Recent sentiment information from the US clearly shows that Americans are getting nervous about the coming six months. The AAII bull/bear indicators is now back to the level seen in 2009 and it is much the same for other sentiment readings such as Market Vane and the NAAIM. We already know that consumer confidence is on the decline and if you take a look at Google Trends you will find that the number of searches for the term “double dip” has surged.

The key question here is not what will trigger the softening in economic activity in the coming six months but what will drive growth during this period. It is clear that the inventory cycle and fiscal stimulus will not play any role in US overall economic activity in the coming 12 months and while business investment is still healthy, it accounts for less than 7% of the economy.

By now it is clear that the US housing market has at least 12 more months before it can initiate contribution to growth while the labour market is not showing any signs that it is about to recover anytime soon. Consumers continue to deleverage while banks are not in any mood to extend credit.

Accordingly, it is not unthinkable that Obama will have to rethink its fiscal exit strategy and will be forced to maintain some level of stimulus in the coming 12 months in order to prevent a double dip. Same goes for the Fed. While Bernanke is starting to talk about his exit strategy, the reality is that the Fed is already back in the MBS market after announcing that it has completed its operation in that market in March of this year. In fact, it is very possible that the Fed will toy again with some limited measures of quantitative easing in the coming few quarters just to keep things going. In this context, it is hard to see the Fed touching interest rates before the third or fourth quarter of 2011.

While all the above will not prevent the Bank of Canada from its tightening monetary policy, however, it will impact how high the Bank can go. The Bank is indicating that it is willing to continue to raise rates but at the same time, it is clear that the Bank is not blind  to what is happening around it. A slowing US economy; uncertainty regarding Europe; a slowing Chinese economy  and a rapidly cooling real estate market here at home, all will work to limit rate increases this year, with the bank rate projected to reach only 1.25% by year- end.

Related posts:

1. Bank of Canada raises benchmark interest rate The Bank of Canada has raised again its benchmark interest...
2. Repercussions on the Stock Market from rises on Mortgage Rates The Bank of Canada is very clear about its intention...
3. All eyes on the US economy A few observations related to the US economy which might...

Canada is America’s largest trading partner. The reasons Canada has come out of the 2008-2009 recession virtually unscathed is murky to most Canadians and all Americans. Some of it was dumb luck and/or the holding back on innovations.

Space limitation allows for a thumbnail sketch only of the differences in style of business in Canada vis-a-vis the United States.

Banking Industry

Canada’s five major banks, with thousands of branches, pleaded with the government to be allowed to merge, evolve into 2 or 3 multibillion dollar banks able to underwrite big deals, big enough to match Wall Street’s behemoths. The government said, “No, you’re likely to close unproductive branches in rural areas.” The banks tried to con the finance minister, claimed they would keep all branches open. The federals wouldn’t budge. The banks got lucky.

Royal Bank of Canada, Toronto Dominion, and CIBC went into the U.S. market anyway. CIBC got badly burned in the Enron fiasco where it settled with the SEC for $1 billion dollars. RBC and TD have had better luck, with TD expanding with commercial branches in the northeast and southern United States.

The Housing Market

There doesn’t seem to have been a single foreclosure in Canada. Prices are still rising in some locations, dipping in others. In the United States, folks don’t care to build up equity since mortgage interest is tax deductable. Furthermore, availability of a 30-year mortgage allows one to get by with minuscule amounts of principle being paid. When home prices rose, the tendency was to apply for a second mortgage treating one’s home like an ATM machine. In Canada, to buy a home, a substantial down payment is required, and credit worthiness is a prerequisite. One is offered a fixed rate (amortized over 20 years) mortgage for up to five years only. Interest is not deductable. The mortgage is insured for a small fee by the Canadian Housing Authority and is held by the issuing bank to maturity. All in all, it was an old fashioned way of doing business.

Living Standard

A little known fact is that, in Canada, a good three-quarters of the population is middle class. While per capita income is lower than the United States, the social safety net, including the National Health Plan, offsets the difference. The fabricated stories of mistreatment, waiting periods, death panels, and more, are just that: malicious rumours spread by those interested in maintaining the U.S. status quo. What puzzles many visitors to Canada is an absence of slums.

Climate

A good many Americans from above the Mason Dixon line retire, and establish permanent residence in the sunbelt. Naturally, Medicare services in such locales are strained, increasing costs. Canadians who wish to avail themselves of the Health Plan stay at home. There is no sunbelt to retire to, and no trailer parks. The benefit of this lower mobility is more stable home prices and adequate medical staffing.

Immigration and Government

Major cities in Canada, (about six), are a polyglot of nationalities. There are no racially segregated areas in Canadian cities, just segregation by housing costs. There is little friction, perhaps because, with the exception of some parts of the Maritimes, Canada is a country of immigrants. Canada does not have a land border with an underdeveloped country. Illegal immigrants that get in, usually by air, can apply for asylum. While they wait for an immigration panel to adjudicate their case, they are free to find work and obtain some subsidy, if needed. A costly affair, but it does provide for peaceful society.

In the recent era, governments of all political stripes, to stave off defeat in a vote of confidence, which brings on an election, managed Canada’s affairs from the center. The current right-wing, minority government is no different. Partisanship is mostly rhetoric. A law passed by the House of Commons (component of Canadian government of elected officials) gets an easy pass from the unelected Senate. There is little drama, and few surprises.

Manny Drukier is a columnist for the Epoch Times. His weekly feature, “The Practical Entrepreneur,” appears every Thursday in the Business section.

Related posts:

1. Alberta’s economy to lead Canada in GDP growth A recently released report by Scotiabank says that Alberta will...
2. Canada won’t fall victim to foreclosure wave by John Shmuel, Financial Post Canada’s housing market is expected...
3. Why the Bank of Canada cannot be blamed for rising mortgage rates According to a recent statement by the Canadian Bankers Association,...

Interest rate policy is often divisive, pitting borrowers against savers and investors against speculators.

On Tuesday, the Bank of Canada raised its key lending rate from 0.50 per cent to 0.75 per cent. On balance, this rate increase will be good for Canada, whose economy has reached a level that is the envy of others, judging by the accolades received in the international press.

However, using low rates to stimulate our economy towards an even higher trajectory could create imbalances that will eventually risk our new global economic standing.

To some, such as politicians, speculators and profligate consumers, a juiced-up economy sounds like a fantastic proposition. Unfortunately, most Canadians don’t fall into any of these categories. If interest rates are kept too low for too long, economic resources begin to flow rapidly to relatively unproductive uses. In the end, disasters such as real estate bubbles pose the greatest risk.

We only have to look south to see what an era of “easy money” interest rate policies have achieved: a real estate meltdown and an economy that has remained flat for a decade when the effects of financial engineering and over-borrowing are netted out. Apart from some lucky real estate speculators who timed things perfectly, is the U.S. better off?

Higher rates would have played an important role in bringing balance to the U.S. economy. Instead, there were some stunning side effects of low rates that included the statistic that 40 per cent of all job creation was related in some way to real estate (agents, bankers, mortgage brokers, construction firms, etc.) before the bubble burst.

Higher rates would have helped other service and manufacturing industries to compete for the labour that was otherwise attracted to real estate with its fevered speculation and promises of unending growth.

In a concerning development, real estate prices in Canada are back at record levels and in many cities prices exceed afford-ability indices. If the bank rate is kept too low for much longer, Canada risks the potential of becoming an economy that is too dependent on maintaining real estate price trends, inhibiting our ability to grow beyond the currently hot economic industries of construction and resources. The future of our economy will be on more solid ground with more diversification and job growth in other areas, and interest rate policy will have an effect on this.

Another benefit of higher rates is to provide savers with a yield. Recently, savings rates in Canada have plummeted as Canadians are being induced to borrow and spend while employment remains strong and rates remain low. In addition, there is reduced incentive to save and invest when yields are so low.

Even worse, for those who are saving or who depend on current investment income, there is the temptation to invest in lower quality investments in order to pick up a little more yield.

The asset-backed commercial paper catastrophe illustrated the hazards of this strategy for income-seeking investors who did not have the resources to assess the true underlying quality.

Finally, being able to cut rates in a time of crisis is crucial. However, this tool is drastically compromised when rates are already severely low, tantamount to “pushing on a string.” If the anemic global economy begins to impact Canada through trade flows, we are going to need all the policy ammunition we can muster.

Increased rates now will ensure that we are able to fight that battle if it arrives, thereby protecting our newly acquired, and envied, economic advantages.

Mark Jasayko and Neil McIver are portfolios managers with McIver Wealth Management Consulting Group at Richardson GMP Ltd.

Related posts:

1. Forecasting Interest Rates Boyd Erman Globe and Mail Update After a year of...
2. The effect of rising Interest Rates on Real Estate National Bank of Canada worries that the impact of rising...
3. Canada first in G7 to increase interest rates Jeremy Torobin, The Globe and Mail As expected, the Bank...

By retirement age, 75% of households are homeowners, and of those, 74% own their homes without a mortgage.

The economic benefit of owning a home is equivalent to the rent that does not have to be paid.

In 2006, when the value of this benefit was taken into account for households headed by individuals in the age group 60 to 69, it increased incomes by $5,500 or 10%.

For households headed by those in the age group 70 and over, incomes rose by $5,400 or 12%.

For households in the age group 70 and over whose household income was ranked in the bottom 20%, home ownership raised incomes, on average, by about $4,200 or 20%.

For households in the same age group whose income ranked in the top 20%, income increased by $10,400, but, in proportional terms, by a more modest 7%.

The research paper “Incomes of Retirement-age and Working-age Canadians: Accounting for Home Ownership,” is now available as part of the Economic Analysis (EA) Research Paper Series (11F0027M2010064, free) from the Key resource module of our website under Publications.

Related posts:

1. Recession-battered Canadians growing more conservative with their money By Sunny Freeman, The Canadian Press TORONTO – Recession-battered Canadians...
2. Household net worth growth slows According to Statistics Canada, household net worth was up 1.3% (or $74 billion)...
3. Home ownership costs increase across Canada except Alberta Owning a home in Canada has become even more expensive...

Energy prices rose 1.3% between June 2009 and June 2010, after increasing 6.2% over the 12 months ending in May. Excluding energy, the Consumer Price Index (CPI) advanced 0.9% in June, following a 1.0% increase in May.

The price of gasoline decreased 2.9% in June compared with the same month a year earlier, after rising 6.9% in May. This was the first year-over-year drop in prices at the pump since October 2009.

Natural gas prices increased 3.0% in June, after rising 4.7% in May. This was the third consecutive advance following several months of decline.

Electricity prices rose 5.8% in June following a 4.0% advance in May.

Prices for the purchase of passenger vehicles rose 2.8% in June, following a 5.1% increase in May.

On a seasonally adjusted monthly basis, consumer prices fell 0.2% in June, the same rate of decrease as in May. Both the transportation and the clothing and footwear indexes fell 0.7% while food prices decreased 0.1%.

Prices increased in seven of the eight major components of the CPI in the 12 months to June; the only exception was clothing and footwear.

Shelter costs rose 1.6% in the 12 months to June, after increasing 1.3% in May. Homeowner’s replacement costs rose 5.2% following a 4.4% increase in May. In addition to paying higher prices for natural gas and electricity, consumers also paid more for rent.

On the other hand, the mortgage interest cost index, which measures the change in the interest portion of payments on outstanding mortgage debt, declined 5.0% in June, following a 5.4% decrease in May.

Despite the year-over-year decline in gasoline prices, transportation costs rose 1.0% in the 12 months to June after increasing 4.1% in May. In addition to paying higher prices for the purchase of passenger vehicles, consumers also paid 5.3% more for passenger vehicle insurance premiums.

Consumers paid 1.2% more for household operations, furnishings and equipment. This increase followed a 0.9% rise in the 12 months to May. Higher prices were recorded for telephone services and child care. Costs for financial services fell 2.8%.

Food prices went up 0.7% in June following a 0.8% increase in May. The increase in June was the smallest since March 2008. Prices for food purchased from restaurants rose 1.8% while prices for food purchased from stores increased 0.1%. Prices increased for sugar and confectionery, tomatoes and lettuce, while prices for oranges and potatoes fell.

Prices in the health and personal care component were up 1.7%. Prices for oral-hygiene products and dental care increased.

In the recreation, education and reading component, prices rose 0.4% after falling 0.2% in the 12 months to May. Consumers paid more for cablevision and satellite services. However, prices for video equipment and computer equipment and supplies fell.

Prices for clothing and footwear declined 1.8%. In this component, lower prices were recorded for women’s and children’s clothing.

Apart from Manitoba, consumer prices rose in all provinces in the 12 months to June, but at a slower pace than in May. Prices at the pump fell in most provinces.

The fastest rate of change occurred in Ontario where consumer prices rose 1.6%. Prices for the purchase of passenger vehicles were up as were passenger vehicle insurance premiums. Ontario consumers also paid more for electricity and telephone services.

In Manitoba, consumer prices decreased 0.2% in the 12 months to June, following a 0.5% increase in May. Lower prices for gasoline, natural gas and home and mortgage insurance were recorded in this province.

In British Columbia, prices advanced 0.5% in June, following a 0.6% increase in May. Electricity prices rose 21.7% while prices for home and mortgage insurance declined.

The Bank of Canada’s core index advanced 1.7% in the 12 months to June, following a 1.8% rise in May. Price increases were recorded for the purchase of passenger vehicles, passenger vehicle insurance premiums, homeowner’s replacement costs, electricity and telephone services.

The seasonally adjusted monthly core index increased 0.1% in June, after increasing by the same amount in May.

For more information, or to enquire about the concepts, methods or data quality of this release, contact the Dissemination Unit (toll-free 1-866-230-2248; 613-951-9606; fax: 613-951-2848; cpd-info-dpc@statcan.gc.ca), Consumer Prices Division

Related posts:

1. GDP increases 1.5% during the first quarter of 2010 Statistics Canada reported Monday that real Gross Domestic Product (GDP)...
2. Canadian home prices keep raising According to statistics released by The Canadian Real Estate Association...
3. Stocks rise on strong 2009 gains amid positive manufacturing data The Toronto stock market advanced Monday afternoon after solid manufacturing...

The bank had previously raised its benchmark rate to 0.5 per cent in June after having kept rates at emergency lows since April 2009.

In the accompanying  statement, Mark Carney and his team said:

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

The bank also made it clear that future rate hikes are not guaranteed.

“Any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the bank added in its statement.

In raising the rate, the bank is effectively slowing down Canada’s economy, which had shown signs of significant strength in recent months, by boosting the country’s dollar and curbing exports. In terms of borrowing costs, strong demand for Canadian debt from foreigners should work to keep longer term yields down, so the effect of the bank’s hikes will be felt more on the short term end of the yield curve.

Economists predict Carney will raise rates again in September before pausing at one of two meetings in the fourth quarter, when economic growth may slow to a 3.1 percent pace instead of the 3.5 percent the bank predicted in April.

Related posts:

1. Canada first in G7 to increase interest rates Jeremy Torobin, The Globe and Mail As expected, the Bank...
2. Interest rates likely to remain at 2.5 per cent through to 2011 Although higher interest rates are expected from the Bank of...
3. Bank of Canada holds rate, but eyes inflation The Bank of Canada reiterated last Tuesday its conditional pledge...

TORONTO – Recession-battered Canadians are growing more conservative with their money and turning away from high risk investments to the safety of savings accounts — a trend that banks are cashing in on, industry insiders say.

Canadians this year have opened about 20 per cent more chequing and savings accounts than last — a giant leap from the average three to five per cent annual increase, said financial services consultant David McVay.

“Canadians are more conservative than they were in 2007,” McVay said, adding that more consumers are paying off debt, opening RRSPs and tax-free savings accounts than they were a year ago.

“We’re seeing a shift from stock investing into keeping more money in savings accounts because of the financial crisis,” he said.

The shift to safer investments is being driven by a nervous baby boom generation who “have lost their mojo” after the plunging stock market wreaked havoc on their retirement investments, McVay said.

They no longer want to take on the risk of a crash that could force them to work another five or 10 years.

“The banks are marketing to the uncertainty that Canadians have about their savings and retirement plans caused by the financial crisis,” McVay said.

Banks are looking to capitalize on the conservative shift in consumer sentiment because they can make more money from savings accounts than they can when stocks and bonds are in vogue, he added.

The 20 per cent increase in retail accounts amounts to about $100 billion in business — and Canadian banks are fighting aggressively for customers with cash-back and points incentives, McVay said.

TD Bank  economist Grant Bishop agrees that the trend away from risky equity markets has increased competition for deposits.

“You did see banks increasing the attractiveness in order to get the largest bulk of that cash flowing in,” Bishop said.

But the rush into precautionary savings during the initial phases of the recession, has since dropped off, he added.

As the early stages of recovery took hold, consumers began to take advantage of historically low interest rates and favourable borrowing conditions.

“We did see households, spurred by ultra-low interest rates, accumulating debt, largely for the purpose of home ownership,” he said.

“But going forward that does need to slow and households do need to save more in order to rebalance their finances and bring down the potential vulnerabilities that households would face as interest rates rise.”

As interest rates on loans begin a cycle of gradual hikes, borrowing will become more expensive. As the same time, that should eventually translate into higher interest on savings accounts.

Scotiabank released results of a survey of Canadians’ savings habits Tuesday that found nearly one-third of Canadians do not have a savings plan in place even though almost everybody —94 per cent— said they feel better when they have a safety net of savings.

That means there is still a large untapped market of Canadians who are looking for help with their savings.

“We did have a tough period in the last few years and I think now is a great time to really focus on this and get people thinking about how they can save,” said Gillian Riley, Scotiabank senior vice-president of retail deposits, payment and lending.

“Over the last year we certainly have seen some movement towards savings as a flight to safety,” Riley added.

About 55 per cent of the 1,000 Canadians surveyed by Harris/Decima for Scotiabank in March told pollsters they save on a regular basis. Still, nearly one-in-five Canadians said they don’t have any rainy day savings at all.

Household consumption had been growing at a faster rate than income growth, indicating that Canadians were taking on more debt to fuel domestic spending, Bishop said, adding that TD predicts that the pace of credit growth will slow in the near future.

The personal debt to income ratio has climbed dramatically in the past year, Bishop said. It sits at around 147 per cent, meaning for every dollar of income households earn, they hold about $1.47 in debt.

“That reflects that households still do need to save a larger portion than they were during the pre-recession period … in order to pay down debt.”

Related posts:

1. Meredith Whitney predicts a second recession in the U.S. housing market The U.S. housing market will experience a second recession, forcing...
2. Canadians not worried about rising mortgage rates Mortgage interest rates may be on the rise, but a...
3. The end of inexpensive money Economic experts now believe that the Bank of Canada might...

Besides Pamplona, the bulls were out in some force this week on Wall Street, after a lengthy absence. Whether they continue to roam quite so freely will depend in no small part on the upcoming S&P earnings season, which begins Monday.

Market eyes will also be on China. That country, a centre of slowdown fears that have battered commodities, reports Q2 GDP on Thursday, becoming the first major economy to do so.

Investors and companies have had their plates full of market moving developments lately. Eurozone contagion fears dominated the headlines during the spring. More  recently, concerns have shifted to the US economy itself.  Forward-looking data is always more critical in interesting times. Analysts are expecting a year-on-year rise of 23% in earnings for the S&P 500 in the quarter ended. How well firms do against that target will as always be of significance. But even more important, given the fast-changing backdrop, will be the clues provided in the guidance of what to expect down the road.  Announcements from some firms have suggested that meeting last quarter’s targets may not prove so difficult. However, the year-on-year comps will get more challenging from here as the earnings recovery matures. Given that fact, a loss of fiscal support and drag from the higher dollar, investors will be more interested in firms’ views on their ability to validate the 27% and 31% earnings gains pencilled in for Q3 and Q4, based on the Thomson data.

Double-dip recession fears appear to have eased a bit in recent days, contributing to the improved tone. That’s not so surprising. While the housing data has been abysmal, two broader gauges of the US economy’s health are still some way from recessionary territory. The yield curve has only flattened by about a fifth as much as it did before the last two recessions (Chart). The ISM index, while softer, is still 14 points above the level typically associated with a broad economic pullback.

The IMF’s upgrade of its forecast for 2010 global growth also helped to ease gloom on Thursday.  Part of the story there was China. With fiscal retightening set to slow growth in the indebted developed nations to a crawl of 2% or less next year, the global recovery’s prospects will rest even more on the shoulders of emerging market businesses and consumers. China’s GDP report will indicate whether those in one key market are up to the task.

Related posts:

1. A Turn for the Worse, or for the Worst? By Avery Shenfeld research.cibcwm.com Economics gets interesting for markets at...
2. Implications of the Greek crisis At this time it is important to put the Greek...
3. Stocks rise on strong 2009 gains amid positive manufacturing data The Toronto stock market advanced Monday afternoon after solid manufacturing...

These are some of the factors to be taken into consideration:

1. Fixed rates are at virtually all time lows.
2. An average 5 Yr Fixed 45 Day QC Rate is 4.17% paying 95bps or 4.13% paying 80bps
3. An average 4 Yr Fixed Rate is 3.99% paying 95bps or 3.95% paying 80bps
4. Fixed rate terms provide certainty of payments and less financial worries.
5. Economists are predicting a +250 basis point increase in the Prime rate by Q4 2011.

Make sure you get the right mortgage designed for your own financial situation.

If you have any questions please call or contact us for a FREE consultation to see if a Fixed-Rate Mortgage would work for you.

Related posts:

1. An Updated Variable / Fixed Rate Comparison Courtesy of Bernice Lim, from Street Capital, we bring you...
2. 86% of Canadians opt for fixed-rate mortgages Despite concerns about a Canadian housing bubble and high levels...
3. Contrasting Fixed Rate and Variable Rate Mortgages Mortgages are very important parts of your home buying dilemma....

Any country living beside an economic and cultural colossus tends to shore up its separate identity by emphasizing its differences and ignoring its similarities. Few nations have mastered this better than Canada, which for decades has seen itself as a kinder, gentler counterpart to the United States. But under Stephen Harper, Canada’s Conservative prime minister since 2006, the two countries have been converging. While Barack Obama has embraced policies that Canadians hold dear, such as near-universal health care and stricter financial regulation, Mr Harper has been importing many hallmarks of American Republicanism. Mr Obama’s expansion of government has generated a fierce backlash from the tea-party movement. Will Mr Harper suffer a similar rebellion in reverse?

Compare the Canada preparing to host the G8 and G20 summits later this month with that of 2002, the last time it hosted the G8, and the difference is clear. Back then the debate was about legalizing gay marriage, decriminalizing marijuana and how to attract more immigrants. Now it is about lowering taxes, and cracking down on crime and bogus refugees. Even abortion, a question settled two decades ago in Canada, has returned to the news.

This grittier mood is partly a function of the world financial crisis. But Mr Harper can also claim to have moulded it. He argues that Canadians are not as left-wing as their governments have been, and that it was conservative divisions that long gave the Liberals free rein to impose a “benign dictatorship”. …

Read more…

No related posts.