What’s Happening with Rates?

Interest rates are a factor of several things, but perhaps the largest influencers are the expectations people have for inflation, and recent actual inflation. In the end, many things impact people’s expectations for, and the actual inflation figures, but no two other things impact interest rates more.

Expectations for inflation mostly impact the bond market. And whether the bond market thinks inflation will rise or fall, it is said that it is always “right”. So when you hear on the news that the unemployment rate is up, and that people are losing jobs, typically two things happen: 1) Investors will think that companies will have less profits and usually prices of stocks drop. 2) Investors will think that inflation will decrease (which normally happens in a shrinking economy) so they are willing to accept lower returns on bonds. As I have mentioned in previous columns, it is the interest rates on bonds that largely impacts today’s fixed rate mortgages. If the yield on a 5 year Canada Bond goes down there is usually an ability to lower 5-year fixed mortgage rates. The same can be said for all mortgage terms. If the 1 year bond yield decreases, the 1-year fixed mortgage rate can decrease.

So whenever you hear news that changes people’s expectations for inflation you can normally count on a change in rates in the short-term unless there is another piece of news otherwise, that would offset people’s original thoughts. An example would be an announcement that 30,000 jobs were created last month, making people think there will be more money floating around in the economy, and then a day later it was revealed that 28,000 of those jobs were for part-time workers at low paying jobs.

Recent Actual inflation normally has a direct impact on what the Bank of Canada does with its short-term lending rates (to banks) which in turn directly impacts the Prime Rate charged by banks. If figures for the last quarter show inflation tracking well above the Bank’s target it will normally raise its rate to slow the economy and curb inflation. If they are right on target, or within their acceptable range they are normally slow to change their rate. In recent times the Bank has maintained its current rate, leaving the Prime Rate unchanged. They are currently holding steady for a number of reasons: 1) Core Inflation is under its target; 2) worldwide problems in the financial sectors; 3) GDP growth in the USA is anemic; and the list goes on.

Unless we see some big jumps in economies you can expect the Bank to keep its rate steady for some time. That’s probably why so many people are looking for Variable Rate Mortgages, however a similar amount of people are chosing 5 year fixed rate mortgages with the rates as low as they are. It is expected that the Bank will raise its rate a couple times by mid 2012, so expect to see Prime at 3.50% this time next year: two small increases in 12 months.

The same logic applies to all fixed and floating rate loan products. The next time you pick up the paper and read about what’s happening in the economy you can make your own predictions about what will be happening with lending rates. See how accurate you can get!

Cheers,
Chris
--
Christopher Bisson
President and Mortgage Broker
The Mortgage Centre
519-763-3900 x1003

www.guelphmortgagecentre.com

Mixed Messages

There is so much conflicting data floating around that it is no wonder that interest rates have been bouncing around like a ping-pong ball. Let’s look at some data that you can get off the Statistics Canada website (but which is rarely reported):

1) We hear relatively good news about employment here in Canada. In April the number of people employed went up by a net of 22,000, and the unemployment rate dropped to 7.4% that seems pretty good until you dig a little deeper;
2) Manufacturing employment decreased by 23,000 in April;
3) 30,000 people started their own businesses;
4) Core Inflation is tracking to end the year around 1.6-1.8% above last year, while total CPI is tracking for 3.25% because of the increase in energy and gas prices.

So while the total employment figures would give you the impression that our economy is ticking along, some of the other figures tell me that things aren’t exactly as they seem. For example, the majority of the 30,000 people that started their own businesses probably won’t earn anywhere close to what they earned while they were employed elsewhere (like in the manufacturing sector). The fact that GDP growth is an anemic 0.3% year over year tells me that they aren’t earning the same amount yet.

The biggest concern for me is the 23,000 people who lost their manufacturing jobs. These tend to be good paying stable jobs, which makes it easier for people to buy things and then pay for them.

The USA is in the tank too, so it is unlikely they will increase demand for our products (which are a lot more expensive now due to the exchange rate).

The net result is that we won’t see mortgage rates go too high any time soon. There isn’t enough positive economic news in the works that will keep rates up for any great length of time. If they pop up it will likely take less than 3 months for them to come back down.

And that is the theme for the rest of 2011, and perhaps all of 2012.

Warm regards,
Chris
--
Christopher Bisson
President and Mortgage Broker
The Mortgage Centre
519-763-3900 x1003

www.guelphmortgagecentre.com

Fixed Rates Should Drop!

The headlines in the paper last week were advertising that Wednesday was a terrible day in the stock market. Odd as it may be, this made me smile.

I hate losing money just as much as the next person, but these big drops are often overlooked for what they really are: Buying Opportunities. When the herd is running in one direction it is normally a signal to look at doing the opposite thing. So don’t hesitate looking at the opportunities that are out there. I myself can’t believe that RIM is trading at a P/E Ratio of less than 7.

The other reason I smiled is that this decline allows Fixed Mortgage Rates to drop down even lower. Rates in the bond market have declined 0.3% over the last month, and the 0.1% drop that occurred yesterday will likely push the 5-year fixed rate mortgage to 3.85% across the board if they hold steady for a few days.

The stock market drop was due to bad economic news out of the USA, which we have been covering for some time now. We still believe that the USA is years away from a recovery. This will make it very hard for our government to raise short-term rates as it will make our Loonie too expensive and put pressure on manufacturing. The government wants people working, so they will err on the side of “wait and see” rather than try to be pro-active and raise the rates. With that being said don’t expect Variable Rates to rise much in the next 18 months.

Have a great week!

Chris
--
Christopher Bisson
President and Mortgage Broker
The Mortgage Centre
519-763-3900 x1003

www.mortgageconcierge.ca