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By Benjamin Tal
CIBC WORLD MARKETS
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.
CIBC WORLD MARKETS
Bank of Canada raises benchmark interest rate
The Bank of Canada has raised again its benchmark interest rate by 0.25% to 0.75% on Tuesday, the second consecutive hike after more than a year of record low rates.
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.
Will the Bulls Keep Running?
By Peter Buchanan
research.cibcwm.com
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.
More than any other province, first time home buyers in Alberta are expecting to pay less than the asking price for their home (71% vs. 65% nationally). One-quarter (26%) expect to pay asking price and only 3% expect to pay more than asking price.
These are the findings of the first TD Canada Trust Home Buyers Report, which surveyed Canadians who have purchased their first home in the past 2 years or who intend to purchase a home in the next 2 years.
Albertans also report putting down as much as they can afford for a down payment (95% vs. 88% nationally). 65% say they saved or plan on saving for two years or less for their home purchase. Despite the majority putting down as much as they can afford, only 25% plan to have more than a 20% down payment. The remaining 75% will require their mortgage to be insured by organizations like the Canada Mortgage and Housing Corporation (CMHC). Two-thirds (65%) are worried about being able to afford their home if interest rates rise.
“It’s only natural to want your first home to be the home of your dreams, but it is important to be realistic about what you can afford as a down payment and what that will mean for both the type of home you buy and for your mortgage payments over time,” says Farhaneh Haque, Regional Sales Manager, Mobile Mortgage Specialists, TD Canada Trust. “I advise first time home owners to consider a larger down payment because a 10% or greater down payment will make a big difference. It may mean that you need to save longer before buying your first home, but it will pay off in the end. Speak with a representative at your bank about setting up an automatic savings plan to help you save.”
73% of those surveyed in Alberta have or plan to have a fixed-rate mortgage.
“Historically you are more likely to save interest costs with a variable rate or short-term mortgage option, so if they can handle some volatility then I recommend buyers choose a variable rate. If people are adverse to interest rate fluctuations then a fixed-rate is best,” says Haque.
Albertans are doing their homework:
Nearly all home buyers are making informed financial decisions before buying their home. Top activities before buying a home include getting pre-approved for a mortgage (94%), learning about mortgage options (93%), calculating closing costs (89%) and speaking to a mortgage lender before shopping for a home (89%). However, land transfer tax, closing costs and property taxes were the top costs that buyers felt unprepared for (53%, 51% and 48% respectively).
What type of home do Albertans want?
59% of Albertans prefer fully detached homes, followed by condominiums (17%) and semi-detached homes (14%). If two homes were at the same price point, 68% would prefer a newer home over an older home. Albertans are split about the preferred location for their home; for the same price, 55% would prefer a smaller home closer to work and 45% would prefer a larger home that requires a longer commute to work.
Home shopping process:
People in Alberta do their due diligence when searching for a home, spending almost 9 months looking for a home and viewing on average 13 homes. They spend a lot of time shopping in Alberta because they plan to live in their first home for longer than people in other provinces. In fact, only 5% of people plan to spend less than 3 years in their first home (compared to 11% nationally). 39% plan to spend more than 10 years in their home or to never sell.
About the TD Canada Trust Home Buyers Report:
Results for the TD Canada Trust Home Buyers Report were collected through a custom online survey conducted by Environics Research Group. A total of 1,000 completed surveys were collected between June 8-21, 2010, including 100 from Alberta. All participants either purchased their first home within the past 24 months, or intend to purchase their first home within the next 24 months.
About TD Bank Financial Group
The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Financial Group. TD Bank Financial Group is the sixth largest bank in North America by branches and serves more than 18 million customers in four key businesses operating in a number of locations in key financial centres around the globe: Canadian Personal and Commercial Banking, including TD Canada Trust and TD Insurance; Wealth Management, including TD Waterhouse and an investment in TD Ameritrade; U.S. Personal and Commercial Banking, including TD Bank, America’s Most Convenient Bank; and Wholesale Banking, including TD Securities. TD Bank Financial Group also ranks among the world’s leading online financial services firms, with more than 6 million online customers. TD Bank Financial Group had CDN$574 billion in assets on April 30, 2010. The Toronto-Dominion Bank trades under the symbol “TD” on the Toronto and New York Stock Exchanges.