(compiled by Calum Ross Mortgage Team)

WEEKLY ARTICLES OF INTEREST

TORONTO – Softening home prices drew Canadians back into the housing market in a big way in the first quarter, according to a Royal Bank (TSX:RY) report. RBC Economics says home affordability recorded some of the biggest quarterly improvements on record in the first quarter. Senior economist Robert Hogue says with market turmoil decreasing and credit flows increasing, resale activity has “rallied impressively.” He says what is most impressive is how widespread this rebound has been, “with all major cities in Canada experiencing a revival.” “read more….”

Home sales in the Greater Toronto Area have rebounded in a big way after a brutal slump, increasing nearly 30 per cent since last June and heralding the return of a seller’s market. The Toronto Real Estate Board reports that this was the best June on record, with 10,955 single-family homes sold last month, and the average price hitting $403,972 – up 2 per cent from the same month last year. “read more….”

Mortgage applications in the U.S. rose last week as refinancing jumped by the most since March and purchases climbed to the highest level in three months. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 11 percent to 493.1 in the week ended July 3, from 444.8 in the prior week. The group’s refinancing gauge surged 15 percent, while the index of purchases gained 6.7 percent.“read more….”

“THIS WEEK’S HIGHLIGHTS”

Canadian interest rates to remain low; long-term bond yields to grind lower with USTs

Against the backdrop of burgeoning government deficits and commensurate increased bond supply and rising US Treasury yields, mid- and long-term interest rates rose in Canada in May. Inflation worries remain under wraps as the combination of growing economic slack, a stronger Canadian dollar (reducing imported goods prices) and lower commodity prices compared to a year ago sets up for the headline CPI rate to move lower. Still, the pressure from impending supply both in Canada and the United States is keeping yields up. The forecast is that U.S. yields will slip as the Fed’s quantitative easing program gains traction paves the way for Canadian yields to dip as well.

Canadian dollar’s strength presents clear and present danger to economic outlook

The recent fluctuations in currency markets reflect investors’ rising risk appetite and must acknowledge the impact of these shifts on the economic outlook. In the near-term, it is expected that the dynamic that supported the increase in risk appetite — with economic data reports generally outperforming weak expectations — will fade as forecasts are ratcheted up to align with the turnaround in the global economy’s momentum. This scenario raises the risk that the data won’t continue to exceed expectations, which will put riskier assets back under pressure and revive support for the U.S. dollar. In this environment, currencies like the Canadian dollar and the euro will give up some of their recent gains, although are unlikely to return to their cyclical lows.

Longer-term, the pressures on the U.S. dollar are likely to re-emerge as the price of the proactive central bank and government policies take its toll. For the economy, the Canadian dollar’s rally means that the cost of imported machinery and equipment receded once again, giving Canadian companies relief as they invest in productivity-enhancing capital goods. On the downside, Canadian exporters, who are already struggling, face another obstacle to increasing demand for their products. On balance, the risks have grown that the trade account, which was one of the few supportive factors for the economy in the first quarter, will return to acting as a drag on output. The positive effects of the rally in commodity prices on incomes will mitigate some of the downward pressure on the economy. Oil prices are more than double their December lows and non-energy commodity prices have gained 4.2% from their early March lows. The rebound in commodity prices juiced the Canadian dollar’s rally, propelling the currency to levels that were slightly above those predicted by the Bank of Canada’s currency model

Inflation rate stays in positive territory

The headline inflation rate rose by 0.7% in May, but the annual inflation rate continued to moderate, coming in at 0.1% from 0.4% in April. The core measure, calculated by the Bank of Canada which excludes the eight most volatile components, increased by 0.4% and was 2% higher than a year earlier, up from 1.8% in April. The increase in the headline rate reflected an 8.3% jump in gasoline prices, rising passenger vehicle insurance premiums and higher costs for traveler accommodation. The unexpected rise in the year-over-year rate reflected the sharp increase in the cost of food, which was 6.4% higher than in May 2008. Food makes up 17.04% of Canada’s CPI basket. Vehicle insurance premiums were 4.3% higher than in May 2008. Mitigating these upward pressures were sharply lower gasoline prices relative to a year earlier (-25.1%) with other fuel prices following suit, falling vehicle prices (-6.8%) and lower homeowner’s replacement costs (-3.4%). Gyrations in energy prices continue to be a heavy influence on the direction of Canada’s inflation rate, which moderated to 0.1% from April’s 0.4% even in the face of a sharp monthly increase in May. Excluding the energy component, the inflation rate has been much more stable, trading between 1.5% and 2.5%, while the all-items inflation rate’s range was between 3.5% and 0.1%. The core measure, which aims to provide a read on underlying price pressures, rebounded back to the Bank of Canada’s official 2% target in May. While the headline inflation avoided falling into negative territory this month, it is still expected that negative prints in the months ahead. With the economy undergoing a relatively severe downturn and the U.S. economy on track for the worst recession in the post-war period, the central bank and economists expect that core prices will ease relative to a year earlier.

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