rate hike of 50 basis points on July 20, according to Bank of America Merrill Lynch economist Sheryl King.

"Futures markets are only partially pricing in that possibility so it would be a shot across the bow to be sure," she said in a note. "The strongest argument against this tack in our view is that the market would immediately rush to the conclusion that all future hikes will be similar in size."

The economist thinks a 25 basis point hike on June 1 is the most likely scenario.

Meanwhile, Ms. King feels a 25 basis point hike on July 20 is the least likely scenario. She noted that this expectation is already fully priced into the Eurodollar and overnight index swap (OIS) markets. "If the Bank wants to elevate the risk premium in the bond market, validating market pricing cannot be the way they will go."

Read the full article here.

 

[Ally]

Finding the motivation to melt your mortgage

Who wouldn`t love to shave a few years off their mortgage payments? Burn My Mortgage aims to do just that, casting families in the GTA to participate in the new W Network series, billed as "home finance meets The Amazing Race."

Considering "where interest rates are, and predicted to be climbing, I just think it`s so timely," says financial expert and Burn My Mortgage host Kelley Keehn. "A lot of people have a mortgage. It`s our largest debt. I think a lot of Canadians just don`t realize how every single cent put down on principal can really add up."

The show, which is currently filming and set to premiere in the fall, is looking for families that ideally have a mortgage of more than $250,000, an interest rate of three per cent or more, a term of 25 years or more, children aged 10 years and older, and live in the GTA.

Participants undertake a series of three challenges to illustrate where their spending woes are occurring. For example, one family was surprised to discover they were spending five times the national average on hydro.

Read the full article here.

 

[Ally]

Watch bond market for rate hike clues

Anyone caught off-guard by mortgage rate hikes by five of Canada`s banks during the last week of March probably wasn`t paying attention to the bond market – and, let`s face it, that means most people.

A common misperception is that mortgage rates follow the Bank of Canada`s overnight lending rate. While it`s certainly true that we`ve seen historical lows in both over the last few months, the central bank only affects variable mortgage rates. Fixed-rate mortgages are affected by government bond yields, which have been trending upward for the past six weeks.

The reason? Bond traders are expecting the Bank of Canada to either raise rates sooner than the planned date of July 20 or be more aggressive in raising them than previously anticipated. Typically, the bond market moves two to four months before the Bank of Canada does.

"The bond market is a live market that can change and fluctuate constantly, but they typically move in anticipation of events, not the events themselves," says Peter Kinch, a Vancouver-based broker. "It`s almost like a speculative market."

Another reason behind the increase, says Benjamin Tal, senior economist at CIBC World Markets, is that U.S. government bond yields are rising and that often impacts Canada`s bond yields. "Long-term rates in the U.S. are going up primarily because of the fact that people are becoming concerned about the ability of Obama to fund the debt," says Mr. Tal. "Unfortunately, you and I are paying for Obama`s healthcare program in a way."

Read the full article here.

 

[Ally]

Dollar pushes Canada ahead of pack

As the rest of the developed world trudges through a fragile recovery, Canada is pulling away from the pack.

The jobs market is healing after the brutal recession, following the path of other economic indicators. Canada`s fiscal position stands out among its peers, its banking system is strong, and the dollar is moving ever closer back to parity with the U.S. currency.

The economy churned out another 21,000 jobs in February and the unemployment rate dipped to a 10-month low of 8.2 per cent, Statistics Canada said Friday. That compares with the peak of 8.7 per cent in the summer of 2009, and is well shy of far gloomier projections made at the height of the crisis.

The jobs report in turn drove the dollar past the 98-cent U.S. mark, welcome news to many Canadians heading to the United States for spring break, where they now have more buying power. Analysts believe the dollar will reach parity with the greenback within months.

While there are quibbles in Ottawa over just how quickly and smoothly Finance Minister Jim Flaherty can shrink Canada`s biggest budget deficit, the books are in such good shape compared with many other governments that foreign investors are being drawn in, buying a record amount of Canadian bonds last year.

Read the full article here.