Calgary Alberta Mortgage and Real Estate News

The Canadian dollar slipped
against the U.S. dollar on Wednesday, after comments by Bank of
Canada Governor David Dodge seemed to do away with any thoughts
of higher interest rates any time soon.
Domestic bond prices, with no major Canadian data to
consider, followed U.S. Treasuries lower.
At 9:25 a.m. (1325 GMT), the Canadian dollar was at
C$1.0056 to the U.S. dollar, or 99.44 U.S. cents, down from
C$1.0036 to the U.S. dollar, or 99.64 U.S. cents, at Tuesday’s
close.
In a Vancouver news conference on Tuesday, Dodge said the
Canadian dollar’s surge to parity with the U.S. dollar was not
entirely justified by economic fundamentals, suggesting the
central bank was fretting about the currency’s rise.
The market, which had previously priced in the chance of
higher interest rates in the near to medium term, has had to
reassess outlooks to take into account the impact of the recent
credit crunch and the soaring currency.
“I think (the bank is) going to be on hold certainly next
month and there’s probably a little bit of doubt creeping into
the market’s mind…about rate increases period,” said Shaun
Osborne chief currency strategist at TD Securities.
The Canadian dollar last week reached parity with the
greenback for the first time in 31 years, reflecting steady
Canadian interest rates — the Bank of Canada left its key rate
steady at 4.50 percent in September — and a U.S. Federal
Reserve rate cut of 50 basis points to 4.75 percent.
A raft of weak U.S. data after the U.S. subprime mortgage
induced credit crunch has increased expectations of further
interest rate cuts in the U.S.
Meanwhile, oil prices spurted back above $80 a barrel ahead
of U.S. data expected to show a further decline in crude
stocks. Part of the commodity-linked Canadian dollar’s rise in
recent weeks has been on the back of soaring oil prices.
“Around these ($80 a barrel) levels, it would suggest that
the Canadian dollar is probably going to trade around this
parity level, but we’d probably need higher levels again to see
the Canadian dollar really take off,” said Osborne.
BONDS SLIP
Canadian bond prices followed U.S. Treasuries lower,
retracing some of the gains made over the past week.
Weaker-than-expected U.S. durable goods figures did little
to help bond prices, as the data is often volatile, said Chris
Holmes, Canadian fixed income strategist at J.P. Morgan
Canada.
With no Canadian data due until the end of the week,
domestic bond prices will likely continue to follow the lead of
U.S. treasuries and North American equity markets.
Friday’s figures are for July gross domestic product, and
August industrial producer prices and raw materials.
The overnight Canadian dollar Libor rate <LIBOR01> was
set at 4.7667 percent, still above the Bank of Canada’s 4.5
percent target for the overnight rate.
And Tuesday’s CORRA rate <CORRA=>, the weighted average of
the day’s rates on Canadian repurchases rose to 4.4840 percent
from 4.4709 percent on Monday. The Bank of Canada publishes the
rate at around 9 a.m. daily.
The two-year bond fell 7 Canadian cents to C$100.15 to
yield 4.174 percent, while the 10-year bond dropped 27 Canadian
cents to C$96.72 to yield 4.420 percent.
The yield spread between the two-year and 10-year bond
moved to 24.8 basis points from 24.0 at the previous close.
The 30-year bond lost 35 Canadian cents to C$108.36 to
yield 4.487 percent. In the United States, the 30-year treasury
yielded 4.920 percent.
The three-month when-issued T-bill yielded 4.03 percent,
unchanged from the previous close.

The Bank of Canada’s 4.5-per-cent overnight lending rate “is appropriate” but the bank must “look at the causes” of the rising loonie over the next three and a half weeks as it drafts its Oct. 16 interest-rate announcement, governor David Dodge said in speech Tuesday.”We need to assess the effect of movements in the exchange rate on the balance of aggregate demand and supply in the Canadian economy,” Dodge said, in what observers took as a hint that an immediate interest rate hike is unlikely as the bank examines the ongoing fall-out from this summer’s market turbulence.

“Overall, it looks like the bank is solidly on hold until they have a chance to assess the impact of the tightening of credit conditions on the real economy, and the impact of the most recent appreciation of the Canadian dollar,” Jacquie Douglas, an economics strategist with TD Securities, wrote in a note following the speech.

In his speech, Dodge noted “significant upside and downside” inflationary risks, observing that stronger-than-expected household demand could drive up inflation while spillover from the sputtering U.S. housing market could have the opposite effect.

Assessing which of those risks is more serious is what “we will be concentrating on between now and our next interest rate announcement,” Dodge told reporters after his speech to the Vancouver Board of Trade.

Of particular concern are rising housing prices, he said, which make up about five per cent of the country’s consumer price index.

“When, on average, new housing is rising at eight per cent, that really puts an upward bias into the CPI and it’s clearly something that in hitting our target we are very concerned about,” he said.

But he offered little hope to Canadian manufacturers, who have pressed the bank to cut interest rates as a way of dropping the value of the loonie, whose flight to parity has slashed returns in the auto and forestry sectors.

The rise in the price of resource products relative to manufactured goods “sends a signal that real resource labour and capital really have to be diverted from now lower value-added activities in manufacturing to higher value-added activity in the resource sector or in a number of service sectors,” Dodge said. “The lesson of history is that not to adjust is just not an option. And we have to find ways to get on with it.”

Still, while noting that a rising currency has little direct impact on inflation, “to the extent the rise in the Canadian dollar affects our exports in a negative direction and our imports in a positive direction, obviously that effect really does flow-through into the balance of demand and supply of Canadian goods and services. And that precisely is what we will have to take into account,” Dodge said.

His comments suggest that “a tighter Canadian monetary policy is not likely and, if anything, pointed to a higher probability of an easing if economic conditions get much worse,” Scotia Capital economist Karen Cordes wrote in a note.

For a generation, Americans have had a reason to feel superior to Canadians: Our dollar was worth more than theirs. Ours was a full dollar; theirs was discounted. And thus it was a shock last week when the Canadian loonie stole across the line of superiority and registered a value of $1.0008.

There were several reasons for this. Oil is the obvious one. Canada is endowed with much oil and gas, and the rise in its value tends to lift the currency. Americans have a large appetite for that oil and gas, perhaps more than is good for them. Another reason for the muscular loonie has been the financial probity of Canada’s conservative government. Unlike our conservative government, Canada’s has really and honestly balanced its budget.

This year, Canada is planning to run a 2-percent budget surplus. Canada’s Treasury has announced a long-term plan to pay off the central government’s debt, allowing cuts in the rates of personal income tax.

Imagine that: Pay off the debt, then cut the tax.

Our conservative government doesn’t think that way. It cuts taxes first, increases domestic spending and starts a war. Our conservative government put the whole smorgasbord on the credit card and argued that there would be no financial indigestion.

When indigestion arrived in the form of a subprime-mortgage crisis, Fed Chairman Ben Bernanke slashed the interbank lending rate. Probably by that time, it had to be done but it was not what a prudent, fiscally sound country should have had to do.

With the interest-rate cut, the dollar fell again, because it is less rewarding to park one’s funds at a lower rate of pay.

Now the greenback swims in the same pond as the loonie, which as recently as January 2002 was worth just 62 cents on the dollar.

And it’s not just Canada: The dollar has fallen this year against the euro, the pound, the yuan and the yen, and also against such proud players as the Polish zloty, the Russian ruble, the Philippine peso, the Mexican peso and the Brazilian real.

We shall have to be polite to the Canadians.

The Bank of Canada is universally expected to hold its interest rates steady at 4.5% tomorrow.

Although the unemployment rate is at a 33-year-low of 6.0%, wages are rising at a 3.7% annual clip, the economy expanded 3.4% in the second quarter and core inflation has been above its 2% target for an entire year, the sludge dripping from North American debt markets is expected to persuade the bank to stay its hand for now.

It will take time to see whether this sludge will contaminate broader lending, mingle with the U.S. housing slump and cause the United States and Canadian economies to slow. Canada also has some sludge of its own to absorb from the asset-backed commercial paper blow-up here.

It is ironic that as the bank holds rates in response to the slump in U.S. housing, it may further stoke a Canadian housing market still on a tear and vulnerable to risks of its own — like the rising labour and materials costs the bank was previously trying to restrain.

While U.S. building and sales have cratered and prices have dipped 3.2% on the year, Canadian resales rose nearly 10% in July to a new record and average prices jumped 12.6% to a record $311,495.

Toronto high-rise sales, meanwhile, are in their second year of 24% increases year-to-date. The luxury hotel-condo — usually commanding the top floors of some architectural jewel and bearing a marquee name like Ritz or Four Seasons — is the latest boom’s must-have.

“It is now common to see 2,000-to 2,500-square-foot condos selling for $2-million or more with property taxes and condo fees to match,” Sherry Cooper, chief economist at BMO Capital Markets, said in a recent note. “Per square foot, condo prices are now higher than single-family home prices of similar quality and location.”

At the Four Seasons hotel-condo in Yorkville for example, a 2,500-square foot condo sells for more than $4-million; a 3,900-square-foot penthouse has a $7.4-million price tag.

Although the prices may not be quite so lofty, they are racing across the country, too, with Saskatoon joining Calgary as the latest hot spot.

Analysts are at pains to point out how the Canadian market is in much better health than the United States.

“The current subprime default rate in Canada is less than 3% compared with 13% and growing for the United States,” Warren Lovely, economist at CIBC World Markets said in recent note. And there isn’t much subprime debt in Canada anyway. It accounted for barely 5% of mortgage originations during 2005-06, well below the 20%-plus share in the United States, Mr. Lovely said.

As well, Canadians have taken out fewer mortgages with teaser or adjustable rates and they have traditionally relied less on home lines of credit to fuel consumption.

Builders and lenders in Toronto, burnt by the 1990 real estate bust, are smarter too.

“There’s a healthy amount of discipline that has been inserted into the Canadian system that was a direct result of the problems of ‘89, ‘90, ‘91,” said George Carras, vice-president at RealNet Canada Inc. Typically a project is 60% to 70% sold before a shovel breaks ground. Deposits are also quite significant and required at various milestones over the course of construction.

At the Four Seasons for example, the buyer must put down a $50,000 deposit, followed by additional deposits equal to 25% down at the end of the first year after signing — with still more than two years to go before occupancy, Ms. Cooper notes.

“There is an incredible rigour around the interim financing, which is typically done after a minimum pre-sales target has been met and enough due diligence is in place — there is enough money to get their loan back on the completed building,” Mr. Carras said.

Yet trouble can come rumbling out of nowhere, as the Canadian ABCP market storm has shown.

Instead of buyers walking away from deposits as prices slid in the United States, Canadian developers might run into trouble grappling with runaway costs, especially if borrowing costs become stickier north of the boarder.

Canada is at, or very near full employment in the construction industry, and competition for labour has become fierce, Mr. Lovely said. Material costs have also soared.

Under a supply-side crunch, a developer might go bust before he can bring his project to completion, leaving buyers hanging.

Mr. Carras agrees the biggest risk for the Toronto market now appears to be execution risk, especially with some 60 of the 160 or so developers building new homes in the Greater Toronto Area having operated for five years or less.

“The things to watch are in the execution risk–being able to deliver the units that are sold, within budget to people that will be closing when they are supposed to be closing,” Mr. Carras said. “That’s the risk profile of this marketplace because there are a number of people in this space that have not been in this space before.”

So far though, the market appears to be functioning smoothly and the condos are flying off the shelves.

But as the U.S. market shows, sentiment can sometimes turn on a dime — all the more reason for the Bank of Canada to hope this subprime mess sorts itself out and it can get back to raising rates.

Calgary homebuyers hunting for reduced prices on remodelled former marijuana-growing operations may be getting more trouble than they bargained for.

Homes renovated to clean up mould and indoor air problems caused by defunct grow ops may still be unfit to live in, says a federal researcher who will study the problem this fall.

Fungicides, insecticides, solvents and other chemicals used in drug-making operations are absorbed by drywall, carpeting, wood, subfloors and concrete basement floors, says Virginia Salares, a senior researcher with Canada Mortgage and Housing Corp.

The chemicals may also be found in backyards, where they are frequently dumped.

“People cannot take for granted it’s safe,” says Salares. Vapours from chemicals can permeate the entire house, not just the rooms where the plants were grown.

The health risks vary, depending on the concentrations of chemicals used, how long the grow op was in operation, and the age, immune systems and health conditions of the people who move in.

“You wouldn’t want to put an infant or a child under those conditions, being exposed to gases,” Salares said.

Calgary police say they raid 120 to 140 residential grow ops each year. A typical bust seizes 50,000 pot plants worth upwards of $60 million annually.

The homes, which are predominately located in the city’s suburbs, are usually unoccupied, according to Staff Sgt. Monty Sparrow.

“It’s pretty steady. We’ve gone from mom-and-pop operations to an organized crime situation,” said Sparrow.

The Calgary Health Region posts homes condemned as grow ops on its website.

Former city grow ops are identified on Internet real estate listings disclosing the toxic past.

One home in Harvest Hills has a reduced price reflecting its drug-house history.

Police estimate there are about 50,000 grow ops in Canada, although the exact number varies.

Grow op homes typically sell for 25 to 30 per cent off market value. Despite the risks, lower prices attract buyers, says Ottawa real estate agent Richard Rutkowski, who recently represented the seller and buyer of a former grow op that had been on the market for two years.

“There’s a buyer for everything,” he says. “Ironically, the (nearby) hydro lines posed more of a deterrent than the actual grow house.”

Real estate agents have to ensure everyone involved in a sale is fully aware of the home’s state, says Rutkowski. He estimates that for every 10 people interested in a property, eight will back out when they learn it’s a former grow op.

Other agents refuse to list grow ops, and counsel their clients to avoid them.

“There are too many unknowns, especially with the chemicals,” says Winnipeg realtor Cindi French. “I personally would never consider them a good deal at any price.”

Salares completed a study this year into mould and indoor air quality in rehabilitated grow ops. It noted that while police succeed in identifying and seizing many grow ops, marijuana growers often avoid detection by buying and selling houses quickly.

“The homes are superficially repaired and sold to unsuspecting buyers, who may be unable to locate the previous owners,” the report states.

Growers typically pack hundreds of plants into small spaces with high moisture and no natural light or air circulation. As a result, the plants get fungal diseases and insect infestations that are treated with high doses of chemical pesticides. Growers are unlikely to use organic solutions or dispose of chemicals in an approved fashion, Salares says.

“High productivity is their goal: the most plants in the shortest time possible.”

Salares is now studying which chemicals are being used in grow ops, how they’re stored, how various surfaces absorb and give off toxic vapours, and how a house can be rehabilitated.

Bob Linney, communications director for the Canadian Real Estate Association, says guidelines for rehabilitating a former grow op and standards for air quality will be invaluable to real estate agents.

Rehabilitating a former grow op can cost anywhere from $3,000 to more than $100,000, depending on how long it was used, how long it stood empty and what changes the marijuana growers made, says Marie Dyck, who worked with Salares on the first study.

People who knowingly buy former grow ops because they’re good deals should think twice, adds Salares.

The governor of the Bank of Canada suggested yesterday the Canadian dollar’s recent surge may have gone beyond levels supported by economic fundamentals — but repeated that interest rates may still have to increase to restrain stronger-than-expected growth and inflation.

The delicate balancing act from David Dodge fell short of verbal intervention to talk the currency down, analysts said.

Instead, the bank was acknowledging the currency’s US10¢ surge to the US94¢ territory over the past couple of months will factor prominently in its interest rate deliberations, putting a question mark over hikes beyond an already expected increase in July.

“I don’t think [the currency’s surge] is going to change the fact that they seem to be gearing up still toward a move in July,” said Michael Gregory, senior economist at BMO Capital Markets. “What this did do was throw a little bit of water on the belief we’ve got multiple hikes coming down the pike here, because the currency is now back on their radar screen.”

Mr. Dodge said the loonie has moved well beyond the US86.5¢-to-US89.5¢ range expected in its April update and it has been significantly stronger than other major currencies against the U.S. dollar.

“Much of this appreciation can be linked to such factors as the strength of demand for Canadian goods and services, continuing firm prices for commodities and a positive outlook for Canadian economic growth,” Mr. Dodge said in a speech in St. John’s. “But over this period, it does seem the overall response of the Canadian dollar to these factors appears to have been a bit stronger than historical experience would have suggested.”

The comment indicates the bank thinks the currency’s latest jump may not be driven entirely by the kind of economic fundamentals that would also drive growth — such as strong commodity prices — so it could act as restraint on the economy.

“I don’t think he’s trying to talk the currency down,” said David Wolf, Canadian economist at Merrill Lynch. “I think what he’s trying to suggest is the bank does view the rise in the currency as having done some of its tightening work for it. It shouldn’t diminish anyone’s expectations of higher rates ahead but it also reinforces the fact that any particular quantity of tightening or duration of tightening certainly shouldn’t be a certainty.”

At the same time, Mr. Dodge also pointed out inflation has been stronger than anticipated, service prices continue to run well above 2%, prices for goods have been higher than expected and there is an increased risk future inflation will persist above its 2% target.

In the bank’s May statement, it said “some increase in the target for the overnight rate” may be needed to bring inflation back into line. It was how Mr. Dodge concluded his speech yesterday in St. John’s — and pointed that out at a later press conference.

Marc Levesque, chief economics strategist for TD Securities, said he is maintaining his forecast for a rate hike in July and September but added Mr. Dodge’s comments did “inject a little bit of uncertainty” into the outlook for monetary policy.

Mr. Dodge downplayed the possibility the bank would intervene in foreign exchange markets to restrain the currency like the Reserve Bank of New Zealand did this week, noting markets had not been “disorderly” — a key requirement for Canadian central bank intervention.

“We haven’t had disorderly markets, which is one of the key issues,” Mr. Dodge said. “Nor have we seen an issue where somehow currency alignment has got way, way out of line.”

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.