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Subtle suggestions the BoC is confident in the housing market

  • Jason Ellis, Managing Director, Capital Markets

Good Morning,

Thanks for tuning in.  Here’s a quick summary of some things that happened this week.

Bank of Canada
As expected, the Bank of Canada left its overnight rate unchanged at 0.50% on Wednesday.  While the banks comments remain relatively dovish, they have taken a more constructive tone.  I’ve even heard the term “soft hawkish” thrown around.  Seriously.  The current level of stimulus was described as appropriate “at present” and slack in the economy is no longer characterized as “material”.  The BoC also said that the adjustment to lower oil prices is largely complete.  Finally, the bank made no reference to Home Capital Group whatsoever, suggesting the BoC is generally confident in the housing market. These subtle changes may not suggest an imminent hike, but any lingering expectations for an easing in 2017 should be gone.  The bank could be getting closer to its first rate hike in nearly seven years.  Eventually.  BoC next meets on July 12th.  No change in policy expected at that meeting.

The Fed
The May FOMC minutes were released this week and suggested that recent data weakness was transitory and that a June rate hike is probable.  Nothing really new or newsworthy.  The Fed next meets on June 14th.  Fed Funds futures imply a 100% chance of a hike.  So you’re saying there’s a chance?

Debt Capital Markets
Manulife bank was in the market on Tuesday with a $500 million 5 year senior deposit note at GoC+107.  The deal attracted 55 investors and was upsized from $300 million resulting in the largest offering ever by the bank.  We haven’t seen a new deposit note issue from any of the big 5 banks recently, but for context, they’re trading in the GoC+85-90 range.

Generic 5 year Credit Spreads vs GoC Curve
Speaking of spreads, once in a while it’s good to see where things are relative to where things have been.  Credit spreads don’t necessarily mean a lot without context.  Here’s table with some numbers.  Enjoy.

 

Current

1 month ago

3 months ago

6 months ago

1yr Tight

1yr Wide

CMB

37.5

37.5

41.5

40.0

36.0

48.5

Ontario

51.0

56.5

56.5

61.5

50.5

71.0

Deposit Notes

89.0

75.0

79.0

90.0

73.0

111.0

Ontario/CMB

13.5

19.0

15.0

21.5

12.5

25.0

Dep Notes/Ontario

38.0

18.5

22.5

28.5

18.5

42.5

Banks
Neither nervous housing markets nor an uncertain U.S. business climate has dampened the performance at Canada’s Banks.  BMO, TD, RBC, and CIBC all announced strong earnings results in the second quarter this week. 

Stock prices for the big six banks have been fading since March, hampered by worries about the alternative mortgage market and allegations of aggressive sales tactics.  Never fear…RBC CEO Dave McKay told analysts “we remain confident in the Canadian economy, the strength of our mortgage book and our prudent credit adjudication processes”.  The TSX Capped Financials Index (XFN) is down 4.3% over the last month but unchanged year to date. 

Other News
Sir Roger Moore, (aka Bond, James Bond) died this week at the age of 89.  I have to admit I was saddened by the news.  To be honest though, if I could choose, I’d rather be Jason Bourne than James Bond.  Only with fewer people trying to murder me.

Housing isn’t overpriced and consumers aren’t over leveraged.  Trust me.  I’ve done a study.

New rules to reduce methane emissions and air pollution from Canada’s oil and Natural gas industry were announced on Thursday.  The plan includes a goal of reducing methane emissions by 40 to 45 per cent by 2025.  That’s all good, but if we really want to get to the root of the problem, we need to do something about the cows.  Cow flatulence produces methane in staggering quantities.  Agricultural methane output (aka cow farts) could increase by 60% by 2030.  It’s true.  They’ve done studies on that too.

Finally, republican Greg Gianforte, won an election for Montana’s seat in the US House of Representatives on Thursday, one day after he was charged with assault for body-slamming a reporter who asked him about the Republican healthcare bill.  Strangely, after reading the story, the most interesting thing I learned is that people from Montana are called Montanans.  Montanans.  It’s fun to say.  Montanans.

Have a great weekend,

Treasury Guy