MacroScope

Canada housing: This time it’s different, eh

AResults are in from the latest Reuters poll on Canada’s rampant property market from economists and market analysts, and the message is everything’s fine.

Prices will rise gradually over the next few years and there is very little risk of a crash.

But house prices in Canada have been rising in nearly a straight line for the better part of a generation, more than doubling, and taking household debt up with them.

They have risen by more than a third since the market last paused for breath five years ago, at the start of the financial crisis.

Meanwhile, Canada’s household debt to income ratio has soared to more than 160 percent, much higher than where it was in the U.S. before the crisis, and nearly as high as it was in Britain in 2007, where house prices have taken off again in the past year after spending years in the doldrums.

The Bank of Canada is probably not ready to seriously consider cutting rates — yet

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn’t mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

Yes, economic growth is expected to be restrained over the next couple of quarters, the long-awaited pick up in exports and business investment still seems elusive and inflation continues to remain undesirably weak.

How many politicians does it take to change a government?

Talks between Angela Merkel’s CDU and the centre-left SPD will resume on forming a German grand coalition but any agreement is probably weeks away yet.

With the Greens having bowed out at least we now know it will be a joint administration of the big two parties or fresh elections. The former remains odds on.

The SPD is scarred by its experience of coalition in the last decade, when its support slumped, but it’s probably the lesser of two evils for the party since a new vote would be quite likely to increase Merkel’s support. She only just missed out on a rare overall majority first time around.

Curse of the front-runner a bad omen for Fed contender Yellen?

The buzz on who will replace Ben Bernanke as Federal Reserve chairman has grown this year and amplified recently with talk of Lawrence Summers as a real possibility. There is also lingering speculation over Timothy Geithner, another previous U.S. Treasury Secretary, and former Fed Vice Chair Roger Ferguson among others as possible successors. Bernanke has provided no hint he wants to stay for a third term.

But above the din the central bank’s current vice chair, Janet Yellen, has remained the front-runner. Her deep experience and implicit policy continuity has crowned her the heir apparent until proven otherwise. A Reuters poll of economists showed Yellen was seen as far and away the most likely candidate.

Yet this is a familiar plot that has played out in other Western countries over the past year – with a shock climactic twist. New Zealand, Britain and Canada have all pulled the rug out from under the presumed front-runner and named a surprise new head of their respective central banks. And perhaps most worryingly for Yellen, in each case the overlooked candidate was the bank’s No. 2 official.

Small rays of hope brightened Canada’s economic outlook last week

 All data released last week point to a far better first quarter growth in Canada than previously expected, prompting economists to revise up their predictions.

In a Reuters poll conducted early last month, forecasters predicted that Canada’s economy expanded by just 1.6 percent on an annualised basis in the first three months of this year.

But that consensus could prove to be too low, with many now expecting growth to be close to 2 percent or even higher, likely a welcome sign for Stephen Poloz who was named Bank of Canada’s new governor last Thursday and will replace Mark Carney on June 3.

Safe-haven Canada

The European crisis has thinned the ranks of countries considered safe-havens for investors, and may be contributing to an increase in foreign ownership of Canadian assets. Canada, whose comparatively robust banking sector helped it weather the 2008-2009 financial crisis better than many peers, saw capital inflows in July that helped reverse a June decline, according to the latest figures.

Foreigners resumed their net purchases of Canadian securities in July, taking on C$6.67 billion ($6.88 billion) after having reduced their holdings by C$7.76 billion in June, Statistics Canada said on Monday. Canadian authorities have said foreign investors view Canada as a safe haven. So far this year foreigners have made C$41.23 billion in net purchases, a substantial amount though down from C$54.31 billion seen in the first seven months of 2011.

According to Charles St-Arnaud, economist at Nomura, stocks saw their biggest inflow since February 2011:

America’s jobs jam

Graph of Civilian Unemployment Rate

The St. Louis Fed had a public forum this week to talk about their research into the ailing U.S. jobs market. Not a feel-good scenario.

The bottom line was something the regional Fed bank’s research director Christopher Waller told Reuters in a recent interview: the last three recessions have brought jobless recoveries and this one is no exception. No one can clearly explain why, except that employers are less likely to hire back workers they’ve fired than in the past, and that with so much of the recent downturn due to the collapse of housing, it’s evident that unemployed construction workers can’t easily find new work in, say, nursing or IT.

At this week’s gathering, Waller and his staff fleshed out their research with a number of interesting take-aways. In no particular order:

Argentina set for wheat windfall

Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat’s rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world’s top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.

No more Mr. Nice Guy

By Louise Egan

Canadian Finance Minister Jim Flaherty catapulted to “rock star” status at international meetings in Washington on the weekend, where he took his anti-tax crusade and stared down the powers in Washington and Europe who had plans for a global bank levy.

The Canadians are traditionally peacemakers at these events, building bridges between opposing camps and forging consensus. So when Flaherty stormed into Washington railing against a bank tax being proposed by some of the world’s most powerful leaders in the G20, the reactions ranged from bemused to outright flabbergasted.

“What has happened to the mild-mannered Canadians?” said one bewildered journalist covering the talks among the G20 developing and developed nations.

Trichet to keep cool at frosty G7

European Central Bank  President Jean-Claude Trichet plans to keep a cool head at this weekend’s meeting of Group of Seven policymakers in Canada’s far north. Large iceberg over Frobisher Bay

Large iceberg over Frobisher Bay

“I am very happy to go very far up, far up in the north of Canada,” he told journalists before hopping on a plane en-route to frostbitten Iqaluit, some 300 kilometres south of the Arctic Circle.

“We will have all the right environment to be as cool as possible in judging the situation.”