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Briefing highlights

  • What to watch for in debt report
  • Global markets largely on the rise
  • New York poised for stronger open
  • Canadian dollar above 77 cents
  • What to expect on national home sales

Credit growth may be slowing in Canada, but that won't stop what's expected to be an eye-popping look at consumer debt today.

And it will serve as the third warning this week alone.

Bank of Montreal expects Statistics Canada may report this morning that the key measure of household credit market debt-to-disposable income hit a fresh record in the fourth quarter of last year, particularly as home buyers scrambled to beat new mortgage qualification rules.

That measure stood at a record 171.1 per cent in the third quarter, which means Canadians owed $1.71 for every dollar they have to spend, and BMO senior economist Robert Kavcic believes the fourth-quarter reading could top that.

"The closely scrutinized household debt-to-disposable-income ratio could push a new record high in Q4," Mr. Kavcic said in a lookahead to today's report, noting later in an interview that home sales accelerated at the end of last year before the new mortgage rules from the Office of the Superintendent of Financial Institutions, the commercial bank regulator.

"While the Bank of Canada highlighted slowing credit growth in its latest policy statement, that became more pronounced early in Q1 as housing activity slowed," Mr. Kavcic added.

"Still, the historically-high debt levels do suggest the economy is more sensitive to interest rates, one reason for caution within the walls of the Bank of Canada."

Royal Bank of Canada expects to see little change in several of the indicators, including debt to income, debt to assets and debt to net worth.

"Rising home prices and equity markets likely lifted household assets by 2 per cent in the quarter," said assistant chief economist Paul Ferley.

"We expect rising mortgage loans and consumer credit pushed household debt up by a slightly less 1.5 per cent, nearly matching the previous quarter's increase," he added.

"That would be enough to raise household net worth after two consecutive quarters of little change. And with household incomes keeping up with debt growth this time around, we expect the always popular debt-to-income ratio will hold relatively steady."

The central bank is monitoring the impact of its earlier rate hikes on consumers who are among the most indebted in the world, though it noted last week that growth in household credit has slowed for three months in a row.

We already know from a previous reading that the debt service ratio inched up in the final three months of last year as interest rates rose, RBC's Mr. Ferley noted.

"The Bank of Canada will be keeping a close eye on how highly indebted households are being impacted by higher rates," he said.

"They'll also be looking for signs that tighter monetary policy and changes in housing regulation are slowly working to address financial system vulnerabilities associated with elevated debt levels."

Mr. Kavcic noted that "Canadian households look less levered" as two other measures, debt to assets and debt to net worth, are far below their peaks.

"That said, net worth dipped from record levels recently, and that trend could continue in Q4 with Toronto single-detached home prices still falling."

Canadians have been warned for years about their nasty debt habits, mostly recently on Sunday when the Bank for International Settlements, a group made up of the world's central banks, again red-flagged the country as it released its early warning signals on potential stress in the financial system.

Moody's Investors Service joined the chorus this week, too, in a report on Canada's banks.

Borrowers are "vulnerable to an economic downturn, despite strong consumer credit quality metrics to date," the U.S. ratings agency said.

"The strong credit quality of Canadian consumer loans, thanks largely to record low unemployment in recent years, is under threat on several fronts: Debt-servicing costs are increasing because of interest rate hikes, the proportion of riskier uninsured mortgages is on the rise, and longer auto loan terms point to greater borrower vulnerability," Moody's warned.

"As debt-to-income levels continue to edge up, the first bite into bank asset quality will be felt in unsecured credit card portfolios."

Defaults have been "very low," the agency added, but noted that debt-servicing needs will probably rise amid the Bank of Canada's rate hikes.

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Stocks largely on rise

Global markets are mixed so far, but largely on the rise as New York heads towards a stronger open.

Tokyo's Nikkei gained 0.1 per cent, and Hong Kong's Hang Seng 0.2 per cent, with the Shanghai composite down marginally.

In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were up by between 0.1 and 0.3 per cent by about 8:10 a.m. ET.

New York futures were also up, coming off yesterday's slump on fears of a U.S.-China trade war, and the Canadian dollar was above 77 US cents.

"Wikipedia tells me that as well as being the anniversary of Julius Caesar's assassination, the Ides of March was the Roman deadline for settling debts," said Kit Juckes of Société Générale.

"It's mostly known as an 'unlucky day' now, but it's hard to see anything much happening in markets one way or the other today. I'll regret writing that if the trade-war-related angst afflicting risk sentiment turns into downright terror, of course."

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What else to watch for today

We've seen several February home sales reports from local real estate boards across the country, but we'll get the full national picture this morning.

And BMO's Mr. Kavcic expects it to show a drop in sales of 12 per cent from a year earlier, and a fall in average prices of 5 per cent.

The MLS home price index, which is considered a better measure, should show a slower rise of 6 per cent.

Of course, the national numbers get skewed by Vancouver and Toronto, the latter having seen a sales decline of 35 per cent in February from a year earlier.

"Other major cities didn't see as dramatic declines, but the overall picture is subdued, with Vancouver sales down 9 per cent year over year, and Calgary down 18 per cent year over year," Mr. Kavcic said, noting Montreal "bucked the trend" with a 5-per-cent gain.

"One of the key price themes is ongoing double-digit gains in the Toronto and Vancouver condo markets, even while detached home prices are falling."

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