Briefing highlights
- Bank of Canada must be gentle
- Stocks, Canadian dollar, oil at a glance
- Sweden ends negative rates era
- What analysts are saying today
- Required Reading
When rates eventually rise
The Bank of Canada will need to watch how fast it raises interest rates given the higher sensitivity among borrowers and how consumer insolvencies have spiked.
Not that the Bank of Canada is looking at an increase. At this point, the central bank is leaving itself more open to a cut in its benchmark overnight rate rather than a hike.
But that key rate, now at 1.75 per cent, is going to rise again at some point.
And that, Canadian Imperial Bank of Commerce warns, could lead to “overkill.”
Benjamin Tal, CIBC’s deputy chief economist, and his colleague, chief economist Avery Shenfeld, took a deeper look at the recent wave of consumer insolvencies, which spiked even as the jobs market remained solid.
Indeed, as The Globe and Mail’s Matt Lundy reports, the latest numbers showed consumer insolvencies shooting up 13.4 per cent in October from a year earlier to their highest in 10 years.
Insolvency and delinquency rates
Three quarters moving average
Insolvency rate (left)
Delinquency rate, 90 days plus (right)
14%
1.7%
13
1.6
12
1.5
11
1.4
10
1.3
9
1.2
8
1.1
7
1.0
6
0.9
5
0.8
4
0.7
2011
2013
2007
2009
2015
2017
2019
SOURCE: CIBC
Insolvency and delinquency rates
Three quarters moving average
Insolvency rate (left)
Delinquency rate, 90 days plus (right)
14%
1.7%
13
1.6
12
1.5
11
1.4
10
1.3
9
1.2
8
1.1
7
1.0
6
0.9
5
0.8
4
0.7
2011
2013
2007
2009
2015
2017
2019
SOURCE: CIBC
Insolvency and delinquency rates
Three quarters moving average
Delinquency rate, 90 days plus (right)
Insolvency rate (left)
14%
1.7%
13
1.6
12
1.5
11
1.4
10
1.3
9
1.2
8
1.1
7
1.0
6
0.9
5
0.8
4
0.7
2011
2013
2007
2009
2015
2017
2019
SOURCE: CIBC
Insolvencies come in two forms: One is traditional bankruptcy, and the other what is known as a proposal, where a troubled consumer negotiates new debt terms.
Proposals in particular are on the upswing and, noted Mr. Tal and Mr. Shenfeld.
“The issue is, why are households struggling with payments in the absence of a material weakening in the national labour market?” Mr. Tal and Mr. Shenfeld said in their report.
“The answer lies in looking at precisely which credit products are experiencing rising write-off rates,” they added, citing credit products that saw their rates reset higher after the Bank of Canada boosted its benchmark in 2018, in turn pushing up prime.
Cases in point include unsecured and secured lines of credit. But there’s no “trend” among credit cards, whose rates “don’t move in lockstep” with central bank policy.
The problem lies not with mortgages, but rather these other credit types where delinquencies are rising.
“Adding it all up, there has been a clear trend to increases in the share of balances that are delinquent coming from interest-rate-sensitive products … and much of that climb took place after rate hikes by the Bank of Canada pushed up prime rates,” Mr. Tal and Mr. Shenfeld said.
Their findings add to questions over how Bank of Canada policy will affect consumers.
Elevated debt levels are a big concern for the central bank, which will obviously think twice before cutting rates lest it fuel a credit binge. Next, as Mr. Tal and Mr. Shenfeld have shown, it will have to be mindful of how past hikes sparked insolvencies.
“If raising the overnight rate to only 1.75 per cent could set off a climb in insolvencies, before any major job losses have been seen, it’s clear that taking rates to anywhere near what was historically neutral, or even where some models might currently put neutral, could prove to be overkill,” they said.
“Monetary policy will have to look a bit dovish to be only neutral for the economy as a result.”
The point the CIBC economists are making, Mr. Tal said later, is that Canadians are more sensitive to higher interest rates than they were before.
Any “big wave” in delinquencies, though, would come if unemployment spikes, he added.
The Bank of Canada had, a year ago, believed the neutral rate was about 3 per cent, Mr. Shenfeld added later, but that estimate has been reduced.
“These data on the interest sensitivity of insolvency rates are just one more reason to think that the neutral rate under current household debt levels could be below 2.5 per cent, and that the central bank needs to be careful about how quickly we get there,” he said.
Just as an aside here, the growth in home equity lines of credit, or HELOCs, has been slowing markedly, Bank of Nova Scotia said in a report this week.
Indeed, the year-over-year rise in such credit slowed to 3 per cent in October, continuing lower growth for an 11th straight month.
This came as housing markets perked up, said Scotiabank deputy chief economist Brett House and senior research analyst Alena Bystrova.
“Bank HELOC lending took off near the end of 2016 and accompanied an overall decline in housing unit sales … as inventories tightened in major markets,” they said in their report.
Affordability was “more challenging” then, and Canadians “appear to have opted to continue to borrow to renovate and upgrade existing homes rather than move,” they added.
But “as housing markets have picked up again in 2019, Canadians have reduced their recourse to HELOCs and instead moved back into mortgage borrowing for new homes.”
Read more
- Matt Lundy: Canadians’ debt burden rises, sparking concern
- David Parkinson: Despite a flurry of global rate cuts, the Bank of Canada holds steady. But how long will this last?
- ‘Canada has been entirely dependent on a debt binge to create the illusion of a strong economy.' (Oh, and happy holidays)
- Canadians are defaulting on non-mortgage debt at highest third-quarter pace since 2012
- Matt Lundy: Personal insolvencies hit highest level in a decade
Markets at a glance
Read more
Regulatory ban
A majority of Canada’s provincial securities regulators are moving to ban the sale of mutual funds that pay upfront sales commissions to financial advisers while charging investors early withdrawal fees, and will also eliminate advisory fees charged by discount brokerages where clients receive no advice, The Globe and Mail’s Clare O’Hara reports.
Last fall, after a six-year review, the Canadian Securities Administrators, an umbrella group for all provincial securities regulators, proposed a prohibition on what are known as deferred sales charge, which are fees investors must pay when they pull money out of a mutual fund before a set date.
Regulators also proposed to ban certain advisory commissions that were being collected by discount brokerages for advice they were not providing do-it-yourself investors.
On the same day that regulators opened a public comment period on the proposals, the Ontario government released a statement opposing the ban on DSC fees, stalling the industry’s review.
Now, a majority of regulators - including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, Prince Edward Island, New Brunswick, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon - announced they will move ahead on banning DSC fees. Ontario will not adopt the measure, however.
Read more
No HBC vote until next year
Hudson’s Bay Co. shareholders cannot vote on a privatization offer from the retailer’s executive chairman – if he decides to proceed with it - until well into January, according to an order issued by the Ontario Securities Commission, The Globe and Mail’s Jeffrey Jones reports.
The OSC ruled that Richard Baker and his allies must file an amended takeover circular with the regulator five days before mailing it out to shareholders. A new meeting date would have to be set for at least 14 days after the mailing, according to the order, issued late on Wednesday.
Mr. Baker and his group of controlling shareholders are studying what to do about the $1.1-billion offer after the OSC ordered a shareholder meeting, which had been set for last Tuesday, to be postponed.
Read more
Ticker
Sweden ends negative rates era
From Reuters: Sweden’s central bank ended five years of negative interest rates on Thursday when it raised its benchmark repo rate by a quarter point to zero, defying an economic slowdown and global uncertainty. The increase from -0.25 per cent makes the Riksbank the first of the central banks that pushed rates below zero to inch its way back to what was long considered the floor for interest rates. Rates are still negative in the euro zone, Japan, Denmark, Switzerland and Hungary, and with the exception of Hungary, expected to remain so for some time to come.
BoE holds steady
From Reuters: The Bank of England kept interest rates steady Thursday, saying it was too soon to gauge how much Prime Minister Boris Johnson’s election victory would lift the Brexit uncertainty that has hung over the economy. Two of the BoE’s nine policy makers voted for a second month in a row for a cut to borrowing costs due to fears the job market is deteriorating. But the majority of the monetary policy committee took a wait-and-see approach.
U.K. to cut some business rates
From Reuters: Prime Minister Boris Johnson’s government plans to introduce a 50-per-cent discount in business rates for Britain’s small retailers and pledged a “fundamental review” of the whole system in the future. Business rates are taxes to help pay for local services, charged on most commercial properties, including shops, warehouses, pubs, cafes and restaurants. Setting out its new legislative agenda in a Queen’s Speech on Thursday, the government said the move will hike the current business rates discount for small retailers from one-third off to 50 per cent off during the next financial year and extend that discount to cinemas and music venues.
China announces tariff exclusions
From Reuters: China unveiled a new list of tariff exemptions for imports from the United States, days after the world’s two largest economies announced a Phase 1 trade deal. The tariff waivers will be effective Dec. 26, and will apply to six items, most of them chemical products such as white oil, high-density polyethylene, linear low-density polyethylene, polypropylene and food-grade petroleum wax, the Ministry of Finance said. The exemption will be for one year and end on Dec. 25, 2020, the ministry said.
BoJ holds steady
From Reuters: Bank of Japan governor Haruhiko Kuroda said the global economic outlook has brightened somewhat due to a preliminary U.S.-China trade deal but warned that risks to Japan’s recovery remain high, signalling his resolve to keep the money spigot wide open. He made the comments after the central bank’s widely expected decision to maintain its short-term rate target at -0.1 per cent and that for 10-year bond yields around 0 per cent.
Also ...
- Court sides with Bell, NFL in Super Bowl commercials case
- Accenture beats quarterly estimates on digital and cloud strength
- Greenland chooses Ericsson over Huawei for 5G rollout
- GM issues two recalls for more than 900,000 new vehicles
- Canadian wholesale sales fell 1.1 per cent in October
- China’s economy may face greater downward pressure in 2020, Premier Li Keqiang says
What analysts are saying today
“The impeachment proceedings provide an entertaining distraction, although given the result is such a foregone conclusion, the market impact should be fairly limited. The president, it seems, could offer to sell Alaska back to Russia and the Republican Party might still not vote to impeach him.” Chris Beauchamp, chief market analyst, IG
“The fact that gold prices barely flinched tells you all you need to know about the risks markets are assigning to the impeachment of U.S. President Donald Trump. Oil prices rose to a three-month high as reports from China indicated its negotiators were still in touch with U.S. counterparts.” Jasper Lawler, head of research, London Capital Group
Required Reading
SNC-Lavalin unit in guilty plea
A unit of SNC-Lavalin Group Inc. has pleaded guilty to fraud, ending a legal drama that had engulfed the engineering company and the Trudeau government. The Canadian engineering giant and prosecutors on Wednesday unveiled a deal in which the company’s construction division pleaded guilty to a single charge of fraud related to activities in Libya. It will pay a $280-million fine and receive a three-year probation order. Nicolas Van Praet, Andrew Willis, Greg McArthur and Sean Fine report.
Moving forward
The SNC-Lavalin guilty plea deal allows everyone to move forward – finally. Read columnist Andrew Willis on the subject.
Plenty of jobs
There are a lot of jobs out there, David Parkinson writes. So why won’t Canadians move to get them?