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Briefing highlights

  • Mortgage ‘sea change’ to bite
  • A Bond scene I’d love to see
  • Markets at a glance
  • Bombardier in C Series sale
  • BMO, Simplii warn of potential breaches
  • Bank of Canada expected to hold on rates
  • What to expect from GDP report
  • What to expect from U.S. jobs report
  • What else to watch for this week

Mortgage ‘sea change’

Canadian homeowners renewing their mortgages will get something of a “reprieve” for the rest of this year.

It’s next year that’s going to really hurt, Bank of Montreal warns.

This comes as Canada’s housing markets, particularly in the Toronto and Vancouver regions, are already adjusting to new measures.

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BMO senior economist Robert Kavcic recently crunched numbers pointing to what he called a “sea change” in the mortgage market as rates rise.

“For the first time in about 10 years, homeowners coming off five-year fixed-rate terms in Q1 were facing market rates a touch higher than those taken out at origination,” Mr. Kavcic said.

“And, after some reprieve through the rest of this year, this rate-reset amount is poised to rise more meaningfully by early 2019 (recall that five years prior, rates were plunging in the wake of the oil shock),” he added in his report.

“If five-year fixed rates just hold steady at current levels (around 3.3 per cent), those with mortgages coming due in 2019-20 could be looking at a 50-basis-point increase. If rates gradually rise to 4 per cent, the reset impact will top one percentage point (i.e., north of $200/month if you took out a $500,000 mortgage in 2014).”

That won’t smash the economy, Mr. Kavcic said, but it does mean the party’s over.

The rise in mortgage rates, and other borrowing costs down the road, could eat into consumer spending, which has helped bring Canada’s economy through some troubled times.

Mr. Kavcic’s colleague, BMO Canadian rates and macro strategist Benjamin Reitzes, has also crunched some numbers on that front, warning that swollen consumer debt levels and “a greater sensitivity to rate hikes” will continue to be an issue, for households and the Bank of Canada alike.

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“Running the numbers shows that debt-service costs would rise by about $5-billion annually for every 25 -basis-point increase in average interest costs (not overnight rates),” Mr. Reitzes said.

“Personal income growth is conservatively $40- to $60-billion per year, suggesting the upward move in rates is a headwind for consumption, but won’t be enough to really crack consumers as the fear mongers would have us believe.”

Affordability is, of course, a huge issue in Canada, particularly in Vancouver and Toronto, and became even worse in the first quarter, National Bank economists said in their latest measure last week.

The Vancouver market is the least affordable since 1980, the bank said, while the Toronto area is “very expensive” by historical norms.

“First- time buyers can turn to condos, but even there the price of ownership is $500,000,” National Bank said.

“The monthly payment for a condo is now a record 41 per cent of median income, compared to an average 29 per cent since 2000.”

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On a national basis, a mortgage payment in the study’s representative home, expressed as a percentage of median income, rose 1.2 percentage points in the first quarter.

“Over the last three quarters, the rise of interest rates has further reduced the affordability of Canadian housing, especially in Toronto and Vancouver,” National Bank said.

“Since buyers can hardly lay out a higher share of their income on housing than these two markets already required, a decline of prices is conceivable over the next few quarters if rates rise as we expect.”

As BMO’s Mr. Kavcic put it, a decade of “persistent mortgage renewal windfalls” is over.

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A scene I’d love to see

“Trump’s right. It’s a security threat.”

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Markets at a glance

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Bombardier in C Series deal

Bombardier Inc. struck a deal to sell a minimum of 30 C Series airliners to Air Baltic Corporation, lifting hopes for the aircraft program ahead of its planned takeover by Airbus SE, The Globe and Mail’s Nicolas Van Praet reports.

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The European carrier has put in a firm order for 30 larger CS300 planes with options and purchase rights on another 30 aircraft, Bombardier said in a statement Monday. The sale is worth US$2.9-billion based on the list price of the aircraft though discounts are common.

The agreement marks a vote of confidence in the C Series from an early customer.

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BMO, Simplii warn of data breaches

Bank of Montreal and online bank Simplii Financial are both warning customers that “fraudsters” claim to have accessed personal and account information belonging to tens of thousands of customers through apparent data breaches, The Globe and Mail’s James Bradshaw reports.

BMO said it was contacted Sunday by the alleged perpetrators, who claim to have sensitive information belonging to “a limited number of customers,” according to a statement released Monday.

Simplii also received a claim of an alleged breach involving information for as many as 40,000 customers on Sunday, and “began investigating to understand the claim and verify its accuracy.” The bank plans to reach out to customers who may be affected, and said it has implemented “enhanced online fraud monitoring and online banking security measures.”

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What to expect from BoC

From housing to trade to the broader economy, there’s more than enough uncertainty to stay Stephen Poloz’s hand this week.

The Bank of Canada governor, senior deputy governor Carolyn Wilkins and their colleagues are expected to hold their benchmark overnight rate steady at 1.25 per cent Wednesday, choosing to wait until July, at the earliest, to begin tightening again.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

PATRICK DOYLE/The Canadian Press

“With much uncertainty remaining and a third consecutive quarter of soft growth, we anticipate the BoC will hold policy rates steady,” said Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist.

“However, our expectation that housing will at least stabilize in Q2 and that the data will turn more positive underpin our call for the next rate hike to come in July.”

Much is at play as the Bank of Canada, which is monitoring the impact of its earlier rate increases, ponders when to move again. Here are the big issues:

THE ECONOMY

Canada’s economy has downshifted, and Statistics Canada will highlight this Thursday, a day after the central bank decision, with a look at first-quarter growth.

Economists expect that reading to show gross domestic product expanded at a soft annual pace of between 1.5 and 2 per cent.

“We now look for an even 2-per-cent real GDP pace, which nicely tops the last BoC projection,” said CIBC World Markets chief economist Avery Shenfeld.

“But there’s no reason for governor Poloz to rush to judgment. The average pace over the last three quarters will still have been below 2 per cent, and core inflation has yet to breach the bank’s target for [overall inflation].”

Of course, Mr. Shenfeld’s projection is on the high side of the range.

Royal Bank of Canada economists, for example, expect to see 1.8 per cent, which, they noted, would be half of a percentage point above the central bank’s forecast of 1.3 per cent.

That “would still mark a third straight quarter of growth at or slightly below the 1.8 per cent the bank estimates as the economy’s underlying ‘potential’ growth rate,” RBC said.

“With the economy assumed to be at or close to capacity, growth close to potential is desirable as it prevents the economy from slipping into excess demand and potential inflationary pressures.”

All in all, RBC and other observers expect the central bank to signal an increase in its key rate, but with no stated timeline.

TRADE FEARS

These just keep mounting.

Already, Canadian, American and Mexican negotiators have missed a so-called congressional deadline to strike a new North American free-trade agreement.

And the central bank has already flagged NAFTA as a key uncertainty, and now come added threats of tariffs on a few fronts.

U.S. President Donald Trump

YURI GRIPAS/Reuters

First, there’s President Donald Trump’s latest threat, a tariff of up to 25 per cent on auto imports, after his administration launched a probe under national security provisions.

Then there’s the fact that the exemption from U.S. tariffs on steel and aluminum runs out on Friday, and “a rate hike just days before tariffs could be imposed would look quite bad,” said BMO’s Mr. Reitzes.

As for the Bank of Canada’s policy statement Wednesday, added CIBC’s Mr. Shenfeld, “no doubt, the BoC will also include a reference to trade uncertainties, which have only gotten messier as the U.S. now waves the threat of auto tariffs.”

Mr. Trump threatens a lot of things, of course, but even a bark adds to uncertainty whether or not it’s followed by a bite.

“President Trump’s latest threat may ultimately prove to be another negotiating tactic in the ongoing NAFTA saga, particularly since such a visible price increase is unlikely to be popular among voters,” said Toronto-Dominion Bank senior economist Brian DePratto.

“But, it adds yet another challenge to already difficult negotiations,” he added.

“Not only does the auto file remain murky, there have been few signs of progress in other contentious areas, such as dispute resolution. Given the realities of the North American political calendar (Mexican presidential elections in July, U.S. midterms in November) it appears that this cloud of uncertainty will be sticking around for some time to come.”

HOUSING SLUMP

Home sales have tumbled in the wake of provincial government measures to cool off the Vancouver and Toronto area markets and, most recently, new mortgage-qualification rules from Canada’s commercial bank regulator.



Mortgage rates have also increased, adding even more pressure.

“With sales yet to stabilize, it’s hard to imagine the BoC will opt to tighten policy further and increase the downside risk to housing,” Mr. Reitzes said in a lookahead to the rate decision.

“Recall that pundits have been calling for a housing crash for the better part of a decade; governor Poloz doesn’t want to be remembered as the governor who caused a housing crash.”

Indeed, Canadians have been walking a fine line, having driven up home prices and borrowing to finance that. Thus, the Bank of Canada’s balancing act.

“Perhaps what is most on the bank’s mind is the gargantuan debt load that the Canadian household sector carries on its balance sheet,” said David Rosenberg, chief economist at Gluskin Sheff + Associates.

“It’s like a ball and chain that can really only be serviced adequately out of current incomes if rates stay low,” he added.

“But the bank has already raised rates three times since the oil crisis ended, and the reality is that the local bond market is highly correlated with U.S. Treasuries — where yields across the curve have been on a discernible upward trajectory. Hence, the recent bond-induced rise in Canadian mortgage rates.”

MONDAY: TAKING STOCK

It will be a slow start to the week, given U.S. markets are closed for Memorial Day.

But watch for how other exchanges fare after Europe’s losses last week on political concerns in Italy, with Canadian stocks also down, though by less than 0.5 per cent.

“As U.S. indices are searching for direction, still consolidating after the early-year blowout and subsequent correction, we’re all acutely aware that the S&P 500 is closing in on the longest post-war bull market on record, now more than nine years old and within shouting distance of that laid down through the 1990s,” said BMO senior economist Robert Kavcic.

TUESDAY: BANKS, BOOKS AND POT

Here’s where it picks up, with Bank of Nova Scotia, CannaRoyalty Corp., Indigo Books & Music Inc. and others releasing quarterly results.

Markets will also get the latest reading on U.S. home prices.

WEDNESDAY: MORE BANKS

Before Mr. Poloz and his colleagues take the stage, Statistics Canada will lay some groundwork with its first-quarter measure of the current account balance.

Economists expect we’ll see a fatter deficit of $18-billion or more, an increase of almost $2-billion.

“Transportation bottlenecks were largely to blame for a slowdown in goods exports, while firming domestic demand later in the quarter supported healthy growth in imports,” said Royce Mendes of CIBC.

“The deficit will be at the wider end of the range seen post-crisis, another headwind to the Canadian dollar.”

The day also brings quarterly results from BMO and National Bank of Canada.

Plus, the Federal Reserve’s Beige Book of regional economic conditions, the first of two reports this week that may suggest where the U.S. central bank is headed.

THURSDAY: AFTER THE HANGOVER

The GDP report may, as noted, highlight a weak first quarter, but economists believe the first three months were weighed down by January, and that the March showing will be better, and point to stronger days ahead.

“The Canadian economy woke up in 2018 with a bit of a hangover,” said CIBC’s Mr. Mendes.

“But, after a brief decline in January, economic activity appears to have perked back up,” he added.

“Our forecast of a 0.2-per-cent advance in March reflects positive readings on manufacturing, retailing, and wholesaling, but also the potential drag from earlier than expected maintenance at an oil production facility.”

On the earnings front, watch for Lululemon Athletica Inc. and Costco Wholesale Corp.

Overseas, watch for what Capital Economics says will be higher inflation in Europe, and unemployment holding at 8.5 per cent.

India, meanwhile, is expected to report first-quarter economic growth of 7.5 per cent from a year earlier, a pickup from the fourth-quarter pace of 7.2 per cent, “with the strength of industrial production growth, various consumer indicators and soft survey data in Q1 all suggesting that underlying conditions have improved,” said Shilan Shah of Capital Economics.

“However, we remain skeptical about how useful the GDP data are as a gauge of the health of the economy.”

FRIDAY: JOBS

Consider it akin to the Fed getting its ducks in a row as it heads into its mid-June meeting.

After Wednesday’s release of the Beige Book, markets will weigh whether Friday’s U.S. jobs report will nudge the U.S. central bank into another rate hike soon.

Economists expect to see May job creation of between 180,000 and 200,000 positions, with unemployment holding at 3.9 per cent.

“We expect a strong U.S. employment report to keep the Fed on track for a June hike,” Capital Economics said.

Also expected are manufacturing purchasing managers index readings from across the globe, which will add to the economic picture.

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Editor’s note: An earlier version of this article incorrectly said the central bank would likely get an early look at the Q1 GDP data when it makes its rate announcement on Wednesday, according to CIBC World Markets chief economist Avery Shenfeld. In fact, Mr. Shenfeld said later that the Governing Council of the Bank of Canada is not among the select group of Ottawa officials that get an advance look at the GDP data.
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