Monday, July 27, 2015

Canadian Retail Sales

Canadian retail sales rose 1 per cent in May, the third increase in the past four months. Strength in retail sales was broad based with rising sales in 9 of 11 retail subsectors.  In BC, retail sales were also up 1 per cent on a monthly basis and were up 8.3 per cent compared to May 2014.

Solid consumer spending could help push May's GDP report into positive territory, though growth in the Canadian economy is still tracking at negative 0.6 per cent for the second quarter. In BC, however, economic growth is tracking at a healthy rate of 2.5 per cent.

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Canadian Consumer Price Inflation

The Consumer Price Index (CPI) rose 1 per cent in the 12-months to June, a slight acceleration from the 0.9 per cent inflation registered in May. Excluding  a 9 per cent decline in energy prices, CPI was up 2.1 per cent year-over-year. Inflation measured by the Bank of Canada's core CPI index, which excludes fuel, food and other volatile components, continued to trend above the Bank's 2 per cent target, posting and increase of 2.3 per cent in June.  In BC, inflation registered just 0.8 per cent in the twelve months to June.

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Bank of Canada Interest Rate Announcement

The Bank of Canada announced July 15, 2015 that it is lowering its target for the overnight rate by 0.25 percentage points to 0.5 per cent. In the press release accompanying the decision, the Bank emphasized that while this additional stimulus is required to help return the economy to full capacity given a contraction of GDP over the first half of the year, vulnerabilities associated with household imbalances could edge higher.

Although core inflation remains close to the Bank's 2 per cent target, growth in the Canadian economy has stagnated. Today's rate cut should help to partially offset the negative impacts of low energy prices in the parts of Canada hardest hit by the dramatic decline in oil prices and oil and gas activity while providing further stimulus to regions like British Columbia that are enjoying more robust growth. For housing, the impact in markets like Vancouver or the Fraser Valley that are already experiencing very strong demand may be relatively muted.  For other markets that been more negatively affected by low energy prices, including some areas of Northern BC, this may help spur housing demand

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B C Home Sales Post Second Strongest June on Record

The British Columbia Real Estate Association (BCREA) reports that a total of 11,294 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in June, up 25.6 per cent from the same month last year. Total sales dollar volume was $7.1 billion, a 42.6 per cent increase in comparison to the previous year. The average MLS® residential price in the province rose to $631,962, a 13.5 per cent increase since last June.

 “BC home sales posted the second strongest June on record,” said Brendon Ogmundson, BCREA Economist. “A growing provincial economy and record low borrowing rates continue to push demand higher, particularly in the lower mainland.”

“While consumer demand is surging, the supply of homes for sale has not kept pace. The resulting imbalance of supply and demand has put upward pressure on prices in many areas of the province, most notably with respect to single-detached homes,” added Ogmundson.

Year-to-date, BC residential sales dollar volume increased 36.8 per cent to $32.6 billion, when compared with the same period in 2014. Residential unit sales climbed by 23.1 per cent to 51,559 units, while the average MLS® residential price rose 11.2 per cent to $631,946.

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Canadian Employment

Canadian employment declined by 6,400 jobs in June following a surge of close to 60,000 jobs in May. The national unemployment was unchanged at 6.8 per cent and total hours worked, which is strongly correlated with economic growth, increased 2.1 per cent compared to June 2014.  Employment grew by a total of 33,000 jobs in the second quarter, as a robust 143,000 full-time jobs was partially offset by a decline in part-time work. Overall, today's employment report is neither strong enough to put off talk of further monetary stimulus by the Bank of Canada nor weak enough to push the odds of a rate cut beyond that of a coin flip.

In BC, employment posted a second consecutive strong month, growing by 15,400 jobs in June. Full-time employment accounted for all of the gains, rising by 36,300 while part-time employment declined. The provincial unemployment ticked 0.3 points lower to 5.8 per cent.

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Mortgage Rate Outlook

Canadian mortgage rates have, more or less, held steady in the second quarter after trending surprisingly downward to start the year. The 5-year fixed rate, the qualifying rate for all insured mortgages, remains at 4.64 per cent, the lowest level on record. Key bond yields, from which mortgage rates are priced, have risen from their own record-low levels; however, those increases have yet to nudge mortgage rates higher and are unlikely to do so during the important spring/summer home-buying season.

With the Canadian economy unexpectedly contracting in the first quarter, due to last year’s dramatic decline in oil prices and the associated downtrend in CPI inflation, there is very little upward pressure on borrowing rates.

Given the current state of the Canadian economy, perhaps the most immediate threat to the current low-rate environment is the prospect of tighter monetary policy from the US Federal Reserve (Fed). After being effectively cut to zero during the financial crisis of 2008, the Fed’s overnight target rate has been kept at that level for the past seven years. Fed Governor Janet Yellen and other key members of the Federal Open Market Committee have indicated an intention to begin increasing rates this year. However, there are many reasons to believe that the Fed will not, or at least, should not, raise rates this year. The US economy contracted in the first quarter, although there is argument over the cause. Some analysts attribute the decline to more severe than expected weather and labour disruptions, while others see a technical problem with how statistical agencies in the US are seasonally adjusting the data.

Whatever the cause, it is clear that the US economy is not currently performing at the level many expected it would in 2015. While the job market continues to post solid employment gains and the US unemployment rate is sharply lower, neither wage nor inflation have responded as expected to tighter labour markets. Add in a dose of uncertainty from seemingly endless debt negotiations in Europe, and there is a strong case for the Fed to hold off on raising rates this year.

Even so, we have built into our forecast some modest uplift in long-term bond yields this year which could translate to a moderate rise in mortgage rates. We forecast that the five-year fixed rate will end the year at 4.79 per cent while the 1-year rate will remain at 2.85 per cent.

Economic Outlook

The Canadian economy contracted 0.6 per cent in the first quarter, a much worse outcome than the Bank of Canada’s pessimistic prediction of zero growth. Naturally, a negative quarter begs the question of whether or not Canada is in a recession, the standard definition being two consecutive quarters of negative growth. With one down quarter already on the books and parts of the economy still reeling from low oil prices, it is possible that the Canadian economy could experience a brief and shallow recession this year.

More importantly, Canada is a diverse economy and the negative oil shock has not had symmetric impacts across the country. Consumer spending in non-oil producing regions remains very strong and housing markets in Ontario and BC are on pace to post multi-year highs in sales. In contrast, oil-producing regions of the country have been facing the brunt of the oil shock via lower exports, business investment and wages. We forecast that the Canadian economy will ultimately avoid a technical recession in 2015; with growth of close to 1 per cent in the second quarter before accelerating to 2.5 per cent in the second half of the year. For 2015 as a whole, growth is likely to register about 1.5 per cent. Interest Rate Outlook The Bank of Canada has kept its target for the overnight rate unchanged at its past three interest rate decision since surprising markets with a rate cut in January.

With oil prices stabilizing and core inflation firming around its 2 per cent target, a further loosening of monetary policy is becoming more unlikely, although a worse than expected first quarter has prompted renewed speculation of further interest rate cuts. However, if economic growth recovers over the next couple of quarters in-line with the Bank’s forecasts, attention will shift once again to the timing of future rate increases. While the door is certainly open for a further reduction in the Bank’s overnight rate, ultimately, we predict that the Bank will opt to remain on hold for the rest of the year. While the first quarter was significantly worse than expected, there is little that the central bank can do to combat the primary factors dragging the economy down at the start of the year: low oil prices and unanticipated sputtering of the US economy. Rather, we believe that the Bank will continue to pin its hopes on continuing stability in global oil prices and a second half US economic recovery spurring Canadian exports.

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Canadian Housing Starts

New home construction in Canada increased 3 per cent in June to 202,818 units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts of 184,000 units SAAR was up slightly and is in-line with Canadian household growth.

Housing starts in BC rose from just over 24,000 units SAAR in May to 35,000 units SAAR in June.  On a year-over-year basis, housing starts jumped 30 per cent. Single-detached starts were 12 per cent higher year-over-year while multiple unit starts were up 38 per cent compared to this time last year. Year-to-date, housing starts in BC are up 15 per cent.

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were up 39 per cent year-over-year in June as both single and multiple unit starts posted double digit increases. In the Victoria CMA, a sharp decline in multiple units starts dragged new home construction down 29 per cent year-over-year. Total housing starts in the Kelowna CMA were up 7 per cent year-over-year in June as strength in multiple unit starts overcame a dip in construction of single units. Housing starts in the Abbotsford-Mission CMA spiked 37 per cent higher compared to June 2014, propelled by stronger single unit starts.

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Wednesday, July 8, 2015

Canadian Building Permits

The total value of Canadian building permits fell 14.5 per cent on a monthly basis in May and was down 4 per cent year-over-year. Weakness in permit activity was widespread both across residential and non-residential sectors and geographically with 5 provinces posting monthly declines. 

Following two months of very strong permit activity, the value of building permits issued in BC declined 8 per cent on a monthly basis, but was up 8 per cent year-over-year. The always volatile non-residential permits tumbled 38 per cent on a monthly basis and were 22 per cent lower than May 2014. The value of permits in the residential sector increased 7 per cent in May on a monthly basis and were 22 per cent higher year-over-year.  

Construction intentions were mixed in BC's four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA more than doubled on both a monthly and year-over-year basis. In the Kelowna CMA, permits jumped 98 per cent from April and were 93 per cent higher year-over-year.In the Vancouver CMA, permits fell 13.2 per cent on a monthly basis but rose 7 per cent year-over-year. 
 In the Victoria CMA, permit activity was down 34 per cent on a monthly basis and was 19 per cent lower year-over-year. 

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