It Might as Well Have: On Wednesday, the Bank of Canada threw caution to the wind and changed its playbook. It pledged not to hike rates until “the 2 percent inflation target is sustainably achieved.” The significance of that statement is now sinking in and here’s why. Normally, the Bank of Canada doesn’t wait for inflation to hit 2% before it starts lifting rates. “For example, when the Bank started its tightening cycle in 2017, core inflation was just 1.3%,” writes Capital Economics. But now, the Bank implies it “will wait until inflation has reached 2%, and stays there for some time, before even one rate hike,” Capital Economics says. That may lead to two things:
More Housing Juice: Remember five weeks ago when CMHC was worried about “excessive demand and unsustainable house price growth?” So much for that. Low rates are a propellant for housing. The public is now thinking rates will be anchored to zero for years. And they’re watching in horror as housing inventories fall to a 16-year low. The result: some will fear runaway home prices and start trampling other buyers, Pamplona-style. And if the benchmark qualifying rate ever drops in line with historical averages (or regulators lower the stress test rate as promised), then Katie bar the door, cuz buyers will come knockin. The main question now is, how long the bulls will keep running.
More Rate Timing: Knowing when to convert your variable to a fixed has never been so easy, right? Simply wait until average core inflation (which is the average of the top three numbers on this link) reaches 2%. It’s 1.67% now, and falling. It’ll take many quarters (years?) to get back to target, says the BoC. “…Given that [inflation is] already around zero, we’re more worried about disinflation than inflation,” Governor Macklem admits. Unfortunately, timing a rate lock isn’t as easy as this sounds, and is usually ill-advised. Reason being: when the economy recovers, bond yields—and hence fixed mortgage rates—usually climb without notice, and months before inflation hits 2%.
Fixing Your Floater: Speaking of locking in, if you’re a variable-rater looking to go fixed, here’s a strategy from Rates.ca on how to lock in smarter.
Unavoidable Risk: Canada’s central bank couldn’t be more clear. Keeping rates low is mandatory, despite housing and debt risk. Macklem told BNN Bloomberg this week: “The best predictor of whether somebody is going to pay their mortgage is whether they have a job. And so yes, high household indebtedness is a vulnerability, but supporting the recovery and reducing that vulnerability are entirely aligned and by holding interest rates low across the yield curve, that will reduce debt burdens for Canadians.”
HSBC Retakes the Lead: Canada’s most aggressive purveyor of bank mortgages is at it again. HSBC chopped a slew of rates on Friday, as follows:
Mixed Signals: If you’re an investor, this CNN story below doesn’t sound bullish. And yet, the floor under bond yields hasn’t cracked (so far), and stocks — a traditional economic barometer — are in a chart pattern that projects potential record highs before year-end. The rate implications are clear. Falling yields would pull down fixed mortgage rates even more, and we’re already setting record lows seemingly every week. But surging stocks are normally not consistent with plunging interest rates. This stock and bond divergence is getting more epic every month. Something’s gotta give. As for which is a better indication of interest rates over the medium term, most traders put their faith in the bond market. It’s notable then that bond derivatives are now projecting (pricing in) an almost 50% chance of negative rates in the U.S. by 2022, according to Bloomberg data.
False Alarm: Social media was abuzz after Blacklocks Reporterpublished a story saying CMHC was spending $250,000 to research “a first-ever federal home equity tax.” That would have been a political firestorm given how many people rely on their home equity for retirement. CMHC quickly put out the facts, however, saying, “The headline and article are both inaccurate and misleading…There is no validity to that headline whatsoever.” More…