“I’d rather be pleasantly surprised than fatally disappointed” – Julia Glass

Tempered Fed Cut Hike Speculation Leads Indexes Lower

Major U.S. indices dipped to end the Friday trading session after a strong opening. The Wall Street Journal reported the coming Fed Cut would be 25 basis points; however, comments on Thursday by Fed officials inferred a larger rate cut.

New York Federal Reserve President John Williams gave a lengthy speech on Thursday – which he later walked back from to an extent – that appeared to favour aggressive rate cuts, Mr. Williams pointed to too-low inflation and the need for stimulus. Fed Board of Governors Vice Chair Richard Clarida also made his case for aggressive rate cuts.

Williams’ accommodative-sounding speech and Clarida’s comments led markets upward on Thursday, but the Wall Street Journal’s report dampened investors’ spirits as Friday wore on.

The extent to which U.S. markets are dependent on accommodative monetary policy is significant. Dennis Dick, head of markets structure at Bright Trading LLC in Las Vegas opined “this market has been dependent on cheap money and it is going to continue to be”.

Rate cut expectations, heavily expected to be 50 basis points or more until Friday, now are lowered to a 25-basis point expectation.

The refocused rate cut expectation does not preclude further easing going forward; thus, further rate cut announcements would likely fuel additional equities growth.

Bank of Canada Lowers Stress Test Qualifying Rate

The Bank of Canada reduced its five-year benchmark rate from 5.34% to 5.14%, a drop of 20 basis points. The BoC’s five-year benchmark is also used by lenders as the qualifying rate for would-be home buyers.

Initially only for high-ratio (less than 20% down payment, requiring CMHC default creditor insurance) mortgages, the qualifying rate now impacts both high-ratio and conventional (20% down or more, not requiring CMHC insurance) mortgages.

The goal of the stress test is, generally speaking, to ensure that a would-be borrower could weather a higher interest rate and/or a lower income level at mortgage renewal.

As a reminder, the stress test for insured mortgages stipulates the buyer(s) must be able to meet the servicing hurdle using the BoC’s posted five-year rate (now 5.14%).

For uninsured mortgages, the 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.


Sources: Globe Investor, Advisor.ca

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.