MacroScope

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.

Even the last monthly jobs report, which tends to be volatile, was a bit of a shock, showing nearly 46,000 job losses during the month when every forecaster was expecting net hiring.

But an overheated housing market built on a mountain of household debt – one of the highest per capita in the world – doesn’t need more stimulus from even lower rates.

Spain ascendant?

Spain appears to be on the road to recovery, if you can call it that with around a quarter of the workforce without a job.

The government says growth hit 0.3 percent in the final quarter of the year, the second quarterly expansion in a row, and may upgrade its forecast for 0.7 percent growth in 2014.

Its borrowing costs have tumbled to four-year lows in a new year bond rally and today Madrid will try to cash in by selling up to 5.5 billion euros of bonds following an above-target sale last week.

Housing boom and bust lesson still not sinking in

Housing markets are booming again in parts of the U.S. and Britain and they haven’t stopped doing so in Canada for the better part of a generation.

What is most striking about the latest round, at least when you listen to those who ought to know, is how nothing much except the price has changed.

We were told a stern lesson in the months and years after the financial crisis, borne out of an over-inflated, over-leveraged U.S. housing market securitised up to the scalp by Wall Street and leaping ever higher up a steeper incline on a blind instinct never to look back.

The big questions on the UK housing market: what the analysts say

Although UK house prices will head steadily higher in the next two years, analysts polled by Reuters are divided over whether the Bank of England can restrain the market if it overheats. Here’s what they said in the latest Reuters poll, taken this week: How confident are you in the BoE’s ability to moderate the housing market if necessary?

PETER DIXON, COMMERZBANK: “Not very. A cynical interpretation would be that the government wants to see a decent rise in house prices over the next couple of years and would not be best pleased to see the BoE take the steam out of it. Nor is it clear that the BoE has the policy instruments to target the housing market without causing collateral damage elsewhere in the economy. Finally, it would call into question the thrust of policy if Help to Buy is giving to the housing market with one hand whilst the BoE is taking away with another.”

PHILIP LACHOWYCZ, FATHOM FINANCIAL CONSULTING: “Not at all. The Bank of England through the FPC does now have the instruments and mandate to take specific action in the housing market. However, we find it unlikely that it will take any action as it would mean directly working against government policy.”

French travails

The Bank of France’s monthly report forecasts growth of 0.4 percent in the last three months of the year, up from an anaemic 0.1 percent in the third quarter. That still makes for a fairly doleful 2013 as a whole.

France is zooming up the euro zone’s worry list, largely because of its timid approach to labour and pension reforms. Spain has been much more aggressive and is seeing the benefits in terms of rising exports (and, admittedly, sky-high unemployment). So too has Portugal.

Tellingly, both the Iberian countries have had the outlook on their credit ratings raised to stable in recent days while S&P cut France’s rating to AA from AA+. It remains at a far stronger level but the differing directions of travel are clear.

A question of liquidity

The Federal Reserve’s decision to keep printing dollars at an unchanged rate, mirrored by the Bank of Japan sticking with its massive stimulus programme, should have surprised nobody.

But markets seem marginally discomfited, interpreting the Fed’s statement as sounding a little less alarmed about the state of the U.S. recovery than some had expected and maybe hastening Taper Day. European stocks are expected to pull back from a five-year high but this is really the financial equivalent of “How many angels can dance on the head of a pin”. The Fed’s message was little changed bar removing a reference to tighter financing conditions.

However, the top central banks have sent a signal that they think all is not yet well with the world – the Fed, BOJ, European Central Bank, Bank of England, Bank of Canada and Swiss National Bank have just announced they will make permanent their array of currency swap arrangements to provide a “prudent liquidity backstop” indefinitely.

Britain’s Help to Buy – what the forecasters say

Now Britain’s housing market is showing real signs of life, should the government abandon its “Help to Buy” scheme to boost access to the market for homebuyers?

Economists and property analysts polled by Reuters over the last week were split. Two weeks ago, a majority of economists put the chances of another UK housing bubble forming at 50 percent or greater, catalysed by the Help to Buy programme.

Here’s a few comments on either side of the debate. Cancel Help to Buy:

“The housing market was slowly recovering already, it has been good for the sector, but in the long term it is throwing money at something that is not the solution. There is a danger we are creating the next bubble and not learning from what’s happened previously.” Mark Hughes, co-head of research, Panmure Gordon

Britain’s Help to Buy unites analysts about its dangers

Even if they can’t agree how much Britain’s Help to Buy mortgage guarantee scheme will boost the housing market, analysts in the latest Reuters poll are united by an understanding of its dangers.

The government’s Help to Buy programme, unveiled in its March budget, is designed to boost mortgage lending and help buyers with small deposits get on the property ladder.

The poll predicts Britain’s house prices will rise at their fastest pace in four years in 2013, and data from Hometrack show London property was snapped up in April more quickly than at any time since October 2007 – adding to concerns Help to Buy might start a new house price bubble.

Pigeonholing Fed hawks

Richard Fisher, the Dallas Fed’s outspoken president, is happy to be labeled a monetary policy hawk. After all, he sometimes quips, “doves are part of the pigeon family.” That may be so. But thus far, the doves have had the upper hand in the policy debate – and the economic data appear to bear them out.

Fed hawks like Fisher have warned that the U.S. central bank’s prolonged policy of low interest rates and asset purchases risks a future spike in inflation. Yet despite the Fed’s aggressive efforts, inflation is actually drifting lower, not higher, suggesting there is something to the dovish notion that there is still ample slack in the U.S. economy following a lackluster recovery from the historic slump of 2007-2009.

Regional Fed hawks tend to argue that the Fed should not overreach in its efforts to bring down unemployment because the only thing it can really control in the long-run is inflation. Says Jeffrey Lacker, president of the Richmond Fed:

Darkening outlook for UK housing

The outlook for the UK housing market has darkened again. The usually optimistic bunch of property market watchers polled by Reuters, who have tended to predict ever-rising property prices no matter what the season or financial climate, now say the market will move sideways for the next two years.

housing1.jpgThey say that in the next few months, the small double-dip in prices that has begun will continue. Modest gains predicted less than three months ago for this year and next essentially have been wiped away.

No one should be surprised by this.  It smacks of an awakening to reality more than a slight change to a few variables in the statistical model. What’s perhaps most striking about these new poll results is that economists think houses are even more overvalued now than they were in July even after a few straight months of falls.