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Category Archives: Interest Rates

Frank Mueller

Weekly Update – July 13, 2018

“Someone’s sitting in the shade today because someone planted a tree a long time ago” – Warren Buffett

Bank of Canada Raises Overnight Rate to 1.50 Per Cent

 The Bank of Canada, as widely expected, hiked its benchmark interest rate on Wednesday. The rate now sits at 1.50 per cent. Two key growth engines – business investment and increased exports – pushed the BoC to raise their key rate.

In its policy statement, the BoC said “The composition of growth is shifting. Exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.”

Record-high household debt levels will be pressured with the rate increase as servicing costs will be driven upward. However, households have reacted to previous rate hikes in the last year, as the numbers show a deceleration in debt accumulation and by extension, household spending. The unexpected growth of business investment and exports picked up the slack, and helped solidify the BoC’s rate hike decision. Future rate hikes were not ruled out.

On the street, Canadians can expect to see further increases to mortgage rates as well as variable lines of credit such as HELOCs. Before taking on increasing debt, you should strongly consider the potential impact on servicing costs, especially considering the possibility of future increases.

 

Sources: Advisor.ca, Financial Post

The information provided on this blog is intended for informational purposes only and is not intended to constitute financial, accounting, and legal or tax advice. For information specific to your situation you should consult a professional.

 

Frank Mueller

Weekly Update – June 15, 2018

“Never let facts get in the way of a good story” – Mark Twain

Weekly Market Wrap-Up

On Friday, US President Trump announced a 25 per cent tariff on strategically important Chinese imports, worth around $50 Billion, along with the threat of further tariffs should Beijing impose their own tariffs in kind. Chinese President Xi responded with retaliatory threats.

Thus, a potential trade war between the world’s two largest economies is one step closer. Global stock prices dropped on the news and increased tension.

Earlier in the week, the US Federal Reserve raised its key overnight rate by 0.25 per cent and signalled up to two further rate hikes for 2018.

It is highly anticipated that the Bank of Canada will follow suit with a rate hike of its own at the next policy meeting on July 11th.

As usual, interest rate increases will generally weigh on bond pricing; as a result, investors may see a further pullback on their fixed income holdings. On the other hand, rising rates are an effective measure against inflationary pressures.

In other news, oil dropped on fears of a supply increase.

Yield Versus Return of Capital

One benefit of holding a balanced mutual fund, an income fund, or some equity funds, is that you are issued distributions. However, there is a common misunderstanding when considering how a fund distributes “yield” on a monthly or annual distribution.

A distribution is comprised of dividends, investment income such as interest, capital gains, and return of capital (ROC). Whereas dividends, interest and capital gains income are the result of the investment choices made by fund managers, ROC essentially amounts to refunded contributions.

There is nothing inherently wrong with return of capital within a distribution, especially when you opt to re-invest your distributions (the default option when investing in mutual funds). In fact, including ROC within distributions can be used to withdraw money in a tax-efficient manner in Non-Registered Accounts.

However, it is important to consider that return of capital, when included in a distribution, should not be confused with real yield.

Should you have any questions about yield versus return of capital, don’t hesitate to ask us.

 

Sources: Fidelity, Advisor.ca

Frank Mueller

Weekly Update – June 1, 2018

“As history has repeatedly proven, one trade tariff begets another, then another – until you’ve got a full-blown trade war. No one ever wins, and consumers always get screwed” – Mark McKinnon

Canada, U.S. Impose Tariffs On One Another

Thursday saw volleys of trade tariffs imposed. Citing “national security”, United States Commerce Secretary Wilbur Ross and President Trump tariffs on imported Canadian steel and aluminum worth about $20 billion, taking effect today (June 1). President Trump also threatened to impose an auto tariffs.

Canadian Foreign Affairs Minister Chrystia Freeland and Prime Minister Justin Trudeau responded only hours later, announcing tariffs of up to $16.6 billion on a wide assortment of U.S. products to take force on July 1.

Tariffs always hurt the end consumer, and they can also hurt market growth. Companies that pay tariffs on imported goods will, to the extent they can, pass the cost on to the end consumer. For instance, tariffs on aluminum could lead to a rise in the production cost of beer cans, and thus, the cost of purchasing beer at the till.

Higher costs over time will put upward pressure on inflation. One option a central bank can employ to counter inflation is to raise their key interest rate. Rising rates drag on market growth and reduce credit availability, leading to lowered returns.

About 75 per cent of Canadian exports go to the U.S., so the beleaguered Canadian economy could be hurt even further.

Bank of Canada Holds Rates Steady

On Wednesday, the Bank of Canada opted to hold its key interest rate at 1.25 per cent, as analysts had expected. However, cautious wording during the previous rate hold were not present this week, signalling a rate hike at the July policy meeting.

The new tariff war between Canada and the U.S. will likely only add to the expectation of a rate hike, as inflation, a natural by-product of tariffs, could be kept in check with rising rates.

Increased borrowing costs for businesses and individuals alike will weigh on the Canadian economy. Canadians already have high levels of household debt, so discretionary spending is likely to decrease – never a good sign for an economy.

Italian Political Chaos

Italy’s “anti-establishment” parties’ plans to form a coalition government fell apart, as the President refused a controversial choice for Economic Minister. Now, the possibility of a snap election has arisen. Markets reacted by putting Italian bonds and specific equities, like bank stocks, under heavy selling pressure.

Italy is a top-5 bond market in the world, so a bond market disruption would have a ripple effect worldwide. Some analysts feel the European Central Bank should steer clear of this, while others feel they should announce their intention to purchase all Italian bonds, should yields hit a certain level (effectively, a yield cap).

Those in favour of ECB intervention feel that simply announcing the intent to put a yield cap on Italian bonds will help calm the waters. It is likely still too early for the ECB to step in, and until they do, investors will likely seek safer, less volatile bond markets around the globe.

Weekly Market Wrap-Up

North America

  • The TSX closed at 16044, down -32 points or -0.20% over the past week. YTD the TSX is down -1.02%.
  • The DOW closed at 24635, down -118 points or -0.48% over the past week. YTD the DOW is down -0.34%.
  • The S&P closed at 2735, up 14 points or 0.51% over the past week. YTD the S&P is up 2.28%.
  • The NASDAQ closed at 7554, up 120 points or 1.61% over the past week. YTD the Nasdaq is up 9.43%.
  • Gold closed at 1298, down 15.00 points or -0.69% over the past week. YTD gold is down -0.92%.
  • Oil closed at 65.75, down -2.13 points or -3.14% over the past week. YTD oil is up 8.82%.
  • The USD/CAD closed at 0.77185, up 0.0008 points or 0.10% over the past week. YTD the USD/CAD is down -2.95%.
  • The MSCI closed at 2093, down -18 points or -0.85% over the past week. YTD the MSCI is down -0.48%.

Europe/Asia

  • The Euro Stoxx 50 closed at 3449, down -66 points or -1.88% over the past week. YTD the Euro Stoxx 50 is down -1.57%.
  • The FTSE closed at 7702, down -28 points or -0.36% over the past week. YTD the FTSE is up 0.18%.
  • The CAC closed at 5466, down -77 points or -1.39% over the past week. YTD the CAC is up 2.88%.
  • DAX closed at 12724, down -214.00 points or -1.65% over the past week. YTD DAX is down -1.50%.
  • Nikkei closed at 22171, down -280.00 points or -1.25% over the past week. YTD Nikkei is down -2.61%.
  • The Shanghai closed at 3075, down -66.0000 points or -2.10% over the past week. YTD the Shanghai is down -7.02%.

Fixed Income

  • The 10-Yr Bond Yield closed at 2.9, down -0.0300 points or -1.02% over the past week. YTD the 10-Yr Bond Yield is up 20.83%.

 

 Sources: Dynamic, Advisor.ca

Frank Mueller

Weekly Update – May 11, 2018

“Nobody likes high interest rates” – Chanda Kochhar

Bank of Canada Raises Five-Year Fixed Mortgage Rate

The Bank of Canada raised its conventional five-year fixed mortgage rate on Wednesday, from 5.14% up to 5.34%. As we all now know, the BoC’s five-year fixed rate is a crucial piece of information for prospective home buyers in Canada. Exactly how this

Less Than 20 Per Cent Down Payment

These prospective buyers must qualify for their mortgage at the BoC’s five-year fixed rate of 5.34 per cent, rather than the rate offered by their lender. For reference, the current five-year fixed rate at one of the “Big Five” Canadian banks is currently 3.74 per cent.

20 Per Cent Down Payment or More

For home buyers with 20 per cent down or more, they must qualify at the greater of the BoC five-year fixed rate, or the agreed upon rate with their bank plus 200 basis-points (two per cent).

So, using the above current five-year fixed rate, purchasers with at least 20 per cent down will have to qualify at the rate of 3.74 + 2.00 = 5.74 per cent, because the “bank rate plus 200 basis-points” exceeds the BoC’s current 5.34 per cent.

Stephen Poloz: Canadian Economy “Finally Positive”; Future Rate Hikes Possible

Stephen Poloz, Governor of the Bank of Canada recently stated that the economy was “finally positive”, adding that he was more encouraged about the economy than he was six months ago.

Poloz did caution that there are still areas of softness within the Canadian economy, as well as high levels of consumer debt. As such, the BoC will need to exercise caution with future rate hikes, to avoid future instability.

While the BoC opted not to raise its key rate steady at 1.25 per cent, analysts pegged a 70 per cent chance of a BoC rate hike in July.

Canadians should look at the potential of further rate increases as a reminder to diligently pay down debt where possible. As always, if dealing with multiple types of debts (credit card balances, student loans, mortgages, lines of credit, etc), attack those debts with the highest interest rates. This almost always means paying down credit cards first. Credit card debt is portfolio poison.

WEEKLY MARKET WRAP-UP

North America

  • The TSX closed at 15983, up 254 points or 1.61% over the past week. YTD the TSX is down -1.39%.
  • The DOW closed at 24831, up 568 points or 2.34% over the past week. YTD the DOW is up 0.45%.
  • The S&P closed at 2728, up 65 points or 2.44% over the past week. YTD the S&P is up 2.02%.
  • The NASDAQ closed at 7403, up 193 points or 2.68% over the past week. YTD the Nasdaq is up 7.24%.
  • Gold closed at 1318, up -9.00 points or 0.15% over the past week. YTD gold is up 0.61%.
  • Oil closed at 70.52, up 0.77 points or 1.10% over the past week. YTD oil is up 16.72%.
  • The USD/CAD closed at 0.7817, up 0.0017 points or 0.22% over the past week. YTD the USD/CAD is down -1.71%.

 Europe/Asia

  • The MSCI closed at 2124, up 53 points or 2.56% over the past week. YTD the MSCI is up 1.00%.
  • The Euro Stoxx 50 closed at 3566, up 15 points or 0.42% over the past week. YTD the Euro Stoxx 50 is up 1.77%.
  • The FTSE closed at 7725, up 158 points or 2.09% over the past week. YTD the FTSE is up 0.48%.
  • The CAC closed at 5542, up 26 points or 0.47% over the past week. YTD the CAC is up 4.31%.
  • DAX closed at 13001, up 181.00 points or 1.41% over the past week. YTD DAX is up 0.64%.
  • Nikkei closed at 22759, up 286.00 points or 1.27% over the past week. YTD Nikkei is down -0.03%.
  • The Shanghai closed at 3163, up 72.0000 points or 2.33% over the past week. YTD the Shanghai is down -4.35%.

 Fixed Income

  • The 10-Yr Bond Yield closed at 2.97, up 0.0300 points or 1.02% over the past week. YTD the 10-Yr Bond Yield is up 23.75%.

 

 

Sources: Dynamic, Advisor.ca

Frank Mueller

Weekly Update – January 19, 2018

“Wealth consists not in having great possessions, but in having few wants” – Epictetus

TSX Marginally Up for The Week

The Toronto Stock Exchange’s S&P/TSX composite index rose on Friday by 68.99 points (0.42 per cent) to finish up at 16,353.46, a gain of 45.28 points (0.28 per cent) for the week. Though modest, the weekly gain put the index back in the right direction after last week’s loss.

Nine of the 10 main sectors posted wins on Friday. Financials and industrials led the way. The Energy sector was weighed down by an oil pullback. A barrel of Crude Oil fell by 38 cents (USD) on Friday to settle at $63.57 USD per barrel, a down-tick of 86 cents for the week (1.33 per cent).

The oil decrease also affected the Loonie, which weakened compared to the Greenback on Friday. As of 3:59pm EST, the Loonie had dropped 0.64 per cent versus the American Dollar, and sat at 80.01 cents USD.

Investors have now set their sights forward to next week’s NAFTA talks. Some analysts feel NAFTA is a risk, and could pull the Loonie down, should NAFTA be abandoned. Said Mark McCormick, North American head of Foreign Exchange Strategy at TD Securities: “The market is really going to have to price in a negative risk premium on the Canadian dollar, driven primarily on the breakup risks of NAFTA”.

Gold retreated from $1,339 USD per ounce to begin the week back to finish at $1,331.10 USD per ounce, shaving off $7.90 USD per ounce (0.59 per cent).

U.S. Markets Advance, Again

Another week, another plateau hit for the Dow Jones Industrial Average (DJIA). This week, it rose above 26,000 for the first time. On Friday, it gained 53.91 points (0.21 per cent) to close at 26,071.72. On the week, the DJIA was up 268.53 points (1.04 per cent).

The S&P 500 hit its own record closing high, gaining 12.27 points (0.44 per cent) on Friday to close out 2,810.30 (up 0.86 per cent for the week).

The NASDAQ also set a record closing high, climbing to 7,336.38 on the back of a 40.33 point, 0.55 per cent, Friday gain. NASDAQ gained 1.04 per cent for the week.

Disagreements between U.S. Senate Democrats and Republicans could lead to a government shutdown. The deadline is midnight Friday night (tonight). Senate Minority Leader Chuck Schumer and U.S. President Donald Trump met to negotiate an end to the impasse on Friday. The potential shutdown had a minor effect on U.S. markets, but these days, it seems nothing can impede their advance.

As Expected, Bank of Canada Raises Key Rate

As widely expected, the Bank of Canada raised its benchmark interest rate on Wednesday morning. As with the previous two rate hikes, this was an increase of 25 basis-points from 1.00 per cent to 1.25 per cent. This makes three rate hikes in a little over six months after the BoC held rates steady at 0.50 per cent for nearly nine years. Strong employment figures were among the main reasons that the BoC felt comfortable enough to enact the rate hike.

Two further rate increases are expected by the end of 2018.

As mentioned last week, the rate rise will affect new home purchasers (who didn’t have rate holds in place) and those who carry credit balances on their Home Equity Lines of Credit, regular lines of credit, or home owners with variable mortgage rates.

 

Sources: Globe Advisor, Yahoo! Finance

Frank Mueller

Weekly Update – January 12, 2018

“Success is not final; failure is not fatal: It is the courage to continue that counts.” – Winston S. Churchill

TSX Winning Streak Snapped

The Toronto Stock Exchange’s S&P/TSX composite index rose on Friday but still posted a weekly loss. Friday saw a 21.24-point rise, good for a 0.13 per cent gain. However, the TSX was down 41.26 points on the week, closing at 16,308.18 (down 0.25 per cent week-over-week). This was the first weekly decline in a month, after three consecutive weekly gains.

Cannabis producers were down sharply, but their losses were offset by resource, gold and lumber gains.

U.S. Crude Oil rose by $2.99 USD per barrel or 4.87 per cent this week, closing at $64.43 per barrel.

Gold rose to $1,339 USD per ounce this week, as the US Dollar depreciated.

The December jobs report once again showed strong growth in Canada, with 23,700 full-time jobs and 78,600 total jobs added. Canada’s unemployment rate fell to its lowest mark in 41 years, from 5.9 per cent in November down to 5.7 per cent for December.

However, David Rosenberg, Chief Economist and Strategist at Gluskin Sheff + Associates opined “at face value the (unemployment) number looks great, but… there are question marks beneath the surface that has me thinking it is overstating the strength in the economy”.

Undaunted, the Loonie took the jobs numbers and moved upward to settle at 80.24 cents to the Greenback. Should the Bank of Canada raise their key rate next week (more on that below) we can expect the Loonie to jump again.

U.S. Markets Continue to Rise

The Dow Jones Industrial Average (DJIA) continued to skyrocket this week. Last week, the DJIA rose above 25,000 for the first time; this week, after a rise of 228.46 points (0.89 per cent) on Friday, the major index rose to 25,803.19, good for a weekly gain of 507 points, an even two per cent gain.

The S&P 500 rose 18.68 points (0.67 per cent) on Friday to close out the week at 2,786, good for a weekly gain of 1.57 per cent.

NASDAQ gained 49.29 points (0.68 per cent) on Friday to close at 7,261, a weekly gain of 124 points (1.74 per cent).

Bank of Canada Expected to Raise Rates Next Week

This coming Monday, January 15th is the dreaded “Blue Monday 2018”, where the perfect storm of poor weather, short days and long nights, the realization of how much was *actually* spent over the holidays, the fact the holidays are now firmly in the rear-view mirror, low motivation levels, and finally, the realization that most or all of our New Year’s Resolutions have failed to take hold all combine to create the saddest day on the calendar year.

For those who haven’t managed to keep spending in check over the holidays (or otherwise), this Wednesday may add to the misery. The Bank of Canada is overwhelmingly expected by analysts to raise its benchmark rate to 1.25%, up from 1.00%, this coming week. Many big banks such as RBC, TD and CIBC have already raised their mortgage rates in anticipation.

As rates climb, you can expect credit balances with variable rates, such as variable rate mortgages, home equity lines of credit (HELOCs), and secured & unsecured credit lines to increase their rates accordingly. As a result, borrowers will now pay more interest each month on these balances. Credit card rates (which are generally sky-high at 19.99 – 28.99 per cent) won’t be affected, but the rates are so high that you shouldn’t carry balances anyway.

Bottom line: pay down those credit lines where possible to avoid paying more interest each month.

WEEKLY MARKET WRAP-UP

North America
The TSX closed at 16308, down -41 points or -0.25% over the past week. YTD the TSX is up 0.61%.
The DOW closed at 25803, up 507 points or 2.00% over the past week. YTD the DOW is up 4.39%.
The S&P closed at 2786, up 43 points or 1.57% over the past week. YTD the S&P is up 4.19%.
The Nasdaq closed at 7261, up 124 points or 1.74% over the past week. YTD the Nasdaq is up 5.19%.
Gold closed at 1339, up 14.00 points or 1.13% over the past week. YTD gold is up 2.21%.
Oil closed at 64.43, up 2.99 points or 4.87% over the past week. YTD oil is up 6.64%.
The USD/CAD closed at 0.80239, down -0.0044 points or -0.55% over the past week. YTD the USD/CAD is up 0.89%.

Europe/Asia
The MSCI closed at 2172, up 15 points or 0.70% over the past week. YTD the MSCI is up 3.28%.
The Euro Stoxx 50 closed at 3613, up 5 points or 0.14% over the past week. YTD the Euro Stoxx 50 is up 3.11%.
The FTSE closed at 7779, up 55 points or 0.71% over the past week. YTD the FTSE is up 1.18%.
The CAC closed at 5517, up 46 points or 0.84% over the past week. YTD the CAC is up 3.84%.
DAX closed at 13245, down -75.00 points or -0.56% over the past week. YTD DAX is up 2.53%.
Nikkei closed at 23654, down -61.00 points or -0.26% over the past week. YTD Nikkei is up 3.91%.
The Shanghai closed at 3429, up 37.0000 points or 1.09% over the past week. YTD the Shanghai is up 3.69%.

Fixed Income
The 10-Yr Bond closed at 2.55, up 0.0700 points or 2.82% over the past week. YTD the 10-Yr Bond is up 6.25%.

Sources: Globe Advisor, BNN.ca, Yahoo! Finance