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Briefing highlights

  • Imagining household debt
  • Bank of Canada holds steady
  • Vancouver, Toronto home sales surge
  • Stocks, Canadian dollar, oil at a glance
  • RBC profit dips in quarter
  • National Bank, Laurentian raise dividends
  • Canadian Natural to boost spending
  • Food prices projected to rise
  • OPEC prepares to discuss cuts
  • What analysts are saying about Google
  • Required Reading

The BoC will be wary of providing a further incentive for households to take on even more debt.

— Benjamin Reitzes, Bank of Montreal

Imagine what could have happened to Canada’s infamous household debt levels had the Bank of Canada cut interest rates today.

The central bank didn’t trim its benchmark overnight rate from 1.75 per cent, but imagine how consumer debt burdens could have become even more problematic if it did. And it’s still an issue given that some observers still expect a rate cut at some point next year.

Consumer debt is one of the reasons seen as holding back the Bank of Canada, which has refused to join the rush among the world’s central banks to ease monetary policy.

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There are other reasons, to be sure, largely the performance of parts of Canada’s economy, though some analysts believe central bank governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues will eventually cut their key rate as “insurance” amid economic uncertainty driven largely by global trade tensions.

“Household debt is a well-known issue in Canada, and was a key reason why the Bank of Canada held policy rates steady through the first seven policy meetings of 2019,” Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist, said in a report on the recent rise in mortgage borrowing.

“While recent speeches from BoC officials suggest they believe the macroprudential regulatory changes are improving the quality of debt burdens, the bank will likely be watching the acceleration in mortgage credit growth carefully,” he added.

“At 4.5 per cent year over year, the rate of borrowing to buy a home is up more than one percentage point over the past six months.”

Which is why, as Mr. Reitzes put it, the Bank of Canada “will be wary of providing a further incentive for households to take on even more debt.”

Indeed, the central bank said today that it “continues to monitor the evolution of financial vulnerabilities related to the household sector.”

Canadian debt levels were among the fattest in the world, and came under scrutiny and warnings from observers the world over.

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The situation has indeed improved, helped along by new federal mortgage-qualification stress tests that came into effect in early 2018.

But then look at what BMO’s findings tell us about more recently and consider that the key ratio of household credit market debt to disposable income, on a seasonally adjusted basis, stood at 177.1 per cent in the second quarter.

That means Canadians owe $1.77 for each dollar at their disposal.

That number is better than what we’ve seen, but is still elevated, which is why it’s such a concern to the central bank.

“This is the financial vulnerabilities portion of the BoC’s conundrum on an insurance cut,” said RBC Dominion Securities rates strategist Simon Deely and his colleague Mark Chandler, head of Canadian rates strategy.

“Any easing would likely be followed by a rise in the debt-to-income ratio,” they added in their lookahead to today’s decision.

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According to a report Tuesday from Canada Mortgage and Housing Corp., we’re carrying swollen debt, though the situation improved as of the second quarter.

“Indebtedness is higher than one year ago, increasing the vulnerability of Canadians to unexpected difficulties in meeting their financial obligations,” senior analysts Anne-Marie Shaker and Braden Batch said in their second-quarter look at mortgage and credit trends.

“However, the trend since the first quarter of 2019 has been a decline of indebtedness.”

Remember, these numbers come before the latest cited by BMO.

Nonetheless, new mortgages as a share of all loans declined last year, when the new stress tests came into effect, but pushed higher into this year, Ms. Shaker and Mr. Batch said, adding that moved in line with the “national trend” in sales of homes.

On the plus side, average credit scores increased in the second quarter and default rates have “remained low and fairly stable across most credit types over the last four years with the exception of auto loans where delinquencies have been rising signaling that consumers with such loans face greater stress paying off debt on time.”

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But as The Globe and Mail’s Matt Lundy reports, consumer insolvencies in Canada rose in October to their highest level since the financial crisis.

This horse appears already to have left its barn.

— Brett House and Alena Bystrova, Bank of Nova Scotia

Here’s what observers said on the debt issue before today’s statement:

“In recent communications, the Bank of Canada’s senior leadership has noted its concern that any move to cut rates could set off a new flurry of household borrowing. This horse appears already to have left its barn - and businesses that finance their operations at the shorter end of the market are paying rates higher than the belly of the curve … The Canadian economy remains too reliant on real-estate investment for growth, but the current mix of short-term and longer-term yields isn’t aligned to change this.” Brett House, deputy chief economist, and Alena Bystrova, senior research analyst, Bank of Nova Scotia

“We expect the Bank of Canada to leave its key policy rate unchanged next week, as fears of stoking the flames of the resurgent housing market outweigh the risk that economic growth will slow by more than expected this quarter.” Paul Ashworth, chief North America economist, Capital Economics

“The BoC opting against an insurance cut in October implicitly suggests that they are willing to tolerate this small, stable output gap to avoid exacerbating household debt vulnerabilities. However, a small, but persistent, widening would likely be another story. The BoC’s projection already has a repeat 1.3-per-cent gain in Q4 – i.e. still below-potential growth – so this could be a slow developing story.” RBC’s Mr. Deeley and Mr. Chandler

“If there is one big downside risk (the global slowdown), there are a number of smaller factors telling the [Bank of Canada] to hold tight. First, housing activity has rebounded smartly in B.C. and Ontario, as the plunge in longer-term bond yields this year has done much of the work for the bank. At the same time, mortgage credit growth has accelerated again – at just over 4 per cent, it’s not flashing warning signs, but the turnaround has reduced the impetus to ease.” Robert Kavcic, senior economist, BMO

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“In our view, the stars are aligned for further strengthening of the Canadian housing market due to lower mortgage rates, the addition of about 300,000 full-time jobs so far this year and one of the strongest household formation rates among industrialized countries.” Sébastien Lavoie, chief economist, Laurentian Bank Securities

“The BoC may be too worried about inflaming housing and mortgage markets this time like it did when it eased in 2015. Obviously worry in itself is legitimate given the history of bubbles often induced by monetary policy. But the question at hand is whether cutting the policy rate would further inflame housing. Mortgage and housing markets recovered in many areas this year in part because a globally correlated bond rally drove fixed mortgage rates lower including the key five-year fixed rate. Cutting the variable rate once or twice is unlikely to do more than to remove a front-end kink in the rates curve rather than drive a flood of variable rate activity.” Derek Holt, head of capital markets economics, Bank of Nova Scotia

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BoC holds steady

As noted, the central bank held its key rate steady, with a statement that pushed the Canadian dollar above 75.5 US cents.

“Future interest rate decisions will be guided by the bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy – notably consumer spending and housing activity,” the central bank said.

“Fiscal policy developments will also figure into the bank’s updated outlook in January.”

As for the world backdrop, which is so key to the Bank of Canada’s stance, the central bank cited “nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years.”

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And as for Canada, it noted that economic growth slowed in the third quarter to an annual pace of 1.3 per cent, but highlighted stronger business investment.

“Today’s statement dialed back the dovish rhetoric of the prior statement, and as such suggests that the BoC is pretty firmly on hold for now,” said CIBC World Markets senior economist Andrew Grantham.

“The statement overall was maybe a little more hawkish than markets were expecting, and investors will now be dialing back the probability of a BoC interest rate cut in the near-term, which has seen bond yields rise,” he added.

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Home sales surge

And on that note, take a look at the latest home sales numbers in Vancouver and Toronto, which jumped in November from a year earlier, as The Globe and Mail’s Rachelle Younglai reports.

In the greater Vancouver area, sales soared 55 per cent to 2,498 homes, according to the Real Estate Board of Greater Vancouver. In the Toronto region, sales climbed 14 per cent to 7,090 homes, the Toronto Real Estate Board reported.

In the Greater Vancouver Area, the November benchmark price of $993,700 was higher than October’s $992,900, but 5 per cent lower than November, 2018. Across the Greater Toronto Area, the benchmark home sale price was $843,637 in November, a 7-per-cent increase over the previous year, but slightly lower than October’s price of $852,221.

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Markets at a glance

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RBC profit dips

Royal Bank of Canada posted a dip in fourth-quarter profit.

Profit slipped 1 per cent from a year earlier to $3.21-billion, or $2.18 a share, diluted.

This was because of lower results in its investor and treasury services, capital markets, and insurance and corporate support businesses, the bank said, which, in turn was partly offset by better results in wealth management and personal and commercial banking.

Loan loss provisions rose to $499-million from $353-million a year earlier, while return on equity slipped to 16.2 per cent from 17.6 per cent.

Separately, National Bank of Canada boosted its quarterly dividend to 71 cents as it posted a fourth-quarter profit of $604-million, or $1.67 a share, diluted, up from $566-million or $1.52 a year earlier.

Laurentian Bank of Canada also raised its quarterly dividend, to 67 cents, as quarterly profit slipped to $41.3-million, or 90 cents a share, diluted, from $50.8-million or $1.13 a year earlier.

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Canadian Natural boosts spending

Canadian Natural Resources Ltd. is boosting its capital spending by about $250-million next year.

Its capital budget for 2020 is $4.05-billion, it said today, with targeted production of about 1.17 million barrels of oil equivalent a day.

“Due to the Alberta government's recently announced elimination of curtailment for certain conventional drilling in Alberta and its previously announced reduction in income tax rates, Canadian Natural has increased its 2020 capital budget by approximately $250-million over 2019 levels, adding approximately 60 drilling locations across Alberta, and putting three additional drilling rigs to work, creating an additional approximate 1,000 full time equivalent jobs for Albertans,” the company said.

While Alberta ended some curtailments, Canadian Natural said its targeted production is still 10,000 to 25,000 barrels below what it would otherwise have been because of the curtailment program.

“We will continue to manage within our curtailment optimization strategy and target to maintain capital flexibility by aligning production growth with improved market access,” Canadian Natural said.

“We are hopeful that the curtailment levels will be reduced or eliminated as we progress through 2020.”

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Food prices to rise

Food prices are set to increase by about 4 per cent next year, according to a new report - meaning the average family will spend about $480 more on groceries in 2020, The Globe and Mail’s Ann Hui reports. The forecast, driven in large part by climate change and continuing trade issues, outpaces the average food inflation rate over the past decade of about 2 per cent to 2.5 per cent a year, according to Canada’s Food Price Report released today from Dalhousie University and the University of Guelph. Meat, fresh fruit and vegetables are expected to jump the most in price. Meat, especially, is to be between 4 per cent and 6 per cent more expensive than 2019.

OPEC, Russia discuss deeper cuts

From Reuters: OPEC and its allies led by Russia are gearing up to approve deeper oil production cuts this week to prevent a new glut and a collapse on oil prices, with OPEC member Iraq saying the move was supported by key members. Non-OPEC Russia also said it was expecting a constructive meeting as OPEC leader Saudi Arabia presses fellow producers to deepen cuts to increase its budget revenue and raise a good price from the share sale of oil giant Saudi Aramco. OPEC meets Thursday in Vienna followed by a meeting with Russia and others, a grouping known as OPEC+, on Friday.

Aramco IPO oversubscribed

From Reuters: The institutional tranche of Saudi Aramco’s planned initial public offering has been almost three times oversubscribed, financial advisers for the IPO said on Tuesday. The bookbuilding process for allocating shares to institutional buyers - typically asset managers, insurers or pension funds - began on Nov. 17 and investors have until 1700 Saudi time on Dec. 4 to place orders. Aramco plans to sell 1.5 per cent of its shares in a deal that could raise up to US$25.6-billion. The state-owned Saudi oil giant has received subscription orders for around 5.9 billion of shares so far from institutions in the first 17 days of the IPO, Samba Capital, NCB Capital and HSBC Saudi Arabia said.

Also ...

What analysts are saying today

“Alphabet shares are also set to be in focus after [Tuesday’s] news that Google founders Larry Page and Sergey Brin would be stepping down from their respective roles. Google CEO Sundar Pichai, will now take on a dual role as CEO of the umbrella company Alphabet, thus overseeing both parts of the business. What this means for the overall business is not immediately clear, however in the short term it’s quite likely that very little will change given that both will still retain their seats on the board as well as their controlling stakes in the company.” Michael Hewson, chief analyst, CMC Markets

“Larry Page was clearly unwilling to participate in this more political phase in the growth of Google and its parent company Alphabet. Alphabet shares have had a stellar year with Sundar Pichai at the helm of Google and we think investors will welcome the continuity. Pichai is not the kind of outspoken CEO to take on politicians and regulators out in the open. That could be his undoing when the rising number of tax and competition probes lead to more public appearances. More likely, though, Pichai can rely on behind the scene strategizing and lobbying to end up with manageable results. That allows Google to keep its top spot in internet search and grow in new areas like the cloud and AI.” Jasper Lawler, head of research, London Capital Group

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Required Reading

Seeking climate change action

An oil company, a bank and a consumer products giant are among a group of companies and civil society leaders asking Ottawa and the provinces to ratchet up efforts to tackle climate change, calling it an economic imperative. Marieke Walsh reports.

Founder defends Huawei

Huawei founder Ren Zhengfei says his company bears no responsibility for how buyers use its technology, dismissing recent criticism that the Chinese telecommunications giant has enabled human-rights abuses - specifically among Muslims in China’s Xinjiang region. Nathan VanderKlippe reports.

Catalyst bid lacks credibility

Private equity fund Catalyst Capital is attempting to portray itself as both a potential buyer of Hudson’s Bay Co. and a champion of shareholder rights in the battle for control of the department-store chain. That’s pretty far from reality, columnist Andrew Willis argues.

Gartman calls it quits

Dennis Gartman’s decision to end his daily investing newsletter says a lot about the transformation the investing world has undergone over the past generation, Ian McGugan writes.

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