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A softer Canadian housing market, the end of federal stimulus packages and guarded spending by U.S. consumers will be a drag on Canada’s economy, according to a report by Avery Shenfeld, Managing Director and Chief Economist with the wholesale banking arm of CIBC.
The CIBC projects the real Canadian gross domestic product, an inflation-adjusted measure of the economy, will grow by 1.9 per cent in 2011, compared with the 3.2 per cent pace assumed in the 2010 federal budget last March.
Ontario will take the brunt of the expected blow — falling an estimated 1.6 per cent below the forecast for next year — because about 80 per cent of its exports are shipped to the United States.
Meanwhile, other provinces heavily weighted in export industries will suffer notable declines. Quebec is expected to see provincial GDP fall 1.1 per cent, while Manitoba is projected to fall one per cent short of forecasts, CIBC said.
Resource-heavy provinces like B.C., Alberta, Saskatchewan and Newfoundland and Labrador will lead growth but are expected to also face challenges meeting their budget forecasts.
Western Canada could face a tougher challenge in its housing market, where prices have overshot fair market value by the largest margin. That’s expected to have a slowdown effect on residential construction, the report said.
Shenfeld said the federal government shouldn’t allow a softening economy to derail plans to return to a balanced budget, and instead the Bank of Canada could back off from plans for higher interest rates, to adjust for a more challenging economic environment.
“We have started the process of raising interest rates, presumably to prevent growth from being so brisk that inflation breaks out. If policy needs to adjust to a more challenging climate abroad, it should be done by backing away from plans for tightening through even higher interest rates,” elaborated Shenfeld.
“Only if the Bank of Canada were forced to take rates back to zero would it be appropriate to postpone a much-needed, if gradual, path back to fiscal rectitude.”
Home prices in the US rose in July for the 4th straight month
Home prices in the United States rose in July for the fourth straight month, although weakness still persists.
The Standard & Poor’s / Case-Shiller 20-city home price index increased by 0.6% in July from from June and 3.2 per cent from a year ago. Twelve cities showed monthly price gains, among them New York, up 0.6%, Boston, up 2.8%, Washington, D.C., up 6.5%, Atlanta, up 0.2%, Miami, up 0.4, Los Angeles, up 7.5% and San Francisco, up 11.2%.
It was an unexpected rise as economists surveyed by Bloomberg had greatly missed the mark by forecasting home prices to fall 0.1% in July from June, and rise 3.1% in July, on a year-over-year basis, after an 0.3% June from May increase, and a 4.2% increase in June, on a year-over-year basis.
Case-Shiller’s 10-city index also rose a non-seasonally adjusted 0.8% in July from June, and 4.1% on a year-over-year basis, after rising a non-seasonally adjusted 1.0% in June from May, and 5.2% on a year-over-year basis.
However, although there are are signs of improvement in the U.S. housing sector, no one should expect large median home price gains in the months ahead, Standard & Poor warned:
“Home prices crept forward in July. Ten of the 20 cities saw year-over-year gains and only one — Las Vegas [down 4.9% compared to July 2009 ] — made a new bottom, as the impact of the first time home buyer program continued to fade away,” David M. Blitzer, chairman of the Index Committee at Standard & Poor’s, said, in a statement. “The year-over-year growth rates for 16 of the cities and both Composites weakened in July compared to June. While we could still see some residual support from the home buyers’ tax credit, which covers purchases closing through September 30th, anyone looking for home prices to return to the lofty 2005-2006 might be disappointed. Judging from the recent behavior of the housing market, stable prices seem more likely.”
About Standard & Poor’s
Standard & Poor’s, a subsidiary of The McGraw-Hill Companies (NYSE:MHP), is the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. With offices in 23 countries and markets, Standard & Poor’s is an essential part of the world’s financial infrastructure and has played a leading role for 150 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions.
For more information, visit http://www.standardandpoors.com
About S&P Indices
S&P Indices, the world’s leading index provider, maintains a wide variety of investable and benchmark indices to meet an array of investor needs. Over $1.25 trillion is directly indexed to Standard & Poor’s family of indices, which includes the S&P 500, the world’s most followed stock market index, the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, the S&P Global BMI, an index with approximately 11,000 constituents, the S&P GSCI, the industry’s most closely watched commodities index, and the S&P National AMT-Free Municipal Bond Index, the premier investable index for U.S. municipal bonds.
For more information, please visit www.standardandpoors.com/indices
U.S. Rating Agencies Ignored Proof of Unsafe Loans
The U.S. Financial Crisis Inquiry Commission, a bipartisan Congressional panel that has been holding hearings on the origins of the housing bubble that nearly brought down the banking system two years later, has been told that the ratings agencies in charge of assessing risk in mortgage pools, dismissed conclusive evidence that many of the loans were dubious.
D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors. Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities. Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service.”
The mortgage securtitizers hired independent analytical companies (like Clayton) to “sample loans and flag any that were problematic.” According to his testimony, Clayton found a large percentage of loans that failed various tests such as geographic diversity, the loan-to-value ratios, credit scores and incomes of borrowers. These findings appear to have veen routinely ignored by both the underwriters and the rating agencies.
According to testimony last week, from January 2006 to June 2007, Clayton reviewed 911,000 loans for 23 investment or commercial banks, including Citigroup, Deutsche Bank, Goldman Sachs, UBS, Merrill Lynch, Bear Stearns and Morgan Stanley. The statistics provided by these samples, according to Mr. Johnson and Vicki Beal, a senior vice president at Clayton who also testified before the inquiry commission, indicated that only 54 percent of the loans met the lenders’ underwriting standards, regardless of how stringent or weak they were.
Some 28 percent of the loans sampled over the period were outright failures — that is, they were unable to meet numerous underwriting standards and did not have positive factors that compensated for their failings. And yet, 39 percent of these troubled loans still went into mortgage pools sold to investors during the period, Clayton’s figures showed.
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http://www.nytimes.com
Fed gives Carney some reasons to pause
Bank of Canada Governor Mark Carney said Friday that if the U.S. Federal Reserve were to embark on another round of asset purchases, a strategy known as quantitative easing because policy makers seek to reduce interest rates by increasing the money supply, it would factor into whether he would continue lifting Canada’s benchmark interest rate, which now sits at 1 per cent.
“There are limits to the divergence that there can be between Canada and the United States,” Mr. Carney said in an interview with the CNBC business television network.
The Fed has not yet decided to return to quantitative easing, but its concession this week that it’s worried about falling short of its inflation and employment targets without fresh stimulus clouds the outlook for countries in better shape, especially Canada.
Mr. Carney’s comment was notable because Canadian central bankers tend to play down any link between the Fed’s decisions and their own. The idea is to discourage the notion that the Bank of Canada is a mere copy cat of its American cousin when it comes to setting interest rates. And for the most part that is true: Mr. Carney has increased Canada’s benchmark overnight rate three times since June, while the Fed’s key borrowing rate remains near zero and U.S. policy makers repeated this week that they intend to leave it there for a considerable amount of time yet.
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