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Briefing highlights

  • Mortgage credit speeds up
  • Stocks, loonie, oil at a glance
  • What to watch for today
  • What analysts are saying today
  • Required Reading

Mortgage credit speeds up

Oops, we did it again.

It’s not particularly sharp, and nothing like the fast pace of the past, but mortgage borrowing is picking up. Given Canada’s history with swollen debts and inflated housing markets, that bears watching.

“That’s little surprise, with home sales perking up in recent months,” Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist, said of the latest numbers from the Bank of Canada, which showed mortgage credit rising 4 per cent in August from a year earlier.

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“Even so, mortgage credit growth remains well below the high single-digit gains seen from 2015-2017, and well below the double-digit pre-crisis levels,” he said in a report.

The pickup could nonetheless make the Bank of Canada “reluctant” to trim its benchmark overnight rate, as it’s expected to do at some point, because “they don’t want to worsen financial vulnerabilities,” Mr. Reitzes added.

David Rosenberg, chief economist at Gluskin Sheff + Associates, agreed.

“We know that elevated household debt levels are top of mind for the Bank of Canada, and their reluctance to lower the overnight rate (despite a vast amount of global central banks having done so) can only be interpreted as concern on their part towards making the situation worse,” he said in a note.

Mr. Reitzes, though, offered “counterpoints” to his own observation:

“1) mortgage rates have already plunged, so a lower overnight rate will have relatively less impact than seen historically, and 2) tighter macro prudential regulations should limit high-risk borrowing.”

The federal bank regulator, remember, brought in new mortgage-qualification stress tests at the beginning of last year, a move designed to head off a bursting bubble but also one that depressed housing markets.

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Temporarily, that is.

Markets are rebounding. We’ve seen the latest numbers from several cities, though the full national picture won’t be released until next week.

“Sellers in Ottawa, Montreal and much of Southwestern Ontario are feasting on a diet of high single-digit prices gains,” BMO senior economist Sal Guatieri said in a note, citing, for example, the 13-per-cent jump in prices in Burlington, Ont., in September.

There are still buyers’ markets in Calgary, Edmonton, Saskatoon and Regina, Mr. Guatieri said, but the “long-running correction” from the drop in oil prices in 2015 is winding down.

Even Vancouver is “also getting back on its feet,” while sales in Toronto are back to normal, he added.

This is all being fuelled by a strong jobs market, lower mortgage rates, the new first-time home buyers incentive and population growth.

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All of which prompted Mr. Guatieri to ask whether Canada may be “on the cusp of another boom.”

Though he doesn’t think so.

“Canada’s economy is growing half as fast as in 2017,” Mr. Guatieri said, while the labour market should cool.

“Despite historic low interest rates, Canadians are also more mindful of debts that are draining a record amount of take-home pay,” he added.

“Many spent much of the past two decades borrowing ever more money for a property in the galloping Vancouver and Toronto markets, home to one in four Canadians.”

He also cited a recent BDO Canada study that showed more than half of us are “living paycheque to paycheque,” which should keep the market tame.

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But, where heavy debts are concerned, we’ve been there and done that. And even though the ratio of household debt to disposable income has eased somewhat, the measure remains high, at 177.1 per cent.

“With benchmark home prices in the nation’s largest real estate market running in excess of overall inflation and wage growth, there is fear of a return to bubble-like conditions,” Gluskin’s Mr. Rosenberg said.

“Not to mention that there is the potential for future upward pressure as a result of promised policy changes from all federal parties in the lead-up to the election in less than two weeks’ time.”

Many Canadians are having trouble.

Consumer insolvencies, for example, rose 7.7 per cent in August from a year earlier to 11,284, according to the latest numbers from the Office of the Superintendent of Bankruptcy Canada.

Insolvencies break down into two types: There are bankruptcies, which declined 3.1 per cent in August, and proposals, under which a borrower negotiates new terms and which rose 16.2 per cent.

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For now, though, as the Conference Board of Canada put it, “policy makers can fairly claim to have engineered the soft landing they sought, and talk of a housing bubble has largely faded.”

Nonetheless, the Liberals propose a tax on non-resident foreign owners of real estate, which sit “somewhat awkwardly alongside the government’s shared-equity mortgage plan, underwritten by Canada Mortgage and Housing Corp., which could boost housing demand,” the group said in a report this week.

The Conservatives, meanwhile, said they’ll take another look at the stress test.

For the record here, and on the other side of the ledger, the pace of lending to businesses has declined for more than a year, BMO’s Mr. Reitzes said.

“Unfortunately, this likely has more to do with the uncertain economic backdrop than borrowing conditions.”

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Markets at a glance

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Ticker

Multinationals face bigger bills

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From Reuters: Governments will get more power to tax big multinationals doing business in their countries under a major overhaul of decades-old cross-border tax rules outlined by the Organization for Economic Cooperation and Development. The rise of big internet companies like Google and Facebook has pushed current tax rules to the limit as such firms can legally book profit and park assets like trademarks and patents in low tax countries like Ireland regardless of where their customers are. Earlier this year more than 130 countries and territories agreed that a rewriting of tax rules largely going back to the 1920s was overdue and tasked the Paris-based OECD public policy forum to come up with proposals.

BoE outlines Libra rules

From Reuters: The Bank of England set out the rules of engagement that Facebook’s Libra cryptocurrency and other new digital payments providers would have to meet before they can open for business in Britain. The principles include a requirement for the entire payment chain to show its operational and financial resilience, and provide enough information for regulators monitor payments.

No impact on IPO

From Reuters: Saudi Aramco’s chief executive said there would be no impact on the stock market listing plans of the state oil giant after attacks on its installations last month, which he blamed on Iran.

World Bank cuts Russia’s outlook

From Reuters: The World Bank lowered Russia’s economic growth forecasts for this year to 1 per cent from 1.2 per cent, revising down the country’s economic outlook for the fourth time so far this year.

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What to watch for today

The U.S. central bank releases the minutes of its last meeting in the afternoon.

Markets will be paying attention given the divisions on the Federal Open Market Committee, the central bank’s policy making panel, when it trimmed its benchmark rate, leading to a “rather contentious” decision, said CMC Markets chief analyst Michael Hewson.

“With the FOMC so split, this week’s minutes will garner a closer insight into how much deeper the divisions go with respect to the prospect for further rate cuts in the months ahead, particularly since the Fed statement didn’t differ that much from the one in July,” Mr. Hewson said.

What analysts are saying today

“It has been a modestly positive morning for European equities, but, over all, stock markets are still stuck in a violent see-saw between buyers and sellers as investors try to position themselves ahead of the U.S.-China trade talks. These discussions are being invested with so much importance that it feels as if the very future of the bull market is probably at stake. In reality, this is probably overstating the case, but it is unlikely that sentiment will improve much if the talks break down in acrimonious recriminations. A better earnings season and continued soft Fed policy would help to mollify markets, but it is a trade war resolution that they really crave.” Chris Beauchamp, chief market analyst, IG

“Markets have a mildly risk-on tone overnight, but moves have been small. Fed chair Powell used his speech to the [National Association of Business Economics] last night outline the Fed’s plan to use its balance sheet to address dislocation in funding markets, but also stressed repeatedly the distinction between reserve management and [quantitative easing]. Ahead of Chinese Vice President Liu He’s visit to Washington tomorrow and the reopening of trade talks, the U.S. put visa bans on Chinese officials linked to Muslim detentions in Xinjiang. In the U.K., reports suggest up to 50 Conservatives MPs would consider standing as independents if the party makes a manifesto commitment to no-deal Brexit ahead of the next election, adding to already elevated election uncertainty.” Adam Cole, chief currency strategist, Royal Bank of Canada

“This morning’s key headlines delivered optimistic tones as China said they are open to a partial deal despite the tech blacklist and that they will buy an extra US$10-billion in agricultural goods. In the short-term, a temporary trade truce will give a boost to global growth concerns. Stock markets, however, will not go into full-on rally as a temporary solution will likely see risks remain for further blacklistings, visa restrictions, compliance on delivering agricultural purchases. Until a broader deal is reach, the risks of fresh tariffs will remain as long as President Trump is in office.” Edward Moya, senior market analyst, Oanda

“It’s not immediately clear what the restart of U.S., China trade talks tomorrow will achieve given the deteriorating backdrop to relations between the two powers in the last few days. The expansion of the U.S. blacklist of Chinese companies, as well as the imposition of visa restrictions on Chinese officials connected to the detention and crackdown on Chinese Uyghurs in western China, has served to up the ante further, particularly since China hasn’t, as yet indicated how it might retaliate. The timing of these escalations is also curious given that they seem designed to make the upcoming talks much more difficult than they need to be, and raise the question as to whether the talks are merely window dressing.” CMC’s Mr. Hewson

Required Reading

No federal party has plan for economy

If there was no winner in Monday’s English-language leaders’ debate, it’s not hard to identify the night’s biggest loser. The economy barely got mentioned during the two-hour slugfest, columnist Konrad Yakabuski says.

Regulators haven’t seen final version of fix

International regulators are reviewing a number of changes Boeing Inc. is proposing for its grounded Max 737 aircraft, but the company has yet to submit for approval the final version of the automated control software on the passenger jet. Eric Atkins reports.

Four ideas

Defensive stocks are getting real pricey. But here, from Ian McGugan, are four ideas where investors can now search for shelter and not overpay

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