Friday, October 4, 2013

Mortgage Market Commentary for October 4, 2013

  • TSX -103.88 to 12,735.12 (CP) has lost ground in three of the last four sessions reflecting increased volatility arising from worries that the United States could be heading for a big economic shock later this month.
  • DOW -136.66 to 14,996.48 falling below the 15,000 pt line as the U.S. Treasury Department warned Thursday that the economy could plunge into a downturn worse than the Great Recession five years ago if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations. The Treasury’s report says a default could cause the U.S. credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket
  • Dollar -.05c to 96.84c US amid widespread U.S. dollar weakness.
  • Oil -$.79 to $103.31 US
  • Gold -$3.10 to $1,317.60US

Canadian 5 year bond yields markets -.00 to 1.86. The spread (obtained by subtracting the bond yield above from the industry average 5 yr rate published mortgage rate of 3.79) is centred within the profit range at 1.93. If the increase in bond yield continues upward, the spread shrinks, which could prompt interest rates to rise. The range for investor desired profitability is currently a bit lower than in the past, more in the region of 1.80 and 2.00.

At our Ontario Professional Development Day this week John Bordignon, EVP at Paradigm Quest spoke to us about the upcoming B21 changes coming in early 2014. No one knows for sure what the changes will be yet, but they will affect all 3 insurers, which means the Credit Unions will be affected by the changes this time too.

Some things he thought most likely are coming:
  • complete elimination of stated income programs,
  • increased documentation required to show proof of numerous areas
  • and higher interest rates.

Bank of Canada may not hike interest rates until 2016: Scotiabank
Michael Babad The Globe and Mail Thursday, Oct. 03 2013

How long for the Bank of Canada?

Bank of Nova Scotia economists are now raising the possibility of no move in the Bank of Canada’s benchmark interest rate until 2016.

Other observers have speculated on late next year or early in 2015 for the first rate hike by the central bank.
But Scotiabank’s Derek Holt, Mary Webb and Dov Zigler say the Bank of Canada is now signalling a hold of more than two years, citing signs in a recent speech by senior deputy governor Tiff Macklem, among other things.

Earlier this week, Mr. Macklem painted a less optimistic picture than that painted a couple of weeks earlier by Governor Stephen Poloz.

The Bank of Canada’s benchmark overnight rate now stands at just 1 per cent.

“The BoC probably now envisages spare capacity remaining into 2016,” the Scotiabank economists said, adding the central bank now projects hitting its 2-per-cent target for annual inflation in mid-2015.

They believe the Bank of Canada may change that forecast, to an even later date, when meets later this month and also issues its monetary policy report.

“Against the conventional thinking that the BoC would want to hike before spare capacity closes, we continue to think that very easy money will be required even as spare capacity shuts,” the economists said.
“That’s because we don’t see the economy slipping into material excess aggregate demand into 2016,” they added in a research note.

“Highly stimulative monetary policy may therefore be required even at a resting equilibrium of no spare capacity. An added constraint in this regard is that while the BoC has exercised modest policy independence from the Federal Reserve in the past and with a mixed track record, we continue to view the central bank as being toward the limits of independence from Fed policy.”

The Fed has vowed to hold its benchmark rate at effectively zero until unemployment eases to at least 6.5 per cent.

The Scotiabank economists have been further out than others in the belief that the Bank of Canada won’t move until the third quarter of 2015, with the possibility of holding steady until “well into 2016

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