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business briefing

Briefing highlights

  • Canada nears sellers’ market again
  • What to watch for this week
  • China’s central bank cuts a key rate
  • Stocks, Canadian dollar, oil at a glance
  • Aimia strikes deal with dissidents
  • Behind the clamour for Aramco IPO
  • What analysts are saying today
  • Required Reading

Canada nears sellers’ market

Canada is oh-so-close to a sellers’ market in housing again, as prices rise at their fastest pace since the “go-go days.”

That's on a national basis, of course. Several local markets are already there, and many more are considered balanced. There's just one buyers' market in all of Canada.

This is based on the ratio of sales to new listings, and how they compare to the longer term.

Nationally, that ratio stood at 63.7 per cent in October, according to the latest figures from the Canadian Real Estate Association on Friday.

That's its highest since January, 2018, when the federal bank regulator established new mortgage-qualification stress tests to head off a credit bubble, noted Bank of Nova Scotia provincial economist Marc Desormeaux.

And where the ratio now stands puts “supply-demand conditions on the cusp of tilting into sellers’ market territory,” Mr. Desormeaux said in a report.

The "lower bound" for a sellers' market is about 64 per cent, he added later.

Royal Bank of Canada senior economist Robert Hogue agreed that where things stand is “a level usually associated with strong pricing power for sellers.”

This came as sales were basically flat in October from September, but up 12.9 per cent from a year earlier, while new listings declined 1.8 per cent on a monthly basis.

Combined, the sales and new listings numbers bring us to where we are now, as many markets perk up after the federal mortgage stress tests, and tax and other measures in British Columbia and Ontario aimed at cooling what had been frothy markets.

The ratio of sales to new listings "has been increasingly rising above its long-term average of 53.6 per cent," CREA said in releasing its national report.

"Its current reading suggests that sales negotiations are becoming increasingly tilted in favour of sellers; however, the national measure continues to mask significant regional variations."

Indeed, here’s how Scotiabank’s Mr. Desormeaux sees things across the country:

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Source: Bank of Nova Scotia

CREA also reported that the number of months of inventory is now down to 4.4, from an average of 6.3, noted Bank of Montreal chief economist Douglas Porter.

Put that together with the ratio of sales to new listings, and they “suggest the market is now squarely on the tight side, at least on a national basis,” Mr. Porter said.

"And, in turn, prices are responding after a lull," he added.

"The MLS [home price index] was a bit stronger than expected at 1.8 per cent, year over year, the fastest pace this year, and average transactions prices rose 5.8 per cent, the highest since the go-go days of early 2017. Little wonder then that mortgage growth has perked back up to above a 4-per-cent, year-over-year clip in recent months, and is likely headed higher."

All of this, of course, plays into the affordability issue, largely in the Vancouver and Toronto areas, where many potential buyers are priced out of the market. That was an issue during the recent election campaign and we'll see how it plays out as a Liberal minority government relies on the New Democratic Party to back it up.

"Affordability continues to be a major issue in Vancouver and Toronto but we’ve seen some minor improvement in the past year," said RBC's Mr. Hogue.

"We expect low interest rates, strong labour markets and rapid population growth to keep the recovery going in 2020," he added.

"Any expansion of the first-time home-buyer incentive - as promised by the Liberals during the federal election campaign- at the margin could stoke the market further."

Mr. Desormeaux believes the “adjustments” to the federal, B.C. and Ontario moves are “largely over,” and that sales will fall into pace with the economy next year.

"More modest employment growth should put less pressure on sales and prices, with further rises in immigration putting a floor under housing demand," he said.

"Interest rates should remain accommodative, but elevated household indebtedness in some of Canada’s most dynamic regions will likely limit borrowing and spending activity."

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A big week

All of this, of course, plays into the hands of the Bank of Canada, which is watching as consumer debts hover at swollen levels.

The central bank will be watching, too, as key indicators are released this week, including the state of manufacturing, retail sales and inflation, all fitting into the puzzle of its December rate decision.

"Many key events [this] week will likely give the final determination on a possible rate cut by the BoC at its Dec. 4th meeting, but we expect all developments will support the BoC remaining on hold," Veronica Clark, associate, U.S. economics, at Citigroup, and her colleague, chief U.S. economist Andrew Hollenhorst, said in a lookahead.

“Retail sales could again be sluggish in September, but [consumer price index] inflation should remain around target.”

Also on tap this week is a speech by Bank of Canada senior deputy governor Carolyn Wilkins, Tuesday in Montreal, and what the central bank bills as a “fireside chat” with Governor Stephen Poloz, Thursday in Toronto.

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Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen PolozAdrian Wyld/The Canadian Press

"Renewed strength in the housing market is one factor that keeps us skeptical that the BoC would be inclined to pursue rate cuts unless there is a more material worsening of the outlook," Ms. Clark and Mr. Hollenhorst said.

"The BoC in the past has expressed concern over financial stability risks that arise from high household debt levels, and would be hesitant to fuel a further accumulation of debt with lower rates," they added.

"Additionally, strong activity leading to upward pressure on home prices is another inflationary force in an environment of already-at-target inflation."

Other economists believe the Bank of Canada may well cut its benchmark overnight rate, now at 1.75 per cent, at some point soon.

China’s central bank cuts a key rate

China’s central bank has cut a key rate in another effort to juice the economy.

And analysts expect further moves down the road.

“One way to interpret the monetary easing in China is that the country is feeling the economic heat from the trade war with the U.S.,” said Jasper Lawyer, head of research at London Capital Group.

“If China wants to ease the short-term economic pain, lower tariffs via a phase one trade deal would go a long way.”

The People’s Bank of China trimmed five basis points from the rate on seven-day reverse repurchase agreements, to 2.5 per cent.

“For the first time this easing cycle, the People’s Bank has cut the rate it charges banks for short-run liquidity,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“We expect further cuts in the coming months, which will open the door to lower interbank rates and make banks less reluctant to cut lending rates … This is the first change to this rate since it was hiked in March, 2018. The move is a key step towards lowering marginal funding costs for banks, which rely heavily on repos as a source of short-run liquidity.”

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Markets at a glance

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Aimia strikes deal with dissidents

From The Canadian Press: Aimia Inc. has reached a deal with a group of dissident shareholders to revise its board of directors and buy back up to $125-million of its shares. The agreement ends a dispute with the group led by Charles Frischer that had sought to overthrow half of Aimia’s eight-member board. Aimia sold its flagship Aeroplan program to Air Canada earlier this year. The deal left Aimia with significant cash on hand, but also questions about its future. Under the terms of the shareholder agreement, the company has agreed to a plan to reconstitute its board no later than Feb. 28, 2020, ahead of the company’s next annual meeting, to be held no later than April 30, 2020.

Tariffs to hurt more: WTO

From Reuters: The World Trade Organization said growth in global goods trade is expected to remain “below trend” in the fourth quarter amid tensions and rising tariffs in key sectors. Its latest quarterly barometer showed growth in global merchandise trade rose by 0.2 per cent in the second quarter of this year against 3.5 per cent in same period of 2018. “Some components of the barometer have stabilized since the last reading in August, while others remain on a downward trajectory reflecting heightened trade tensions and rising tariffs in key sectors,” it said.

VW cuts outlook

From Reuters: German car maker Volkswagen cut its medium-term outlook for operating profit as the industry is being hit by a global downturn. VW now expects operating profit before special items to grow by at least 25 per cent in the 2016-2020 period, down from a previous forecast of more than 30 per cent, slides for a presentation showed. It also cut its forecast for medium-term sales growth to 20 per cent from more than 25 per cent.

Clamour for Aramco IPO

From Reuters: From taxi drivers to clerics, Saudis clamouring to own part of state oil giant Aramco went online and to local banks on Sunday at the start of a long-delayed share sale for what could be the world’s biggest initial public offering. Ahmed Sanad, 37, who signed up at a Saudi British Bank branch in central Riyadh called the IPO, which has dominated conversations on social media, in cafes and at family gatherings, “the talk of the town” and “a global event.” Retail investors will be able to buy up to 0.5 per cent, about US$8.5-billion worth of shares, in the Aramco IPO, valuing the company at US$1.6-trillion to US$1.7-trillion.

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U.S. to ease up on Huawei: report

From Reuters: The Trump administration was set to issue a 90-day extension of a license allowing U.S. companies to continue doing business with China’s Huawei Technologies Co., two sources familiar with the deliberations said. Reuters reported Friday that an initial extension of around two weeks was expected and a longer extension was in the works, but had not yet been finalized due to regulatory hurdles. Over the weekend, the Trump administration’s plans changed and it now plans to renew the temporary extension for the same 90-day period as it did in August, the sources said.

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What analysts are saying today

“Trade talks between the U.S. and China remain at the forefront of traders’ minds. The positive sounds from the U.S. side helped boosted European as well as US equity markets last week … The language is driving the bullish sentiment even though President Trump doesn’t appear to be keen to roll back on the tariffs. The U.S. side would like to see more concessions being made in relation to intellectual property, while the Chinese side are balking about the size of agricultural purchases the U.S. are calling for … Liu He, China’s vice premier, held constructive talks with Steve Mnuchin as well as Robert Lighthizer over the weekend. The discussions concentrated on phase one of the trade deal. The fact the discussions took place are being viewed positively by traders.” David Madden, analyst, CMC Markets

“Sterling’s the pick of the major currencies this morning, because opinion polls over the weekend put the Conservative share of the vote at 45 per cent, compared to 30 per cent for Labour. Sterling still has upside from here, unless ‘no deal’ returns as a serious possibility. The Chinese news reinforces my belief that [the Canadian dollar] is a better buy than either [the Australian or New Zealand dollars].” Kit Juckes, global fixed income strategist, Société Générale

“It still remains the case that the epicenter of the euro area slowdown is in Germany, which narrowly escaped a technical recession in Q3 this year. Up to now, the slowdown in Germany has been concentrated in the manufacturing sector. This has been reflected in the [purchasing managers indexes] also, which have shown a clear divergence between the performances of the two sectors. Some subsectors within services are already worse off due to their close relationship with the manufacturing sector but our economists see the main pass-through of weakness to services coming through the labour market channel. The October PMIs suggest that this could already be happening, with the composite employment index having fallen below 50 for the first time in six years. Unless global uncertainties are lifted, which are weighing down on the manufacturing sector, it is only a question of when, not if, the weakness in manufacturing spreads to the rest of the economy.” Daria Parkhomenko, foreign exchange strategy associate

Required Reading

Less saving, more debt

Canadians are saving much less than they used to, the result of a long-term shift in incentives that has favoured borrowers over savers and seen households pile on billions of dollars in mortgage debt to build wealth. Matt Lundy takes an indepth look.

New cannabis rules

Canadian cannabis companies that need money are being forced to agree to costly financing terms as their share prices collapse in an industry-wide rout. Tim Kiladze reports.

Quebec poutine maker turns to patrons

Even the godfather of poutine is having trouble finding staff amid Quebec’s severe labour shortage and booming economy. And he’s turning to his diners to help. Read Nicolas Van Praet on Ashton Leblond, the founder and chief executive of Quebec City region fast-food chain Chez Ashton, a 50-year-old institution venerated for its generous servings of golden French fries topped with cheese curds and brown gravy.

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