Despite having a massive property bubble, the Bank of Canada discussed cutting rates on Wednesday to stimulate the economy.
A rate cutting move is even more likely now, as retail sales unexpectedly fell 0.1% in August vs. an expected gain of 0.3%.
In response, the Loonie Plunges to Lowest Level Since March.
The loonie is on pace for the biggest weekly decline since May as the data add to concern about Canada’s economy. The slump began Wednesday when Bank of Canada Governor Stephen Poloz said that officials “actively” discussed the possibility of adding more stimulus into the economy.’
“So now we know why the BOC considered easing,” said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. “Economic growth in the third quarter doesn’t look as good as expected, inflation is below target and it’s unclear where an acceleration would come from.”
The loonie fell 0.8 percent to C$1.3332 per U.S. dollar as of 10:06 a.m. in Toronto, reaching the weakest level since March 16. The Canadian dollar is down 1.5 percent this week, the worst performance among Group-of-10 currencies.
The yield on the country’s two-year federal government bond fell for the fifth day to 0.51 percent, heading for the steepest weekly decline since June.
The probability of a BOC interest-rate cut this year rose to 16 percent from 7 percent Thursday, overnight index swaps data compiled by Bloomberg shows.
Retail sales fell 0.1 percent in August, compared with forecasts for a 0.3 percent gain. Consumer inflation accelerated for the first time in five months in September to 1.3 percent, however the jump was below the 1.4 percent rate economists were forecasting.
Wild Rides in Loonie
The Loonie soared from 1.60 to the US dollar to highs near 0.94 to the dollar from 2001 to 2007, and again in 2011.
Since February of 2011, the Loonie has declined 27.5% but is better than the end of 2015 wen it touched 1.469 per US dollar.
Those swings had a lot to do with Canadian exports to China and commodity prices. Now, with the Fed discussing hikes, the Bank of Canada discussing cuts, and Vancouver real estate finally slowing, the Loonie is again under pressure.
Canada Yield Curve Inversion
In Canada, as everywhere else, central banks lower rates at the first sign of trouble. But with the Canadian 2-Year bond at a mere 0.517% there is just not that much room for cuts.
The 3-Month bond yield is 0.49% and the 1-year yield is at 0.53%. This makes the yield curve partially inverted as the 2-year yield is less than the 1-year yield.
Combined, these are strong recession signals for Canada.
Mike “Mish” Shedlock
“Since February of 2011, the Loonie has declined 27.5% but is better than the end of 2015 wen it touched 1.469 per US dollar.”
Heh.
Back around 2011 David Rosenberg was talking up the loonie Big Time vs $US
Now the fool wants several $trillion helicopter drop.
I guess if he gets his wish, his call on usd / cad might come true …
CAD$ is set to go dramatically higher as Canadians stop spending and start clamouring for CAD$ to repay CAD$-denominated mortgage debt. Similar to what happened when the US housing market fell apart in 2008. Canada has very little debt overseas, so a global rebalancing of reserves could also see significant CAD$ demand as the USD$ is dumped.
CAD$ is a petro/currency and as oil goes so goes the CAD$ – down IMHO…but with federal/provincial governments spending like inebriated sailors, who found an unlimited credit card (and on what? certainly not in improving conditions to foster job growth), there may be a rise over the very short term. As a result, Canada’s balance sheet will be affected negatively and will be another point of contention and the prognosis of CAD$ will ultimately be bleak.
“In Canada, as everywhere else, central banks lower rates at the first sign of trouble. But with the Canadian 2-Year bond at a mere 0.517% there is just not that much room for cuts.”
Well, there is always NIRPville.
All year I’ve been saying 2017 will be the year NIRP discussed broadly in US.
Time will tell.
If HIllary wins, one year from now the Fed will be trial ballooning buying Spiders….and by year end 2017 will do so.
People like Gary Schilling, Peter Schiff, Fred Hickey, Marc Faber, Fleckenstein and others have steadfastly stuck to their “lower interest rates and more QE” prescription for the USA.
After all, Japan and EU are more addicted to easy money that the USA. So rates are too high
here in relative terms. And China is a powder keg. European banks in worse shape than 2008.
Therefore NIRP is the obvious path for the USA in 2017. After all we have peak GLOBAL debt and peak GLOBAL demand and US economy slowing down from a slow growth trajectory. No alternatives remain.
Makes about as much sense as “we now all have declining health form alcohol related liver cirrhosis, so let’s get busy slamming some more booze…”
The correct interest rate for every economy, in every society, at every single instant, on every conceivable populated planet, is the one set by freely transacting economic actors, in a fixed supply currency, without any manipulation whatsoever. Manipulation never, ever makes things “better” for anyone not obtaining special favors from the manipulator. And then, the degree to which those not favored suffers, is always and everywhere greater than the benefit received by the chosen few.
Basically I am in agreement with you, that getting these Soviet-style Central Planning Politburos (i.e. central banks) out of the interest rate and money supply invention business is best. However, even your preferred argument, “a fixed supply currency,” is a manipulation, even if necessary. So, no getting away from some degree of manipulation. Even designating a given amount of gold as backing for a currency is a manipulation. Unless of course by eliminating central bank manipulation and a fixed supply currency you are allowing a restoration of Bills of Trade as a natural way of regulating the amount of credit in the marketplace; which is basically what Canadian-Hungarian Professor Antal E. Fekete advocates to restore the economy. In other words, a fixed supply currency alone will not work without a mechanism like Bills of Trade to regulate the amount of business credit in the marketplace.
People will, absent manipulation, gravitate towards something for currency that they have pretty high confidence in won’t suddenly be multiplied manifold.
Given a free, uncoerced, unmanipulated choice, people will choose to keep their savings in a currency where the supply grows slower and more predictably, over the alternative. Apply recursively, and you get to fixed supply.
Of course, ideally, any given actor would prefer the supply to actually be shrinking. But since none of them will volunteer to have their own personal supply shrunk, the recursion stops at fixed.
Hence, fixed it is. No manipulation required.
The US may very well avoid NIRP due to the billions in US dollars and US Treasuries being redeemed by foreigners, and the demand such represents on the US economy.
Canada, however, has almost no CAD$ debt outstanding outside of Canada. Canada will need NIRP far more than the US will need it, especially as the CAD$ moonshots against the USD$.
The Canadian economy rises and falls with the housing market which as everyone knows is in a historic bubble. Only more personal debt can keep it going.
Now, let’s look at the government. It will probably rack up a historic deficit, and still needs stimulus from the central bank to keep this racket from collapsing.
The featherhead who the voter elected, is a true disciple of the great eCONomic theories of Krugman and Summers. The “secular stagnation” brainfart is a second nature to him.
Ok all you American take a deep breath. First, yes there is a property bubble in Canada — in two main places Vancouver (externality) and Toronto (internal growth). The Canadian real estate system is fundamentally different to the US, no 30 year fixed mortgage — it resets every 5 years, deposits are in the order of 20/25% (i Know my daughter is buying a house…in Vancouver). Canada’s banks are very solid, with almost no level 3 assets. The Bank of Canada did no QE at all, the balance sheet of the bank of Canada is where it was 8 years ago. The Canadian economy is VERY dependent on commodity prices in General and on oil prices in particular. in the 1980s the correlation between the US market and the Canadian market was probably around 90% — today its more like 65%.
Yes Canada expects a recession, yes rates are low, because inflation is very low, yes the Bank of Canada has tried to raise rates, many many times and its been a flop.
Canada is a very open economy, when the US sneezes Canada catches a cold. The US economy, while doing well is not exactly on fire, and China that has been a massive market for Canadian goods (eg natural resources) is finding a new equilibrium between investments and consumption. That hurts the country (the same way that Australia is suffering).
However, where the criticism is pointed is that Canada’s citizen suffer from excessive personal borrowing, that is a real problem — and higher rates will not help. What I am saying is that the triggers in Canada are fundamentally different than those applicable to the US, Canada has 8 large banks that are well capitalized, borrowers have to make substantial deposits on real estate purchase — and the price of real estate in Western Canada has almost nothing to do with Canada’s economic health — rather its rich foreigner looking for safe harbor.
As for the Loonie, well the CAD is a petro currency, watch it rebound when oil prices rise again!
Excessive personal borrowing is always and everywhere a direct result of excessively cheap and available credit. Can’t have one without the other. Just basic supply/demand.
Markets are fundamentally the same; the herding impulse drives them first toward new heights, then to new lows.
Actually foreign participation in Canada’s RE markets are negligible. Vancouver prices are high primarily because Vancouver has a large number of primarily South Asian highly leveraged extended “landlord families”. Who, since the mid 1990s, have basically been “pac-manning” houses on credit, leveraging themselves to ownership of 20-30 properties typically to provide themselves and their families income since the traditional employment market does not treat South Asian-Canadians very well.
“Chinese” are only minimally involved. If anything, Chinese selling into the Canadian RE bubble has been fairly significant, with containers of high-end goods being shipped back to China.
Last week Canada pur new mortgage rules in place for people buying residential real estate with less than a 20% down payment. This is only step one in a series of reforms. They should have done this 2 or 3 years ago to curtail the bubble… Right now, their mortgages are in high danger of defaulting. This is political bullshit in action… respond when its too late.
Greg – “They should have done this 2 or 3 years ago to curtail the bubble…..” You are correct, but it should have been done about 7 to 8 years ago (2008 – 2009). Instead, Canada went out of its way to ensure the bubble continued. Amortizations went from 25 years to 30, to 35, to 40 years. Down payments went to zero in many cases, and cash back from the banks were used as the down payment. No doc? Yep, Canada had that too.
They allowed China to buy up their land (you can’t do this in China or Thailand or anywhere else in Asia – you’re allowed to buy a condo there, but not land). Hot, corrupt Chinese money flooded into Canadian cities, sometimes in cash stuffed into suitcases, and the country was sold. The Chinese pushed prices up and up and up, and rental prices have increased as a result; vacancies are dangerously low, making it very difficult for families.
The Chinese, who were encouraged to come, bought out the most expensive parts of major cities, and when condo developments went up for sale they often bought four, five, six, seven units, pushing prices up higher. The funny thing is that even the areas where the highest priced homes were bought (millions of dollars), these residences are showing on their Income Tax forms that they only make around $20,000.00/year, in order to avoid paying taxes. They often do not even live in these homes or condos; they’re just bought on spec, in order to gain capital appreciation in the future, or as a way to park dirty money.
It’s a real mess. Our government, especially the Conservative government under Harper, allowed the country to be sold. Realtors, developers, and other vested interests won big, but the citizens lost. They lost their cities. Trudeau is sitting on a powder keg. This thing is going to blow! People are in huge debt. Same thing in Australia.
Sorry to disagree with you, but I don’t see it as being such a mess. British Columbia has an abundance of land, and Canada is vast with lots of areas with small settlements that can tolerate and even benefit from expansion. So what if metro Vancouver has housing price inflation? It is not like Canada is lacking in buildable land. Canada has benefited from a higher standard of living by living on cheap imported goods from China for longer than the USA. Eventually, some of that Canadian currency spent in China has to find its way back to Canada. If Canada allowed and encouraged the Chinese to buy up its oil and mineral assets and farmland and factories and banks and hockey teams, then perhaps the Chinese would buy less residential housing.
Point number two: Having a low income and owning expensive assets is not so unusual. I know people who own expensive homes and are very cash poor; mostly they bought when home prices were low, and though their asset-inflated homes are now worth a million dollars, their incomes stayed low and never ever matched asset price inflation. As to the particulars of the Chinese people, I doubt you or I have knowledge of what led them to have a lot of cash and no income earning jobs. All we have is mainstream media stereotypes and propaganda blaming the Chinese using varied abstractions about corruption. But I suspect that if a person rich in assets cashes it all out in China, they may be able to live on that cash and not need a job. So, investing in capital gains producing assets benefiting from QE instead of having a conventional wage job is simply an indication of superior intelligence applied to good fortune (whether ill-gotten or not is a value judgment that matters little, as cash on the barrel head always talks loudly regardless of its source).
joelg5 – I will never read another post of your’s again. Hey, everyone, remember this guy’s name; full of crap. “Having a low income and owning expensive assets is not so unusual.”
It’s not so unusual for Canadians who already owned a home because their house went up, but their income didn’t. But the rich Chinese coming in and buying up land, million dollar houses, forcing prices up, using all of the social benefits (some even going on welfare), and then claiming they don’t make any income or very little, that’s a complete crock. They’re scam artists, liars, crooks. How do you think they got their money? Same way, corruption.
Superior intelligence? Get real! It doesn’t take superior intelligence to steal. They’re fleeing a sinking ship, and the elite are getting out before the peasants in China string them up.
Dear Backwards, I am glad you will no longer be reading my comments, as my challenges to your viewpoints and stereotypes would just further raise your blood pressure to unhealthy levels. It is not my wish to cause you ill health or burden the Canadian health care system with your care, so I applaud your wise decision to stay clear of that which you do not like and that which runs counter to your preconceptions and prejudices. Please do calm down, and chill out.
Maybe in Canada you can feel clean and virginal and superior, but here in the USA after Hillary and the Clinton Foundation it is harder to cast aspersions of corruption without being overly hypocritical. If I am full of crap for feeling that way, so be it. But no one, I repeat no one, is forcing Canadians to sell real estate to the Chinese. It is a voluntary transaction. You can always say no, and keep your real estate in the hands of Canadians and non-Chinese immigrants. People I know in the southwestern USA have been happy to take the Chinese money for their real estate and run; and obviously Canadians are doing likewise. Personally, makes little difference to me who buys real estate; it is not like the Chinese can export it back to China. If the USA intervened to stop the Chinese from buying, Vancouver would look like Aleppo.
If you want to run the Chinese out of Canada, be my guest. The USA is unlikely to go back to the days of deporting the Chinese wholesale, which was the case back in the 19th and 20th centuries after the Chinese laborers helped build the transcontinental railroads. A few decades back we were hearing stories about the Japanese buying up everything in sight, and the Japanese got taken to the cleaners overpaying for real estate and movie studios that later crashed in price. When Vancouver real estate crashes, you will be wishing for Chinese or any color money.
There is minimal participation of foreign nationals in Canada’s RE marketplace. Chinese simply are not dumb enough to bring hard earned money to Canada to buy some of the most expensive RE on the planet. China’s rich didn’t get to be rich by making poor investments, that’s for sure.
Chinese are plenty dumb enough, no smarter than anyone else. But they’re way more corrupt. And hard-earned money? Get a grip. There is so much corruption in China. And what made it the most expensive RE on the planet? Why, the Chinese did! And our government allowed it to happen, sold out the country in order that they could gain.
China’s rich are part of the Chinese elite, the corrupt class. They’re parking money all over the world, anywhere stupid enough to take their corrupt money, and they’re forcing up prices (Canada, Australia, Singapore, England, U.S., Hong Kong, etc.)
Can’t wait for the history to come out on this. Hope some heads roll.
Minister Flaherty put the brakes on in 2013. Canadian housing hasn’t appreciated since. Not sure what more could have been done a few years ago.
Mark – bullsh*t! Flaherty FINALLY did something, but he’s dead now. He was the bag man; I guess it got too much for him. Yes, Canadian housing HAS appreciated greatly since 2013. Take a look at Vancouver, you liar. Did my comment take you away from your realtor job?
Here’s the chart of Vancouver house price increases:
http://globalnews.ca/news/2531266/one-chart-shows-how-unprecedented-vancouvers-real-estate-situation-is/
Here’s one of the Conservatives’ idiotic policies (notice the happy Flaherty in the picture):
http://business.financialpost.com/personal-finance/mortgages-real-estate/ottawa-cuts-mortgage-amortizations-to-25-years
“Not sure what more could have been done a few years ago.” Yeah, right. I’m sure you’re not sure! None of this had to happen, but a lot of people got their palms greased (developers, realtors, etc.)
Can’t stand liars.
Those charts are not sales-mix adjusted. The statistical peak of Canadian RE nationwide was 2013, coinciding with Minister Flaherty’s changes. Yes, I agree with you though, he was the main architect of the bubble, although it was the Liberals, in the early 2000s, in response to the 9/11 recession, that started the no-money down CMHC subprime nonsense and pushed the government into extensive CMHC subprime mortgage insurance.
An identical Canadian house would not sell for a dime more today (or even a couple months ago) than it did in 2013. Because subprime was significantly restricted in 2013, transactional volumes favoured the upper quartiles of the housing stock, and thus, transactional prices ‘rose’ on that basis alone. Similar happened in California circa 2005-2008. Just like as in California, took about 3 years between peak and panic.
Please stop lying. My own house along with every other house in Vancouver would sell for roughly 30% to 50% more now than it would in 2013 – just as is shown by repeat sales housing indices which account for the sales mix. As is shown in property assessments from the government, as is understood by everyone on the planet except you – why do you keep lying about this?
@Someguy, you are highly mistaken in your belief that your Vancouver house would sell for 30-50% more. The housing indices do not account for the shifted sales mix. I am not lying at all. I believe you might be, but I know better than to pollute Mish’s blog with unparliamentarily language.
Bankers will print to bail Canadian bankers out of the mortgage situation printing created. IOW, bankers will confiscate goods from the majority, and give the loot to bankers. Banker central planning of the housing market will follow, as it did in the US after 08. Canadian youngsters will then have to dwell in their parents’ basements, as in the US. The average Canadian will be able to buy fewer goods at the store.
Anything to bail bankers out of the looney theories bankers have adopted.
Canada already has the central planning disease, with $900B out of a roughly $1.3T mortgage market under government-sponsored CMHC subprime mortgage insurance. If you use a typical 1:10 scale between the Canadian and US economies, that is dramatically larger than the GSE’s involvement in the US RE financing system.
These are inconsequential changes downward so far. But Canada does have a few problems. Canada doesn’t have the kinds of debt problems America has. Their housing bubble is a concern. What kind of interest do you in a savings account there now? We get nothing here.
From: MishTalk To: pinatubo1945@yahoo.com.ph Sent: Friday, October 21, 2016 11:19 AM Subject: [New post] Canada Recession Signals: Retail Sales Unexpectedly Dip; Loonie Sinks; Bank of Canada Ponders Easing; Yield Curve Inversion #yiv7842440103 a:hover {color:red;} #yiv7842440103 a { text-decoration:none;color:#0088cc;} #yiv7842440103 a.yiv7842440103primaryactionlink:link, #yiv7842440103 a.yiv7842440103primaryactionlink:visited {background-color:#2585B2;color:#fff;} #yiv7842440103 a.yiv7842440103primaryactionlink:hover, #yiv7842440103 a.yiv7842440103primaryactionlink:active {background-color:#11729E;color:#fff;} #yiv7842440103 WordPress.com | mishgea posted: “Despite having a massive property bubble, the Bank of Canada discussed cutting rates on Wednesday to stimulate the economy. A rate cutting move is even more likely now, as retail sales unexpectedly fell 0.1% in August vs. an expected gain of 0.3%. ” | |
Housing in Canada is on target to collapse just like in the United States 2008. After 3 years of stagnation coming off of the 2013 peak of Canadian subprime. We all know what happened to the USD$ in the wake of the collapse of US housing, as people stopped spending and valiantly attempted to repay the debt associated with their housing. Similar is in store for the Canadian dollar which will drive Canadian deflation even further.
The Bank of Canada now appears to be behind the curve in lowering policy rates. They’re going to find out the hard way, very soon, with the CAD$ rocketing higher if they don’t do something at the next meeting.
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Canada will be booming soon once the land rush really starts.
Add in extended families and its the best deal since Peter Minuit bought Manhattan for $24…er make that since Islam got Europe for free.
http://www.centuryinitiative.ca/2016/10/19/breaking-news-growth-council/