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Category Archives: Interest Rates

Frank Mueller

Weekly Update – October 20, 2017

“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money” – Arthur Godfrey

TSX Rises for 6th Straight Week

The Toronto Stock Exchange’s S&P/TSX composite index rose by 39.22 points (0.25%) on the day to close at 15,857.22. This represents a gain of 50.05 points (0.50%) over last week’s 15,728.32 finish.

Gains came from across the board, as 9 of the 10 major Index Sectors posted gains.

Brent crude jumped nearly a dollar per barrel to settle at $57.17 (USD) per barrel, as post-hurricane inflation continued to rise.

The Loonie was roughly even for the week, until the U.S. Senate passed their budget resolution on Thursday. On Friday, the CAD dropped by 82 basis points (1.09%) to finish at 79.22 cents USD as the Greenback surged in reaction to the budget resolution.

U.S. Markets Rise on Tax Cut Optimism, Encouraging Q3 Earnings Reports

On Thursday the U.S. Senate passed a budget resolution that raised optimism President Trump will be able to get his tax-cut blueprint put into effect. On Friday, the major U.S. Indices were up on this optimism.

The Dow Jones Industrial Average (DJIA) spiked 165.32 points (0.71%) to finish at 23,328.36. For the week, the DJIA was up a full 2%. Like the TSX, the DJIA advanced for the 6th straight week.

The S&P 500 was up 13.07 points (0.51%) to close 2,575.17. For the week, the S&P 500 was up 0.86%.

The NASDAQ jumped 23.99 points (0.36%) on Friday to end the week up 0.35% at 6,629.05. The NASDAQ has now posted gains 4 weeks running.

Consumer confidence, as well as strong Q3 earnings calls thus far – 70% of S&P 500 companies so far have posted Q3 earnings that beat street expectations – means continued positive movement is expected, say analysts.

Q3 earnings, overall investor optimism, and the budget resolution passing all worked to put downward pressure on Gold (a classic safe-haven asset). Gold dropped by $8.20 USD per ounce on Friday to finish at $1,281.80. This represents a loss of $24.30 (1.86%) USD per ounce compared to last Friday’s finish of $1,306.10 per ounce.

OSFI Makes Uninsured Mortgage Stress Test Official

As first mentioned on our Weekly Update for July 28, 2017, the OFSI made the Uninsured Mortgage Stress Test official this week. The changes take effect January 1, 2018 (looks like we nailed the date on this one!).

You can read our original post on the subject here.

The biggest change to the original proposals is the stress test rate to be applied. Originally, the stress test rate was proposed to be the mortgage rate the borrower had access to, plus 200 basis points (2%). So, a rate of 2.50% would result in a stress test qualifying rate at 4.50%.

However, the final stress test calculation is measured as the greater of the lender’s rate + 200 basis points OR the Bank of Canada’s Posted Five Year Fixed Rate, currently 4.89%.

So, the minimum stress test rate will therefore be 4.89% (if rates are unchanged from today until January 1, 2018), and will be higher if bank’s increase their lending rates.

WEEKLY MARKET WRAP-UP

North America
The TSX closed at 15,857, up 50 points or 0.32% over the past week. YTD the TSX is up 3.80%.
The DOW closed at 23,329, up 457 points or 2.00% over the past week. YTD the DOW is up 18.04%.
The S&P closed at 2,575, up 22 points or 0.86% over the past week. YTD the S&P is up 15.01%.
The Nasdaq closed at 6,629, up 23 points or 0.35% over the past week. YTD the Nasdaq is up 23.15%.
Gold closed at 1,282, down 29.00 points or 1.84% over the past week. YTD gold is up 12.65%.
Oil closed at 51.66, up 0.24 points or 0.47% over the past week. YTD oil is down 1.07%.
The USD/CAD closed at 0.79, down 0.0100 points or 1.25% over the past week. YTD the USD/CAD is up 6.48%.

Europe/Asia
The MSCI closed at 2,033, up 9 points or 0.44% over the past week. YTD the MSCI is up 15.97%.
The Euro Stoxx 50 closed at 3,605, changed 0 points or 0.00% over the past week. YTD the Euro Stoxx 50 is up 9.54%.
The FTSE closed at 7,523, down 12 points or 0.16% over the past week. YTD the FTSE is up 5.32%.
The CAC closed at 5,372, up 20 points or 0.37% over the past week. YTD the CAC is up 10.49%.
DAX closed at 12,991, down 1.00 points or 0.01% over the past week. YTD DAX is up 13.15%.
Nikkei closed at 21,458, up 303.00 points or 1.43% over the past week. YTD Nikkei is up 12.26%.
The Shanghai closed at 3,379, down 12.0000 points or 0.35% over the past week. YTD the Shanghai is up 8.86%.

Fixed Income
The 10-Yr Bond closed at 2.38, up 0.1000 points or 4.39% over the past week. YTD the 10-Yr Bond is down 2.86%.

Sources: Globe Advisor, Yahoo! Finance, Dynamic Funds

Frank Mueller

Weekly Update – September 22, 2017

“The stock market demands conviction; it victimizes the unconvinced” – Peter Lynch

TSX Flat to Finish the Week, But Gains 1.25% Overall

The Toronto Stock Exchange’s S&P/TSX composite index finished with a drop of 0.69 points on the day, settling at 15,454.23. For the week, the TSX rose by 281.20 points (1.85%), and hit a 14-week high in doing so. 7 of the 10 main index sectors were up on the day.

The TSX concluded the week on Friday with a 0.31-point rise to settle at 15,173.03. This finish represents a rise of 1.25% over last week’s finish at 14,985.32. Declines in energy and utilities weighed on the TSX, while the consumer discretionary/staples sector gained on the day.

The Loonie barely moved vs the Greenback on Friday, and sat at 81.10 cents USD as of 2:45pm PST, off by about a cent compared to last Friday’s finish of 82.08 cents.

Light, Sweet Crude Oil Barrel futures finished the week above $50 at $50.66 per barrel.

Gold again dropped this week – off $23.00 USD on the week – to finish the week at $1,300.50 USD, as investors eased away from the safe-haven asset.

U.S. Federal Intends to Reduce Balance Sheet, Signals Rate Hike to Close Out 2017

The U.S. Federal Reserve announced its intention to reduce its balance sheet of ≈ $4.2 Trillion (USD) in U.S. Treasury bonds and mortgage-backed securities. Fed Chair Janet Yellen also signaled a rate hike before the end of 2017.

The market pegs the odds of a December rate hike at about 70%. Prior to the Federal Reserve meeting earlier this week, the odds of a December rate hike sat at 51%, according to investors.

The Federal Reserve offered no answers for the inflation decrease this year, and Michael Dowdall – investment strategist at BMO Global Asset Management – offered that “Clearly, the Fed doesn’t have answers on the 2017 low inflation weakness, but they’re still very sensitive to falling behind the curve so they want to stay in front of the inflation curve.”

On the heels of the Fed announcement to hold rates and reduce the balance sheet, valuations spiked. The S&P 500 was trading at 17.6 times expected earnings as of end-of-day Thursday; comparatively, the S&P 500’s 10-year average is 14.3 times expected earnings.

Sources: Globe Advisor, Advisor.ca

Frank Mueller

OSFI to Make Conventional Mortgage Approvals More Difficult

As we mentioned in our Weekly Update for July 28th 2017, the Office of the Superintendent of Financial Institutions (OSFI) released a set of proposals that would serve to tighten up the conventional mortgage market. The objective of these proposals is to protect would-be home buyers from over-extending themselves during our current low-rate environment against further rate increases; additionally, the measures look to protect banks from creditor default risk.

On a more basic level, the proposed measures have been put forth to protect the economy overall. Canadians owed an average of $1.67 per $1 of disposable income, according to a debt-to-income report released by Statistics Canada in December of 2016. The Bank of Canada, as well as many of the “Big 5” banks, has been vocal about household debt levels. The Bank of Canada has also raised concern over inflated house prices in major Canadian markets such as Toronto, Vancouver, and recently including Victoria and Hamilton. Rising rates and an uptick in unemployment could lead to increased mortgage defaults.

How Would It Work?

The counteractive proposal for uninsured, conventional mortgages would require potential buyers to qualify for their mortgage using a new stress-test qualifying interest rate. Where the high-ratio stress-test rate is simply the Bank of Canada’s 5-year fixed rate (recently raised to 4.84%), the conventional stress-test rate would be the street rate offered by the lender plus 200 basis-points (2%).

So, let’s say you have a mortgage rate offered by your bank or credit union for 2.85%. When qualifying, your bank/credit union would use the stress-test rate of 2.85% + 2.00% = 4.85%. The logic is simple: if you can qualify – and afford – your payments at a rate of 4.85% in this case, then surely, you’ll be able to absorb an interest rate hike of 25bps (as we’ve experienced twice now in the last 3 months).

Of course, it’s important to remember that the borrower would only be exposed to the increased rate when their current mortgage term expires.

What’s the Bottom Line?

Analysts believe that if enacted, prospective borrowers would lose about 20% of their purchasing power. For instance, if without the stress-test, a borrower could qualify for a $1 Million mortgage, when using the stress-test, the same borrower would only qualify for an $800K mortgage.

If enacted, this proposal would look to cool the overheated Canadian real estate markets with a more precise, surgical approach, rather than the more broad-based interest rate hikes (which affect the economy overall due to cost of borrowing, the effect on the Canadian dollar, etc).

Frank Mueller

Weekly Update – September 8, 2017

“Every day is a good day to be alive, whether the sun’s shining or not” – Marty Robbins

Bank of Canada Raises Overnight Rate to 1.00%, TSX Drops for Fifth Straight Day

The Toronto Stock Exchange’s S&P/TSX composite index continued its retreat on Friday. On the day, the TSX finished down 39.21 points (0.26%), dipping below 15,000 in the process to settle at 14,985.32. 6 of the 10 main index sectors dropped for the day.

For the week, the TSX was down 207 points, or 1.36%, from last week’s finish of 15,191.60.

The week’s big news came on the Bank of Canada announcement to raise the overnight rate by 25 basis points to 1.00%. You can read a bit more about the announcement here.

The announcement – as expected – pushed the Loonie higher against the Greenback, finishing the week at an even 82 cents, up 1.32 cents (1.63%) for the week. The Loonie is now at its highest mark against the US Dollar since May 2015.

Gold finished higher this week, as investors move to safe haven assets, rising to $1,351 (USD) per ounce.

Hurricane Irma Threatens Southern States, Geopolitical Concerns Add to Worries

On the heels of Tropical Storm Harvey comes Hurricane Irma, expected to hit Florida on Sunday. Irma is one of the most powerful Atlantic storms (if not THE most powerful) in over a century. Investors are taking caution, as Irma’s damage and destruction could be catastrophic.

The S&P 500 ended lower on Friday; however, the Dow Jones Industrial Average (DJIA) managed to finish in positive territory, with a modest 13.01 point (0.06%) gain. The NASDAQ was down 37.68 points, or 0.59%.

North Korea tested another nuclear missile this week, their 6th such test. South Korea is bracing for another possible missile test on Saturday. This situation, coupled with the repeated storms hitting the U.S., to say nothing of the intense flooding and storms in Southeastern Asia, has pushed concerns onto the trading floor. Many major markets across the world finished down for the week.

Major Markets Year-To-Date (YTD)

North America
The TSX closed at 14985, down -207 points or -1.36% over the past week. YTD the TSX is down -1.91%.
The DOW closed at 21798, down -190 points or -0.86% over the past week. YTD the DOW is up 10.30%.
The S&P closed at 2461, down -16 points or -0.65% over the past week. YTD the S&P is up 9.92%.
The Nasdaq closed at 6360, down -75 points or -1.17% over the past week. YTD the Nasdaq is up 18.15%.
Gold closed at 1351, up 23.00 points or 2.35% over the past week. YTD gold is up 18.72%.
Oil closed at 47.58, up 0.29 points or 0.61% over the past week. YTD oil is down -8.89%.
The USD/CAD closed at 0.8229, up 0.0147 points or 1.82% over the past week. YTD the USD/CAD is up 10.92%.

Europe/Asia
The MSCI closed at 1965, down -1 points or -0.05% over the past week. YTD the MSCI is up 12.09%.
The Euro Stoxx 50 closed at 3448, up 4 points or 0.12% over the past week. YTD the Euro Stoxx 50 is up 4.77%.
The FTSE closed at 7378, down -61 points or -0.82% over the past week. YTD the FTSE is up 3.29%.
The CAC closed at 5114, down -9 points or -0.18% over the past week. YTD the CAC is up 5.18%.
DAX closed at 12304, up 161.00 points or 1.33% over the past week. YTD DAX is up 7.17%.
Nikkei closed at 19275, down -417.00 points or -2.12% over the past week. YTD Nikkei is up 0.84%.
The Shanghai closed at 3365, down -2.0000 points or -0.06% over the past week. YTD the Shanghai is up 8.41%.

Fixed Income
The 10-Yr Bond closed at 2.06, down -0.1000 points or -4.63% over the past week. YTD the 10-Yr Bond is down -15.92%.

Sources: Dynamic Funds, Thomson Reuters DataStream, Globe Advisor, BNN, Advisor.ca

Anthony Sabti

Bank of Canada Raises Overnight Rate to 1.00%

As we discussed last Friday in our Weekly Update, the Bank of Canada followed up on expectations by raising its overnight rate by 25 basis-points to 1.00%. Analysts had forecast a rate hike in either October or December, but recent Q2 GDP growth data exceeded expectation, leading some to predict a rate hike this week. This is the second such rate increase of 25bps, following up on the July 12th increase. Before the July increase, the overnight rate had been at 0.50%.

Inflation is below the 2% target, but there was a slight uptick during Q2. In the face of continued and robust consumer spending, solid employment figures and income growth, the Bank of Canada acted to raise the rate as a means of stemming further inflation.

Recent rate levels have been at historic lows, so these recent rate increases were, in a way, inevitable; still, they are the first such increases in 7 years. The Bank of Canada is confident that the economy is strong enough to weather these increases.

As one might expect, the markets have reacted by driving the Loonie up over 1 cent vs the Greenback to 81.81 cents USD, a 1.29% increase (as of 2:33pm EST).

Sources: Globe Advisor, Bank of Canada