Mortgage Rates Jump

Five year mortgage rates jumped about 0.5% this week in response to a jump in yields in the Canadian bond market.

In recent weeks, bond markets around the world seem to have woken up to the fact that maybe inflation is not 2% anymore and maybe it won't be 2% anytime soon. In fact, in most countries, inflation has been creeping up to the mid single digits for the past few years, due to soaring energy and commodity prices, low interest rates and a strong world economy.

Canada has been somewhat exempt from this trend due to a soaring loonie that has caused import prices to drop sharply.

Well, the Bank of Canada decided to surprise the markets this week and not drop interest rates by 25 basis points as expected. Most central banks are either threatening to tighten or are tightening (despite the credit crunch) and the BoC woke up to this new reality this week.

Ultimately, I think that the credit crunch and the coming implosion of the commodities bubble will stop inflation dead in its track, but for now, mortgage rates are increasing. The timing of this will further hurt the Canadian housing market, which had a poor May.

May numbers stink

Longtime readers of this blog may remember that back in late winter, declining sales and slowing price growth were blamed on snowfall.

The results for the three months since then have been even worse even as that snowfall has melted away.

The May sales price increase YoY was 1.1%. This was down sharply from April's 3.2%. As I wrote back in April:

I will venture a guesstimate that the national home price "increase" will be close to zero sometime this summer. And maybe then the CREA will blame the heat...

Summer starts in June and we are already close to zero. Let's wait until the June results to try to confirm my guesstimate (and see if CREA blames the heat).

Watch CREA spin (remember they have a fantasylike 5% price increase for the full year despite all the building inventory)

• "Unlike the situation in the United States, re-sale housing prices in Canada continue to increase," said CREA president Calvin Lindberg.

• "The resale housing market has evolved in just a few short months," said CREA chief economist Gregory Klump. "The record number of new listings means more opportunities for buyers.

Yes, the situation in the United States is worse RIGHT NOW. Yes, housing prices in Canada continue to increase. But, the US did not go negative right away. It took almost a year for prices to go negative once the bubble began to unwind. Our bubble only started to unwind a few months ago!

"More opportunities for buyers". Lovely how they spin a record number of listings as a buying opportunity. Yes, there are more houses available and possibly better deals than a few months ago, but this is like saying that internet stocks were a good buy one month after the dotcom bubble began to burst. The housing bubble has taken years. It will take at least a few years for house prices to remove the excesses. Not a few months....

And remember that this housing bubble is unwinding despite record oil prices (Calgary and Edmonton are now the 2 weakest markets), declining interest rates and a strong loonie and new record highs on the TSX.

It will be interesting to see the effects of this week's sharp run up in mortgage rates on the July and August numbers. I think that a negative number in either July and/or August is quite likely. And then, you may (just maybe) start to see articles in the mainstream papers similar to what you've read here since the beginning of the year.

Recession confirmed in US; likely in Canada

Very good article in the Financial Post the other day that finally talks realistically about a recession in Canada (http://www.financialpost.com/story.html?id=552789). As you may know, this blog has been talking about this many times already. The question asked back in February was "did recession start here in February". With a negative December and now negative Q1, it appears that the financial media was sleeping!

The article mentions the negative Q1 and likely negative Q2 and mentions that it does not feel like a recession as it does in the US (consumption grew at 3.2% in Q1, down from 7.5%; real income grew at 3.7% vs 1.5% in the US) partly due to the fact that the GDP figures don't measure the high price of commodities directly in output.

I have no argument with the fact that it "feels" worse in the US. However, if the commodity markets and the strong loonie are keeping us relative strong, what happens if they turn? Despite the recent run up in crude oil, most commodities are already below their highs.

Relying on historically cyclical and volatile commodity prices to keep us going could be a dangerous strategy. We could in theory have positive GDP in the Q3 and Q4 and also have people "feeling" poorer if commodity markets implode...

Also, today's US unemployment rise to 5.5% (from 4.4% last year) should put any recession doubts to rest. Forget the positive GDP number for Q1 in the US. Expect it to be revised down...

Big day in the markets

June 6th: just another day for the markets!

-Dow down almost 400 points (3%)
-Unemployment rate in the US jumps 0.5% to 5.5%
-Oil up $11 (8%)
-Financials hit new lows (BKX index lower than Bear Stearns panic March 17th)
-TSX barely moves (down 26) as higher metals and oils offset by everything else plummeting.

If you are not in a few select areas (oil & gas, fertilizers, steels, a few select techs) you are getting killed. The TSX is "lucky" in that it has some of each (ECA, POT, RIM). Take away a few select stocks, and it is not doing well either.