Carney's Big Call

Paul Vieira, Financial Post

Ottawa -- Bank of Canada governor Mark Carney has had a busy time of it since taking over as the country's central banker 27 months ago, mostly tackling the financial crisis, mapping out the road to recovery and reassuring Canadians that at the end of the day the bank's extraordinary policies would work.

The one thing he has yet to do during his term, however, is raise interest rates. That might be about to change on Tuesday. If he does pull the trigger - and that is what most analysts expect - it won't be after grappling with competing forces that convey two starkly different messages about the economic outlook.

"We are at point where it is a tug of war between structural issues that are facing the eurozone and a very strong economic cyclical backdrop," says Stéfane Marion, chief economist at National Bank Financial.

Weighing on the governor are the economic data, which call out for a rate hike - as much as 50 basis points, some reckon. The data have been consistently strong and surprising to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank's preferred 2% target. The sterling fundamentals prompted the central bank last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July, leading traders to price in a nearly 100% chance of a rate hike on June 1.

That was until sovereign debt worries exploded in Europe, once Greece formally asked for international help days after the last Bank of Canada rate decision. That sparked an across-the-board retreat in global equity markets, down 9.3% since the beginning of May, as traders sold stocks and poured into risk-averse U.S. treasuries and other government securities on fears that another credit crunch was at hand. Mr. Carney is likely aware of this better than most, given his capital markets background from Goldman Sachs.

The most worrying sign on Mr. Carney's radar screen might be the small but steady increases in the cost of borrowing among banks, a signal European lenders are finding it tough to access cash from their peers on concern over how much Greek, Portuguese and Spanish debt they hold.

In the end, the consensus is Mr. Carney is leaning toward a rate hike - a modest one, though, of 25 basis points. The thinking is, an ounce of prevention now is worth a pound of cure later.

"We can't look at things in a vacuum, because there are so many other factors besides Europe's issues" says Jonathan Basile, an economist with Credit Suisse in New York who closely watches Canadian markets. "The truth is the macroeconomic evidence is outweighing the financial risks right now."

The last time the Bank of Canada raised its benchmark rate was in July 2007, by 25 basis points to 4.5%. At the time, former governor David Dodge said the economy was operating above its production potential, and inflation was likely to stay above its 2% inflation target for longer than forecast.

Little did Mr. Dodge know that the U.S. subprime crisis would morph into the worst financial crisis since the Great Depression, roiling markets and economies around the world. This is why Europe's recent fiscal woes have triggered a case of nerves, and might prompt Mr. Carney to rethink any rate move.

"The Bank of Canada wants to raise rates, but it doesn't have a crystal ball," CIBC World Markets said in a note to clients. "It can't be certain that the recent financial market downturn isn't going to morph into something more severe that would make a rate hike look out of place."

There's another school of thought, though, that suggests markets have overreacted to a regional problem. In this context, it is key to remember the Bank of Canada didn't expect the eurozone to contribute much to global growth, envisaging only 1.2% expansion this year and 1.6% in 2011.

"The European picture will calm down and people will realize it is not as dramatic as being played out," says Carlos Leitao, chief economist at Laurentian Bank Securities.

Yes, he acknowledges, the debt-ridden southern European economies have tough years ahead. But other countries, led by Germany and France, are going to capitalize on the lower euro and boost their exports to emerging economies and North America, which will help offset the drag from the so-called Club Med nations.

Besides Europe, Mr. Carney has other factors to consider.

Canada's sovereign debt levels are indeed much better than the industrialized world, as our politicians like to remind us. But the amount of debt held by households, measured as a percentage of disposable income, stood at a historical high of 146% - of which 98% is mortgage related - at the end of 2009, rating agency DBRS estimates. That would put Canadian households ahead of the United States but behind Britain on this measure. A rate hike would signal it might be time to live more modestly and refrain from too much debt-financed consumption (which helped fuel those nasty asset bubbles that central banks may want to pay more attention to in the aftermath of the subprime debacle).

Mr. Carney's other challenge is to explain why, and what's ahead. He has come off a period where he provided extraordinary guidance to markets. Don't expect similar language from the governor.

If anything, Mr. Marion warns the central bank should refrain from using the type of guidance the U.S. Federal Reserve deployed in 2004, when it signalled a period of "moderate" rate hikes were in the offing.

In retrospect, the Fed's use of the word moderate "encouraged more financial excesses," leading to the subprime bust, Mr. Marion says. "Carney doesn't have to be brusque about it. He has the luxury to start slowly, and leave his options open," from pausing should Europe deteriorate to hiking aggressively, by 50 basis points, if conditions warrant.

Mr. Carney reminded us recently that "nothing is pre-ordained" at the Bank of Canada. He's likely to drive home that point on Tuesday, rate hike or not.

Financial Post

pvieira@nationalpost.com

Read more: http://www.financialpost.com/news-sectors/story.html?id=3084621#ixzz0pWefy3St

Carney's Big Call

Home foreclosures don’t add up

Andrew Allentuck, Financial Post

Why do people default on mortgage and other loans? It turns out that it's not so much the amounts they owe, but that they are unable to do the math that tells them exactly what their financial situation looks like. Lack of ability to add turns out to be a cause of many consumer insolvencies.

The damage caused by failure to do sums becomes evident when people find themselves in credit counselling.

"The common characteristic of people in serious debt is that they don't know how to budget or track expenses," says Sandra Sherk, executive director of the Credit Counselling Service of Ontario's Durham Region. "They let what they owe and incidentals get ahead of them."

The problem is not limited to Canada.

In a Federal Reserve Bank of Atlanta working paper published in April 2010, economists Kristopher Gerardi, Lorenz Goette and Stephan Meier found, "a large and statistically significant negative correlation between financial literacy and measures of mortgage delinquency and default."

Translation – folks who can't add up their obligations are more likely to default on them than those who can do their sums.

The researchers asked a series of questions to test responders' financial fluency.

For example: "a second hand car dealer is selling a car for $6,000. This is two-thirds of what it cost new. How much did the car cost new?"

Gerardi and his Fed colleagues connect lack of financial fluency to the U.S. mortgage meltdown. Their argument – soaring house and condo prices in 2004 to 2008 led some people to think that finance cost did not matter and therefore did not need to be tracked or even understood. All that followed is history, but as Gerardi noted, low levels of saving are correlated with inability to do simple calculations. When income, which is correlated with education, is statistically removed from the analysis, the conclusion remains – if you can't add up what you owe, you can be in big trouble. And that's how innumeracy, the lack of ability to cope with numbers, became one of the causes of the mortgage meltdown.

What happened to arithmetic? In many schools, the three Rs – readin', ‘writin' and ‘rithmetic – have had to make way for the teaching of social skills and community values. According to Statistics Canada, high school dropout rates, 12.2% for young men and 7.2% for young women in 2004-2005, have declined from the level in 1990-1991 when the rates were 19.2% and 14.0%, respectively. The dramatic improvement in school retention rate reflects students' awareness that education is the ticket to employment and a good income. It also reflects grading standards that allow those with poor academic skills to advance rather than be stigmatized by flunking out. The consequence of this shows up when graduates can't handle questions such as another asked in the Atlanta Fed survey:

"In a sale, a shop is selling all items at half price. Before the sale, a sofa cost $300. How much will it cost in the sale?"

Lack of basic arithmetic skill compounds a serious and growing problem. The days of a farmer or shopkeeper with one debt to one bank are long gone. As Brock Cordes, a lecturer in marketing at the Asper School of Business at the University of Manitoba notes, "people are baffled by the many credit obligations they may have. A few decades ago, a person might have one credit card and one mortgage. Today, he may have seven credit cards, a few lines of credit, and a mortgage. There are different payment options. And there is ever more fine print on credit card disclosures and other documents. People have lost the ability to add. They let little calculators do it for them. It is no wonder that innumeracy is a problem."

Inability to add shows up in Canadian bankruptcy data. Bill Courage, a Chartered Insolvency Restructuring Professional in the Owen Sound, Ont., office of BDO Canada LLP says, "lack of numeracy is a contributing factor in personal bankruptcy. People don't keep track of what they are doing. ‘No money down and $27.95 per month starting next year, is something that they can understand, but they don't use their common sense. Many people just don't add up what they owe."

This casual attitude toward debt shows up when snowballing debts become an avalanche of obligations. "People who get into credit trouble don't watch the cost of loans They go from 5% on a mortgage to 15% to 19% on standard credit cards like Visa, then they load up on credit on store plastic that may have 28% interest rates, then borrow from payday loan stores at rates that may work out to 58% per year," Ms. Sherk explains. These rates, to which they agree, trap them in debt forever, she explains. "If you owe $3,000 on a major credit card and you pay $60 per month, which is a minimum, and the interest rate is 17%, it will take 7 years and 4 months to pay if off."

What to do? "We prepare people for budgeting, even if we turn them down for a loan," says Laura Parsons, area manager for specialized sales at the BMO Financial Group in Calgary. "It is not so much that people don't know that they should sharpen their pencils, it's not knowing what to do with them."
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/story.html?id=3068447#ixzz0p81lNaoP

Day of Decline

John Greenwood, Financial Post In a worrying replay of the crisis of 2008 and 2009, lending rates in Canadian credit markets continued to react to the growing turmoil over European debt, with key overnight bank lending spreads doubling since February.

"We are starting to see interbank lending rates back up again and that's an unfortunate development," said Doug Porter, deputy chief economist at BMO Capital Markets. "We are starting to see investors shun any kind of risky trade again, whether corporate bonds or equities. We are seeing risk aversion right across the board."

While Canada has only modest direct exposure to troubled European countries, like other major economies it is feeling the indirect impact of turmoil in global financial markets sparked by fears of a possible sovereign default.

The early days of the crisis that climaxed early last year were characterized by a steady retreat by lenders from any kind of risk, reflected in steadily rising rates that banks charged each other for short-term loans, which eventually moved so high that interbank lending was effectively halted.

Conditions in Canadian credit markets are still nowhere near where they were in March 2009 at the height of the storm but the widening of spreads in just about every sector is a worrying "echo of what happened," Mr. Porter said.

The comments come after German Chancellor Angela Merkel slapped a ban on the short-selling of certain kinds of stocks and bonds, that sparked anger among other European leaders and sent equity markets into a tailspin as investors concluded the European bailout was unravelling.

The closely watched London Interbank Offered Rate climbed to the highest level in 10 months earlier this week as international banks hoarded money and investors grew more leery of risk.

Meanwhile, a U.S. Federal Reserve governor yesterday warned that the European troubles could spark another financial crisis, with credit markets freezing up around the world all over again.

"The European sovereign-debt problems are a potentially serious setback," Daniel Tarullo said in testimony before congressional subcommittees.

But Mr. Porter said the markets have now moved beyond that and are now focused on the possibility of "a deeper global slowdown" that would result if the European issues are not contained.

As a major global economy roughly the size of the United States, Europe is a key driver of global growth and if European demand starts to fall, as is already happening, the rest of the world will feel it.

As a major global economy roughly the size of the United States, Europe is a key driver of global growth.

If European demand starts to fall, as is already happening, the rest of the world will feel it.

That includes regions such as Canada and China that have so far avoided serious recessions.

Indeed, Canada emerged largely unscathed from both the crisis and the economic downturn that followed partially because Canadian governments did a better job of handling their finances than most other countries.

But one reason for the widening of credit spreads on Canadian government debt may be that investors are starting to take a second look at the quality of that debt.

In a report titled Is Canada Really So Pristine on the Debt Front, Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc., notes that Canada is average with other major countries in terms of the size of its debt, about 83% of gross domestic product, sandwiched between Britain (78%) and the United States (93%).

As a result of being downgraded by most of the rating agencies about 15 years ago, Canada lost its appeal to many foreign investors and little Canadian debt is now held by foreign institutions, which is a good thing when credit markets are roiled.

However, Canada still faces the worry that holders of its debt may not be willing to renew, known as "roll-over risk," and once again we are about at "the middle of the pack" internationally, Mr. Chandler says in the report released yesterday.
Read more: http://www.financialpost.com/story.html?id=3054501#ixzz0oYt2D0pG

Day of Decline

Friday's Inflation Rate Expected to Open Door to Interest Rate Hikes: Economists.

By Julian Beltrame, The Canadian Press

OTTAWA - Canadians likely have only two weeks left to enjoy historically low interest rates.

With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.

Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.

Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.

The reason, says the bank's director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.

"The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they've got to start adjusting now to get the interest rate at what would be considered more neutral," she explained.

"And if they don't go now, it could mean we see bigger adjustments down the road," she added.

Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.

Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.

The TD Bank and many others believe Canada's policy rate will hit 1.5 per cent by year's end, more in line with inflation.

Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.

He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.

But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.

The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.

Those numbers are still below the bank's two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.

That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year's end.

"Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets," write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.

Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there's a big downward surprise in underlying inflation Friday.

Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country's manufacturing and exporting sectors.

But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie's recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds.

Friday's Inflation Rate Expected to Open Door to Interest Rate Hikes: Economists.

Designing a Water Efficient Garden

You can create a lush, colourful garden that requires little maintenance or
water by applying the seven principles of xeriscaping – an approach to
designing landscapes so that their water requirements correspond to local
climatic conditions. While these are sound principals for any garden, they
are particularly useful if you live in a region with low rainfall or that
experiences water shortages such as the Okanagan.

1. Design for your site and your needs
Sketch your lot including property lines, buildings, driveways and
features that will remain. Add trees, shrub and flower beds, lawn
areas, patios, decks, etc. Consider the specific conditions of your yard,
taking into account that water requirements will differ in shady versus
sunny spots, and slopes versus flat areas or depressions. Moisture
availability for your plants will also differ according to your soil type.
Sandy soils drain water whereas clay soils hold water.

2. Group plants with similar water needs to make watering more
efficient
Shrubs and perennials should be grouped together in mulched beds.
Trees should also be clustered in mulched beds rather than isolating
individual specimens in lawn areas. This will help to reduce moisture
loss and competition.

3. Amend the soil
First, find out what type of soil you have and improve its water
retention capabilities accordingly, for example, by adding compost or
other organic materials.

4. Size your lawn area to meet your practical needs for play and
traffic
Avoid many small or narrow lawn areas in favour of consolidated lawn,
to make them easier and more efficient to water. For primarily visual
areas, consider water-efficient ground covers, perennials or shrubs. For
foot-traffic routes or narrow spots, such as side yards, a permeable
inert surface such as wood chips or natural stone requires no water.

5. Choose plants that are well suited to your climate and site
conditions
Consult your local garden centre to find plant lists. Know your site
including its soil types. In shady areas, use shade-tolerant species or
consider a woodland shade garden. In sunny spots, use drought
tolerant, sun-loving species or consider a wildflower meadow. Drought
tolerant species should be used on rapidly draining slopes (avoid turf
grass), but you can consider moisture-loving plants in depressions or
low spots.

6. Use mulch

7. Use an efficient irrigation system and appropriate maintenance
(Source: cmch.ca)

Designing a Water Efficient Garden

GST /HST New Housing Rebate

From July 1, 2010, new home sales in Ontario and BC will be subject to the
new Harmonized Sales Tax (HST).

In Ontario, the existing 8% Provincial Sales Tax (PST) and 5% federal Goods
and Services Tax (GST) will be combined to create the 13% HST.

In BC, the existing 7% Provincial Sales Tax (PST) and 5% federal Goods and
Services Tax (GST) will be combined to create the 12% HST. However, there
are government cost-savings initiatives that have been put in place to help
home buyers, home owners and investors such as the GST/HST New Housing
Rebate.

The GST/HST New Housing Rebate program provides a rebate on part of the GST
or the federal part of the HST paid on the construction or purchase of most
newly constructed or substantially renovated houses used as a primary place
of residence.

If you purchase a home after July 1, 2010, you may qualify for the GST/HST
New Housing Rebate.

GST/HST New Housing Rebate

The New Housing Rebate allows you to recover a part of the GST/HST that you
paid on the purchase price or cost of building a new, or substantially
renovated house.

What type of housing qualifies?

These types of housing qualify for the rebate:

# A house that you built, substantially renovated or on which
you built a major addition on land that you own or lease (you can do the
work yourself or hire someone to do it)
# A new mobile home (this includes a modular home) or a new floating home that you brought from a builder (this includes a vendor)
# A new or substantially renovated house (including a condominium unit) that you brought from a builder (building and land)
# A new or substantially renovated house that you bought where you lease the land from the builder under the same agreement to buy the house and the lease is for 20 years or more, or gives you the option to buy the land
# A share of capital stock in a co-operative housing corporation (co-op) that you bought or
# A non-residential property that you converted into your house

Whether you're a first-time home buyer, a home owner planning to trade up,
or you've decided to stay put, make sure you know about savings programs
that benefit you.

For more information regarding the GST/HST New Housing Rebate, contact the
Canada Revenue Agency (CRA) or visit their website at:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rbts/nwhsng-eng.html

GST /HST New Housing Rebate