Market Projects Prime Rising To 2.75%

Percent growthCanada’s key lending rate is headed at least 1/4 point higher in eight days…that is, if the financial markets are right.

Here’s the latest…

  • Friday’s eye-popping employment report has lifted the odds of a quarter-point hike to 96%, based on the price of overnight index swaps.
  • Bankers' acceptance (BA) yields have averaged 20 bps above the overnight rate since 1992. Their current 0.94% level also points to a 25 bps rate increase.
  • Every last one of Canada's primary securities dealers is now predicting a 25 basis point hike this month, according to a Reuters poll on Friday. Not only that, but every single dealer also forecasts another rate increase in September.

If the overnight rate does rise to 0.75% on July 20, prime rate will likely move to 2.75%. The last time prime was above 2.50% was February 2009.

Sources: Bloomberg, Reuters

  1. Very unfortunate that the jobs report did not break down the number of jobs that were attributed to the G20 summit. All which won’t be around any longer. To then raise the rates on the back of that is ridiculous. – Ravi Shanghavi, Ottawa

  2. The large majority of jobs were not related to G20.
    52,000 jobs were in the private sector.
    25,600 jobs were from the self-employed sector.
    Any way you slice it this was an extremely strong report. Forecasters only anticipated 15,000 jobs total!

  3. Takloo, I believe it’s done as follows:
    Take the number of days between today and the next meeting. In this case it’s eight. Multiply that number by the current overnight rate (0.50%). Then take the weighted average for the following 22 days based on the assumed new overnight rate.
    Here’s how the OIS market got 0.66% for this month:
    0.50×8/30 + 0.75×22/30 = 0.66

  4. Actually you need one more factor, the probability:
    0.50×(8/30) + 0.75×(22/30)×P = 0.66
    Solve for P … in this case you get 0.96, or 96% probability! I’m glad you asked, this was my first time figuring it out too.

  5. Hi Dan,
    Thanks for posting. That seems about right, although it’s been a while since I did the calculations manually. I used to do them by hand when I had access to a Bloomberg terminal (before we started simply taking the figures off the wire). Back then I had a really explanatory Fed funds & OIS formula guide. I’ll try to see if I can dig it up and post it here.
    Cheers,
    Rob

  6. “25,600 jobs were from the self-employed sector”
    How can that be included in the report?
    How reliable is that? A person creates a company and calls himself a self-employed, does that count as 1 self-employed job?
    So if BoC is counting on that as employment numbers for policy decision, that is very wrong in opinion … any thoughts on that?

  7. Sudip … thanks for keeping the topic alive … I think they’d like everyone to forget about it and sweep that extra 0.25% under the rug.

  8. “25,600 jobs were from the self-employed sector”
    How can that be included in the report?
    How reliable is that? A person creates a company and calls himself a self-employed, does that count as 1 self-employed job?
    So if BoC is counting on that as employment numbers for policy decision, that is very wrong in opinion … any thoughts on that?

  9. Agreed. What are the quality of the jobs created in the private sector? The G&M article states that retail jobs were one of the leaders in growth. I’m not sure, but I don’t think the influx of students working summer jobs at The Gap should constitute an interest rate hike for the rest of the country.
    It seems to me that the Big 5 are looking for any excuse to justify a rate hike (or not give back, as per Sudip). Not to sound too cynical, but I think a break-out of chicken-pox across the country is going to be the new ‘hint’ or ‘indicator’ of a BoC rate hike according to Big 5!

  10. Over 1/2 the new jobs were full-time positions. Summer jobs are a small fraction of the employment gains.
    Self-employed jobs include business professionals too, not just lemonade stand operators.
    Allow me to repeat from above: Any way you slice it this was an extremely strong report. Forecasters only anticipated 15,000 jobs total!

  11. That’s exactly how it works – how does that make it unreliable?
    It’s not as if anyone has an incentive to lie when they’re being surveyed by StatsCan, unless they’re one of the anti-census libertarians, but a big enough sample corrects for that.

  12. The extra 0.25 is pure “profit” for them on everything that is based on prime. There is no rule that says that prime has to rise & fall with the overnight rate from the BoC, and the banks may be hoping that people will “forget” that a year ago they increased spread by 25bp when the BoC lowered the rate 50 and they only matched half…

  13. It is not pure profit. You have to look at a lender’s costs.
    Variable rates are now 1.80%.
    Bankers acceptances are 0.96%.
    That leaves a spread of 84 basis points, which is far below the 120 lenders require to be profitable long-term.
    There is no possible way to “give back” that 1/4% without reducing variable rate discounts by the same amount. Take your pick.

  14. In addition, the Labour Force Survey is seasonally adjusted to remove the impact of summer employment from the data.

  15. most of the jobs in today’s economy or so called new jobs are more or less McJobs!
    McJobs are povertly level jobs, no one can support a family off of a McJob.
    We have a hollow economy, that I believe, is going to be crashing down towards a depression.

  16. Why would a lender not borrow at the current bank rate of 0.5% from Bank of Canada instead of using BAs for funding the loan? … since it is a variable rate loan

  17. The overnight rate is the interest rate at which major financial institutions borrow and lend one-day funds among themselves. Only these institutions have access to it.
    Alberta Treasury Branches
    Bank of America, National Association
    Bank of Montreal
    The Bank of Nova Scotia
    BNP Paribas (Canada)
    La Caisse centrale Desjardins du Québec
    Canadian Imperial Bank of Commerce
    Credit Union Central of Canada
    HSBC Bank Canada
    Laurentian Bank of Canada
    National Bank of Canada
    Royal Bank of Canada
    State Street Bank and Trust Company
    The Toronto-Dominion Bank
    One-day loans are not appropriate for funding variable-rate mortgages primarily because of their purpose and short maturity.

  18. Question…we have come to the “almost” conclusion that when we build our new home this fall, we should pay the outrageous penalty ($13000) to break our mortgage (5.2 % with 2 yrs left) and go variable 5 yr as our port rate is 4.69……what I am wondering is a.any thoughts on this and b. if we did a rate capper, we were told we pay the cap rate the whole time and just more goes to principle….is that correct?
    thanks for your help

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