Merrill Lynch’s David Wolf made headlines today with an eye-catching prediction. He thinks Canada’s key interest rate will plummet 1.25% in 2008.
Wolf blames weakening U.S. demand for our goods and subdued Canadian inflation. He says quite bluntly, “It seems ridiculous not to expect a substantial slowing in Canadian growth ahead.”
Goldman Sachs backs up Wolf’s view about the U.S. Goldman today warned that the United States is in, or approaching, a “mild” recession. Wolf expects this recession to last 2-3 quarters.
(Many economists dispute that the U.S. is in recession however.)
Either way, Canada has “only” followed the U.S. into recession 4 of the last 6 times so its not a foregone conclusion that we`ll suffer.
We can’t forget oil either. At $95 a barrel, oil exports are now a much bigger part of our economy, and a much bigger contributor to inflation. What’s more, Benjamin Tal says Canada’s real GDP growth is now far less dependent on the U.S. than it once was. In 2007, for example, Canadian exports to China rose 27%.
Last but not least, there’s our mighty housing market. Most expect Canada’s housing sector to remain firm in 2008, and that could keep confidence up and equity cash outs coming.
Given all of this, many still think it’s possible that the Bank of Canada could hike rates later this year.
But, will they end up higher than they are now?
There`s just too much uncertainty to tell.
Last modified: April 25, 2014
I wouldn’t say Canada only followed the US into recession 4 of 6 times.
Thats seems like bad odds to me.
Hi Smitty,
Thanks for the feedback. Yes at first glance it does give that impression, which is why “only” is in quotes.
However, six events are nowhere near a statistically valid sample–especially given the infinite economic inputs that effect the correlation between our countries.
The point is just that it’s far from a sure thing that Canada will get kicked while the U.S. is down.
Cheers,
Rob
Hi Mt,
It’s hard to say if Canada will follow the US into a recession. (What a difference six months makes!)
As a general rule Wall street and Bay Street always look on the sunny side of things. When they finally talk negative that is usually the time to buy. Since the banks are still talking good things about the market but drop the odd bad thing we are still not there yet.
Remember all the talk about interest rates going up and the markets doing well? The stock market peaked in July. The stock markets usually are ahead of real estate etc.
Most people including myself follow the “experts” and the media reports it. The best advice is usually treat the reports with a gain of salt and consider the opposite. Buy the time everyone agrees the economy is doing well, run for the hills. Buy on bad news.
regards,
Brian
Hi Brian,
This is good advice of yours:
“The best advice is usually treat the reports with a gain of salt and consider the opposite.”
Then again, the danger to a contrarian is averaging down into pessimism and getting smoked. As a former stock trader I can tell you firsthand how this smarts.
Cheers,
Rob
Hi Rob,
Good advice. The “experts” I like to follow are guys who have been around awhile (at least 20 years).
They don’t get it right all the time, but most of the time.
Examples are Bill Gross at PIMCO which manages over $720 Billion US in bonds in business since 1971. Calling on a poor US real estate market etc. for a while. Another person is Jim Rogers, who correctly called a falling US dollar years ago and a rising oil prices back in 2000 when it was under $20! Warren Buffet is also a good one. The key is these guys have been around the block a few things!
My biggest mistake in my business is listening to young fund guys who talked about labour sponsored funds (about 10 years ago). They were new to the business and I had a few years in the business. Anyway, after the tax credit was given, this stuff went down. Lesson learned!
regards,
Brian
Good news for people with variable mortgages: the jobs report was much weaker than was expected, which virtually cements a quarter-point rate cut on the 22nd.
Bad news for people with variable mortgages: wages were 4.9% higher in December than they were in Dec 2006, which will limit the extent to which the Bank of Canada can cut rates.
Hi Brian,
Thanks for the post. Those folks you mentioned have made a very good name for themselves by being right just slightly more than they are wrong. (Which is an extraordinary accomplishment in this business)
The variables that go into interest rate forecasts are neverending. Even the world’s best professional sports bettors– who arguably have far less factors to consider than a macro-economist–have accuracy rates of only 57-58%. (and they need to be right 52.4% of the time just to break even).
In short, finding an economist who’s even 55% right is one tough order. And then what do you do? Do you bet your family’s financial security on those odds?
In the mortgage business it seems the best bet (for most folks) is to simply rely on the long-term numbers. The top research we have suggest variable mortgages are the way to go–regardless of what anyone thinks rates will do next year.
Al, Thanks for your comments as well. It seems like we’re getting a lot of offsetting economic reports these days. It makes it especially hard to have any clarity beyond what the Bank of Canada tells us.
Have a great weekend,
Rob
From what I’ve read I see that the target rate is 4.25 and banks are charging >= 7.4% and the reason for this is due to the cost of borrowing going up between banks. (http://truenorthmortgage.blogspot.com/2007/11/why-is-5-year-rate-still-at-6.html)
My question is, if the rates drop by 1% will we see a drop by banks on their lending rate? Or will they maintain rates to claw back lost money from the sub prime fallout / higher cost of borrowing money?
Hi Sebastian,
You can never be too sure what rates will do. The fact that spreads are as surprisingly high as they are now is case in point.
That said, it’s safe to assume that fixed mortgage rates will fall if bond yields fall another 1%. The spread should not keep growing indefinitely.
It’s also a fair assumption that fixed mortgage rates will fall if the spread above bond yields decreases.
As for variable rates, if the Bank of Canada were to lower 1% then variable mortgage rates would fall by default because they are priced at a discount to prime .
Have a wonderful day,
Melanie