Calgary Alberta Mortgage and Real Estate News

The cost of borrowing money to buy a home rose another notch late last week as bond yields jumped amid fears that growing inflation pressures are becoming too strong to ignore.

Canada’s largest bank, the Royal announced its residential mortgage rates would increase between 0.10 and 0.15 percentage points, bringing its five-year closed rate to 7.29 per cent.

“The global economy has a lot more momentum than most people, including central bankers believed,” said Doug Porter, deputy chief economist with BMO Nesbitt Burns.

“It’s beginning to put upward pressure on inflation in a variety of areas.”

Interest rates across North America have become the focal point of money watchers lately, with speculation increasing almost daily that the U.S. Federal Reserve may raise rather than lower rates, even if that doesn’t happen immediately.

Earlier this month, the Bank of Canada warned bluntly it could raise interest rates, with expectations the overnight rate of 4.25 per cent could rise a quarter point next month.

Much of Canada’s mortgage market is tied to prime rates, which are based on the central bank’s overnight rate.

On May 29, Canada’s major banks raised their residential mortgage rates by nearly one third of a point in expectation of a rate hike from the Bank of Canada.

The latest rate hikes come against a backdrop of a Canadian housing market that continues to sizzle.

Average resale prices recently climbed above the $300,000 mark for the first time, while sales values and listings all set fresh records this spring driven by a buying frenzy in the west.

The Canadian dollar dipped
against the U.S. dollar on Monday but was still within striking
distance of its recent high as the market looked ahead to a
mid-week speech by Bank of Canada Governor David Dodge.
 Domestic bond prices, which have been under pressure in
recent months, were stuck lower.
 At 8:40 a.m. (1215 GMT) the Canadian unit was at C$1.0615
to the U.S. dollar, or 94.21 U.S. cents, down from C$1.0602 to
the U.S. dollar, or 94.32 U.S. cents, at Friday close.
 The Canadian dollar has eased slightly since touching a
30-year high early last week, but each drop in the currency has
been met with another wave of buying.
 ”Every indication tells us there should be a correction
lower,” said David Watt, senior currency analyst at RBC Capital
Markets. “But any time it seems the Canadian dollar starts to
sell off it seems to get bumped on and people push it back to
levels it has been trading at for the past several days.”
 The latest example of that resilience came on Friday as the
Canadian dollar bowed down to a weak Canadian jobs report, only
to find buying interest at lower levels which buoyed it to a
higher finish than where it started.
 With no key economic reports due in Canada this week, the
market will turn its attention to Dodge’s speech on Wednesday
to the St. John’s Board of Trade.
 Dodge will speak about demographics and labor, but the
market will listen closely for any comments on the Canadian
dollar’s surge and how that could factor into future policy
decisions.
 The Bank of Canada has hinted at imminent monetary policy
tightening and market expectations are now calling for rate
increases in July and September. Higher interest rates would
raise the yield on Canadian investments.
 ”It really just seems like the market is looking for a key
reason to sort of go one way or the other,” said Watt.
 BONDS STUCK LOWER AFTER DATA
 Canadian bond prices were stuck lower after a pair of
Canadian economic reports did little alter current sentiment.
 New housing prices jumped 0.8 percent in April from March,
the biggest monthly gain since August 2006. Canadian industries
ran at 83.0 percent capacity in the first quarter, the first
increase after four quarterly declines, but still a touch shy
of market expectations.
 Bond prices have fallen sharply in the past month, given a
slew of up beat economic reports that have had the market
anticipating rate hikes in the near term.
 ”I don’t think you can attribute it to any particular
positioning at this point in time because frankly the numbers
out today aren’t Grade A figures in Canada and I think I think
people are still taking a breather from last week,” said Eric
Lascelles, strategist at TD Securities.
 The two-year bond was down 5 Canadian cents at C$98.23 to
yield 4.703 percent, while the 10-year bond slipped 5 Canadian
cents to C$95.37 to yield 4.637 percent.
 The yield spread between the two-year and 10-year bond was
-6.9 basis points, compared with -4.9 basis points at the
previous close.
 The 30-year bond slid 20 Canadian cents to C$118.40 to
yield 4.536 percent. In the United States, the 30-year treasury
yielded 5.241 percent.
 The three-month when-issued T-bill yielded 4.33 percent,
unchanged from the previous close.

Canadian government debt fell, pushing yields on two-year bonds to the highest since 2001, on concern that accelerating inflation will prompt central banks worldwide to raise interest rates.“Inflation fears are back in investors’ minds,” said Sal Guatieri, a senior economist with BMO Capital Markets in Toronto. “That’s got bond investors quite worried, and that will continue to push yields higher.”

The yield on Canada’s two-year bond rose 8 basis points this week, or 0.08 percentage point, to 4.68 percent. It reached a peak of 4.72, the highest since August 2001. The price of the 3 3/4 security maturing in June 2009 fell 12 cents to C$98.27 in Toronto. Yields move inversely to prices.

Guatieri said the two-year bond yield may climb to 4.90 percent by the end of the year.

New Zealand’s central bank raised its benchmark interest rate a quarter-percentage point on June 7 to a record 8 percent. Investors in the U.S. reduced bets the Federal Reserve will need to lower borrowing costs this year.

Yields in Canada climbed for a third-straight week as investors raised bets that the Bank of Canada will increase borrowing costs more than once to stem inflation. The yield on the December bankers’ acceptance contract rose to 4.92 percent from 4.53 percent a month ago on the Montreal Exchange.

The central bank held its target rate for overnight lending between banks at 4.25 percent on May 29 and said it may raise borrowing costs “in the near term” should inflation stay above its 2 percent target. Policy makers next meet July 10.

`Deteriorated’ Inflation Climate

“The Canadian inflation climate has deteriorated during recent months,” said Yanick Desnoyers, a senior economist with National Bank Financial in Montreal. “It’s time to get ready for a new round of monetary tightening.”

Consumer prices, excluding volatile components such as energy, accelerated in April to the highest level in more than four years, Statistics Canada said last month.

Canada’s economy added 9,300 jobs last month after shedding 5,200 positions in April, Statistics Canada said yesterday. Employers were expected to add 14,300 new jobs in May, according to the median of 24 economists’ forecasts in a Bloomberg survey. The unemployment rate held at 6.1 percent.

Guatieri said the Bank of Canada will raise interest rates as soon as July “because economic data has been very supportive of this move.”

The Canadian dollar was little changed this week, closing at 94.24 U.S. cents in Toronto yesterday. One U.S. dollar bought C$1.061.

Just before the high-tech bubble burst, a colleague hurried into the office declaring excitedly to all within earshot that she was now in the stock market. Having tired of listening to everybody else’s endless chatter about stocks and the profits they were claiming on a daily basis, she decided that it was time for her to be involved.

Oh, Lord, I thought, here comes the elevator boy, harkening back to the legendary tale of the Wall Street financier who got out of the market just before the October 1929 crash after the elevator boy gave him a stock tip. That was a realization the market was riding a speculative bubble.

Some say the financier was Bernard Baruch. Others that it was J.P. Morgan and a shoeshine boy. No matter. Whenever speculative motives enter the investment equation, the risk increases. There’s no question that the climate in today’s stock market differs notably in one respect from the situation at the height of the high-tech mania. These days, there isn’t the feverish day-trading that accompanied the high-tech meltdown.

But there are other concerns. Core inflation is running at 2.5 per cent, and while we dodged a bullet on Tuesday when the Bank of Canada held its key overnight rate steady at 4.25 per cent, a rate hike seems inevitable in the “near term,” those words accompanying the bank’s decision to hold for now.

An anticipated rate cut that we have been living with since last September is now nowhere to be seen and no one expects it to materialize.

The worst of the scenarios comes from Toronto-Dominion Bank economists, who forecast that Bank of Canada Governor David Dodge will raise the key rate by 25 basis points in July and by another 25 basis points in September to bring the overnight rate to 4.75 per cent.

“Given the fact that core inflation has consistently been at or above the target of two per cent for the past 11 months, the odds of higher rates are tilted toward the upside now,” TD senior economist David Tulk told me.

The Bank of Canada’s concession that “some increase in the target for the overnight rate may be required in the near-term to bring inflation back to target,” confirms this.

The message for mortgage hunters or those making a purchase that requires credit is to lock in now, because interest rates are heading upward.

The benchmark S&P/TSX composite may have priced-in some of those increases, but that hasn’t tempered the chances of a pullback.

Short-selling — the practice of borrowing a stock and selling it in anticipation that it will fall, and then buying it back at a lower price, a dangerous practice, at best, because historically stocks go up — is at its highest level ever.

The short interest on the NYSE is 11.76 billion shares, which represents 3.1 per cent of all outstanding shares.

In Canada, short-selling activity is highest in the IT sector, where 6.5 per cent of all outstanding shares have been shorted, notes National Bank Financial market strategist Pierre Lapointe.

The IT companies and the percentage of their outstanding shares shorted are Celestica (12.8 per cent), CGI Group (9.7), Cognos (9.4), and Research in Motion (6.7).

The most heavily shorted stock in all sectors is Norbord (13.8 per cent), followed by CanWest Global Communications (13.4), Northern Orion Resources (12.9), Cott Corp. (12.4), Saskatchewan Wheat Pool (11.2), Gildan Activewear (10.9), Abitibi-Consolidated (10.4) and Angiotech Pharmaceuticals (10).

“Given the adverse market conditions that short-sellers face, we regard these short-sold companies as red flags,” says Lapointe. “Even the raging bull market hasn’t stopped many investors from betting that these stocks will fall. Short-sellers clearly see something negative that merits investigating.”

Barring a severe decline today, most investors will have recorded remarkable returns during May. The S&P/TSX has so far gained 665 points for a return of 4.9 per cent. The Dow Jones Industrial Average is up 4.3 per cent and the S&P 500 index 3.2 per cent.

It is worth noting that Canada’s inflation now exceeds U.S. core inflation for the first time in three years and the possibility that the Federal Reserve will ease its Fed Fund rate, although slim, is still greater than the chances of it happening here.

The only saving grace for Canada is that the anti-inflation lobby is running full steam in Washington where the word is that core inflation at two per cent is not good enough. The Fed wants it down to 1.5 per cent and that could mean higher interest rates for Americans and a tighter spread, now at a full percentage point, between the two central banks.

A spread wider than that would catapult the dollar even closer to parity and cause all sorts of trouble for Canada’s manufacturing sector, export industries and equity markets.

The Bank of Canada on Tuesday maintained its target for the overnight rate at 4.25%, but suggested that future rate hikes might be needed to contain inflation.

In an accompanying statement, the central bank said information received since the April Monetary Policy Report indicates that economic growth and inflation in Canada in the first part of this year have been “stronger” than the bank was expecting.

The bank judges that “there is an increased risk that future inflation will persist above the 2% inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target,” according to the statement.

“With this statement, the [Bank of Canada] has signaled it is prepared to hike interest rates by [a quarter percentage point] at its next meeting on July 10,” said Michael Woolfolk, senior currency strategist at The Bank of New York.

Woolfolk said the Canadian dollar could “easily reach 1.05″ against the U.S. dollar in the second half of this year.

The Canadian dollar, also known as the loonie, rallied on the news, last trading up 0.7% at C$1.0721 vs. the greenback.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/4 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 1/2 per cent.Information received since the April Monetary Policy Report (MPR) indicates that economic growth and inflation in Canada in the first part of this year have been stronger than the Bank was expecting. In April, both total CPI inflation, at 2.2 per cent, and core inflation, at 2.5 per cent, were above expectations. On the basis of available information, the Canadian economy is likely to have grown at an annual rate of about 3 1/2 per cent in the first quarter of this year - a full percentage point higher than was estimated in the MPR. The Bank now judges that there is somewhat greater excess demand in the economy than was thought to be the case in April. U.S. economic activity has come in largely as expected and continuing robust growth outside North America has maintained the global demand for, and high prices of, many commodities produced in Canada. Against this overall backdrop, the Canadian dollar has risen appreciably above the range assumed in the Bank’s April projection.

On balance, the Bank judges that there is an increased risk that future inflation will persist above the 2 per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.

An updated analysis of the Bank’s outlook for growth and inflation, including economic and financial developments, trends, and risks, will be set out in the Monetary Policy Report Update, to be published on 12 July 2007.

Information note:
The Bank of Canada’s next scheduled date for announcing the overnight rate target is 10 July 2007.

After leaving its key interest rate unchanged for the last year, the Bank of Canada could be about to signal that higher rates are on the way, some analysts are forecasting.

The central bank will release its next interest rate policy announcement at 9 a.m. ET Tuesday.

While no one is expecting a rate hike on Tuesday, some rate watchers say the central bank and its governor, David Dodge, could lay the groundwork for the overnight lending rate to jump as early as the following meeting on July 10.

The key overnight rate has been stuck at 4.25 per cent since May 2006. Any change in this interest rate triggers an immediate change in rates charged for variable mortgages and many demand loans and lines of credit.

TD Economics, for one, thinks the next rate hike could be as early as July, with another hike to follow in September. “The inflation backdrop has become troubling enough, in our view, to fully justify the bank finally moving off the sidelines,” said TD Securities chief economist Marc Lévesque in a commentary.

BMO Capital Markets agrees that the Bank of Canada will move off the sidelines, but not before the fall. “We judge that that Canadian dollar appreciation … and the prospects for continued slow growth will likely keep Dodge & Co. on the sidelines, at least through the summer,” wrote BMO senior economist Michael Gregory.

But he said his firm was “pulling forward our forecast for a first [central bank] rate hike into late 2007 from early 2008.”

RBC Economics also expects a later 2007 rate hike.

“With the core inflation rate well above the two per cent target and the domestic economy gaining steam, the odds of a significant slowing in price pressures are waning, making a very strong case for a policy interest rate increase later this year,” says RBC senior economist Dawn Desjardins.

Markets gird for rate increase
The markets are now fully pricing in at least one rate hike before the end of the year. Mortgage rates have already begun to head up as bond yields have risen in anticipation of higher rates. 

The mere prospect of higher interest rates has helped to boost the Canadian dollar to a 30-year high near the 93-cent US level.

The C.D. Howe Institute asked its nine-member monetary policy council to weigh in on what they think the Bank of Canada should do, as opposed to what they think the bank will do.

Their verdict? The majority think the central bank should raise its key overnight rate right away from the current 4.25 per cent to 4.50 per cent. “Both headline and core inflation are running ahead of the bank’s target,” the council said in a statement.

The core inflation rate — which excludes volatile items such as gasoline and fresh fruit and vegetables — surged to a four-year high of 2.5 per cent in April.

The Royal Bank of Canada, the nation’s largest bank by assets, forecasts the Canadian dollar will strengthen 2 percent to C$1.08 by the end of the third quarter, on expectations the country’s benchmark interest rate will increase this year to curb inflation while the U.S. Federal Reserve stays on hold. The outlook was revised higher last week from the firm’s previous forecast of C$1.13, according to Monica Fan, global head of foreign-exchange strategy at RBC in London. The currency will drop back to C$1.10 by the end of the fourth quarter, stronger than the firm’s previous estimate of C$1.12, Fan said. The Canadian dollar is nearing a 28-year high of 91.44 cents, matched on May 31, 2006. Futures traders last week placed the largest bet for the Canadian dollar to rise since the week ended Oct. 6, further adding to the currency’s momentum, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop — so-called net longs — was 8,851 on May 1, compared with net shorts of 1,631 a week earlier. Largest Bet The data shows a reversal from bets on the Canadian dollar to fall, according to CFTC data. Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of May 1. Interest-rate futures traders have increased bets for a Bank of Canada rate increase later this year. Policy makers kept the benchmark lending rate at 4.25 percent on April 24 for a seventh straight meeting. The yield on the September bankers’ acceptances futures contract has gained 41 basis points, or 0.41 percentage point, since March 5 to 4.46 percent on the Montreal Exchange. Bankers’ acceptances futures have settled at a three-month lending rate averaging 16 basis points above the central bank’s rate target since Bloomberg started tracking the difference in 1992. Fed Cut Foreseen The Federal Reserve will lower its benchmark lending rate between banks by 25 basis points to 5 percent by the end of the year to stimulate a slowing U.S. economy, according to the median of 71 economists polled by Bloomberg on April 9. The yield on Canada’s benchmark 10-year bond maturing June 2016 fell a second day by 2 basis points to yield 4.19 percent. The price, which moves inversely to yield, gained 16 cents to C$98.65. The yield premium, or spread, between the 10-year U.S. Treasury and its Canadian counterpart narrowed to 45 basis points, near a 12-month low reached May 4.

The Canadian dollar was slightly
higher versus the U.S. currency on Thursday but further moves
were expected to be limited given the lack of any significant
domestic data and ahead of a key U.S. jobs report due on
Friday.
 Domestic bond prices were slightly lower, handing back a
portion of recent gains fueled by the diverging monetary policy
risks between Canada and the United States.
 At 9:15 a.m. (1315 GMT), the Canadian unit was at C$1.1073
to the U.S. dollar or 90.31 U.S. cents, up from C$1.1087 to the
U.S. dollar, or 90.20 U.S. cents, at Wednesday’s close.
 With no key Canadian data to consider, currency traders
were expected to stick close to the sidelines until details of
the U.S. jobs report surface.
 Any weakness in the U.S. labor market could further boost
the case for interest rate cuts by the U.S. Federal Reserve
while the Bank of Canada is widely expected to keep interest
rates unchanged for the foreseeable future.
 ”I think the market is fairly stable ahead of tomorrow’s
key U.S. payrolls report and I don’t think we are going to see
a big move ahead of that critical number,” said Doug Porter,
deputy chief economist at BMO Capital Markets.
 ”If it’s a very weak report then I think there will be some
questions raised over whether Canada’s economy will also
succumb to some U.S. weakness.”
 But Porter said if the report is “a bit below” forecasts
then it could be ideal for the Canadian dollar because it could
open the door for Fed easing while the U.S. economy would not
undercut commodity prices.
 Wednesday’s testimony before a Senate banking committee by
Bank of Canada Governor David Dodge and Senior Deputy Governor
Paul Jenkins after the market closed did not spark any sharp
moves for the Canadian currency.
 Dodge said the central bank would not consider currency
intervention even if the Canadian dollar rises as high as 92.5
U.S. cents. He also said it was too soon to determine whether
the 4-percent rise in the currency against the U.S. dollar over
the past four weeks would require a change in interest rates.
 Stronger economic data in Canada, higher commodity prices,
and takeover interest in Canadian companies have fueled the
currency over the past six weeks.
 Merger-related interest in the Canadian currency could
continue as Swedish specialty steel maker SSAB (SSABb.ST: Quote, Profile, Research said
it had made a recommended cash offer for Ipsco (IPS.TO: Quote, Profile, Research that
values the firm at $7.7 billion.
 BONDS SLIDE
 Bond prices were lower as the absence of any key Canadian
data forced it to follow the drop in the bigger U.S. treasuries
market.
 Data that showed Canadian foreign reserve holdings rose by
$874 million in April to $40.18 billion, did little to spur a
move in the bond market.
 The two-year bond eased 2 Canadian cents to C$99.13 to
yield 4.192 percent, while the 10-year bond retreated 9
Canadian cents to C$98.46 to yield 4.206 percent.
 The yield spread between the two-year and 10-year bond
moved to 0.3 basis points from 0.8 at the previous close.
 The 30-year bond fell 35 Canadian cents to C$123.60 to
yield 4.245 percent. In the United States, the 30-year treasury
yielded 4.822 percent.
 The three-month when-issued T-bill yielded 4.17 percent,
down from 4.18 percent at the previous close.

Bank of Canada Governor David Dodge may keep interest rates unchanged for the longest stretch in five decades as inflation is tempered by a slump in U.S. demand for Canadian exports.Dodge, nearing the end of his seven-year term, will probably keep the benchmark rate at 4.25 percent tomorrow for the seventh-straight meeting. Some economists predict no interest rate changes before Dodge’s term ends in January, capping the longest pause since 1954.

“It’s almost an ideal world for the Bank of Canada,” said Doug Porter, an economist with BMO Capital Markets in Toronto. Core inflation, which discounts items such as fruit and gasoline, hovers near Dodge’s 2 percent target, and the economy’s “close to full capacity,” he said.

The world’s eighth-biggest economy has remained stable during global turmoil in part because Dodge hasn’t overreacted to events such as the fastest rise in the Canadian dollar since World War II. The currency’s surge prompted manufacturers such as jetmaker Bombardier Inc. to push for lower borrowing costs.

“Rates have been relatively stable given the massive shocks hitting the global economy,” said John Johnston, who helps manage about $2.6 billion in Toronto as chief strategist at the Harbour Group, a unit of Royal Bank of Canada. “It reflects a maturing of the bank’s monetary strategies.”

Lessons From 2003

Dodge, 63, may have learned from April 2003 when he tightened only to ease in July, underestimating the impact of slower U.S. auto imports and outbreaks of SARS and mad-cow diseases. The central banker left rates alone last May as investors called for an eighth-straight increase, and again at the end of 2006 as exporters lobbied for a reduction.

The bank’s six-member governing council, led by Dodge, deserves praise for “keeping the economy on a pretty good even keel,” said Dale Orr, Toronto-based managing director of Canadian research for Global Insight, a forecasting firm. “There is a reasonable amount of judgment involved, so you can give them credit.”

Since July, Dodge has said the risk of inflation veering from his target is balanced by stronger consumer spending and weaker U.S. demand for Canadian goods. Monthly data has so far borne this out, with core inflation between 2 percent and 2.4 percent, even with the jobless rate at a three-decade low.

If the bank keeps the overnight rate at 4.25 percent tomorrow, the pause would surpass a 2004-2005 stretch, and rival an 18-month run that ended in March 1973. Pausing through Jan. 31, when Dodge’s term ends, would extend it to 20 months, a streak not seen since the first governor, Graham Towers, retired in 1954.

All 22 economists in an April 19 Bloomberg survey forecast no rate change tomorrow.

Safest Thing

Dodge, who meets the bank’s board in June to discuss his future, will also keep rates unchanged through the first quarter of 2008, according to the median estimate of 11 economists surveyed by Bloomberg News April 4-9.

“The safest thing to do is nothing,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, who predicts no rate change this year. “There are two diverse and opposing sets of forces the bank has to deal with,” namely strong growth in oil-rich Alberta and slower growth in manufacturing-heavy Ontario and Quebec, he said.

The economy may not stay close to capacity. Some forecasters predict a strong dollar, trading close to a five- month high, and sluggish labor productivity will limit economic growth to 2.3 percent this year, according to a Bloomberg survey. That pace is half a percentage point below what the central bank says the economy can tolerate before inflation accelerates.

`Slowdown Contained’

Still, the slowdown has been limited to exports of lumber and other housing-related materials, said Jonathan Basile, an economist at Credit Suisse in New York. “Canada still has a lot of natural resources that will be in demand for a long time,” he said.

Some investors are betting any rate move this year would be an increase. They point to the 6.1 percent jobless rate and February’s core inflation rate of 2.4 percent, a four-year high. The yield on the December bankers’ acceptance contract, tied in part to the central bank rate, rose to 4.42 percent April 19, from 3.97 percent March 7 on the Montreal Exchange.

Dodge, who hasn’t indicated whether he’d seek a second term, says he isn’t focused on the long pause in rate moves.

“What we are trying to do, always, is to have monetary conditions such that we will hit our inflation targets,” Dodge said in an April 13 interview in Washington during a meeting of the Group of Seven industrialized nations. “What it reflects is exactly what we’ve said, that we think that they are appropriate to do that.”