Canadian 5-Year Bond Yield Surges

Central banks have attempted to soothe markets, with European Central Bank chief economist Philip Lane saying the institution can buy bonds flexibly. Fed Chair Jerome Powell called the recent run-up in yields “a statement of confidence” in the economic outlook. Bank of Canada Governor Tiff Macklem told us earlier this week that it’s a long road to recovery for the Canadian economy. The Bank of Canada will continue to provide support every step of the way. Many Bay Street economists took this to mean that he reinforced the BoC’s commitment to keeping the policy rate at its effective lower bound of 25 bps until sometime in 2023.

These global developments have sideswiped Canada. On Tuesday, I warned that the 5-year government bond yield had risen 27 bps to 0.69% since the beginning of this month, shown in the first chart below. This morning, the rise has become exponential..

Savings rates are high, and the big banks have reported a surge in deposit growth as consumers squirrel away those savings. Remember, the Roaring Twenties was a response to the 1918 Pandemic, more than anything else.

The CRB commodity price index, shown below, is on a tear, and the gains are in every sector except gold and orange juice. That means that new home construction costs are also rising, as home sales remain well above listings.

It’s time to lock-in mortgage rates. For those in the market, preapprovals are prudent. Rising rates will likely trigger more housing activity in the near-term as those thinking of buying might move off the sidelines, pushing prices higher over the first half of this year.

The surge in interest rates would undoubtedly stall or reverse if we see a third wave of new variant COVID cases in advance of a full rollout of the vaccines in Canada. However, there is enough monetary and fiscal stimulus in global markets, and oil prices are expected to continue to rally sufficiently that an ultimate rise in interest rates cannot be far off. This is indicated by the loonie moving to a near a 3-year high.

Housing Continued to Surge in January

The seasonally adjusted activity was running at an annualized pace of 736,452 units in January, significantly above CREA’s current 2021 forecast for 583,635 home sales this year. Sales will be hard-pressed to maintain current activity levels in the busier months to come, absent a surge of much-needed new supply; However, that could materialize as current COVID-19 restrictions are increasingly eased and the weather starts to improve.

A mixed bag of gains led to the month-over-month increase in national sales activity from December to January, including Edmonton, the Greater Toronto Area (GTA), and Chilliwack B.C., Calgary, Montreal and Winnipeg. There was more of a pattern to the declines in January. Many of those were in Ontario markets, following predictions that sales in that part of the country might dip to start the year with so little inventory currently available and many of this year’s sellers likely to remain on the sidelines until spring.

Actual (not seasonally adjusted) sales activity posted a 35.2% y-o-y gain in January. In line with activity since last summer, it was a new record for January by a considerable margin. For the seventh straight month, sales activity was up in almost all Canadian housing markets compared to the same month the previous year. Among the 11 markets that posted year-over-year sales declines, nine were in Ontario, where supply is extremely limited at the moment.

CREA Chair Costa Poulopoulos said, “The two big challenges facing housing markets this year are the same ones we were facing last year – COVID and a lack of supply. It’s looking like our collective efforts to bring those COVID cases down over the last month and a half are working. With luck, some potential sellers who balked at wading into the market last year will feel more comfortable listing this year.”

The dearth of new listings continues to be the biggest problem in the housing market. As we move into the spring market and continue to see fewer COVID cases, the likelihood is that new supply will emerge. But for now, the number of newly listed homes plunged 13.3% in January, led by double-digit declines in the GTA, Hamilton-Burlington, London and St. Thomas, Ottawa, Montreal, Quebec and Halifax Dartmouth.

With sales edging higher and new supply falling considerably in January, the national sales-to-new listings ratio tightened to 90.7% – the highest level on record for the measure by a significant margin. The previous monthly record was 81.5%, set 19 years ago. The long-term average for the national sales-to-new listings ratio is 54.3%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 20% of all local markets were in balanced market territory in January, measured as being within one standard deviation of their long-term average. The other 80% were above long-term norms, in many cases well above. This was a record for the number of markets in seller’s market territory.

There were only 1.9 months of inventory on a national basis at the end of January 2021 – the lowest reading on record for this measure. At the local market level, some 35 Ontario markets were under one month of inventory at the end of January.

Low available supply is the reason property values will continue to go up. Strong demand pre-pandemic and the historic market rally since summer have cleaned up inventories in many parts of the country. Relative to the 10-year average, active listings had plummeted between 50% and 61% in Ontario, Quebec and most of Atlantic Canada, and 29% in BC by the late stages of 2020. And that’s despite a surge in downtown condo listings since spring in Canada’s largest cities. With so few options to choose from (outside downtown condos), buyers will continue to compete fiercely. Buyers in the Prairie Provinces, and Newfoundland and Labrador, however, will feel less pressure to outbid each other given supply isn’t quite as scarce in these markets.

Home Prices

Viewed from another angle, sellers enter 2021 holding a powerful hand when setting prices in most of Canada. We see this continuing during most of 2021. We expect provincial sales-to-new listings ratios—a reliable gauge of price pressure—to generally stay above the threshold (0.60) where sellers have historically yielded more pricing power. In several cases (including BC, Ontario and Quebec), ratios are well above the threshold, providing plenty of buffer against demand-supply conditions flipping in favour of buyers.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose by 1.9% m-o-m in January 2021. Of the 40 markets now tracked by the index, prices were up on a m-o-m basis in 36.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 13.5% on a y-o-y basis in January – the biggest gain since June 2017.

The largest y-o-y gains – above 30% – were recorded in the Lakelands region of Ontario cottage country, Northumberland Hills, Quinte & District, Tillsonburg District and Woodstock-Ingersoll.

Y-o-y price increases in the 25-30% range were seen in Barrie, Niagara, Grey-Bruce Owen Sound, Huron Perth, Kawartha Lakes, London & St. Thomas, North Bay, Simcoe & District and Southern Georgian Bay.

Y-o-y price gains followed this in the range of 20-25% in Hamilton, Guelph, Oakville-Milton, Bancroft and Area, Brantford, Cambridge, Kitchener-Waterloo, Peterborough and the Kawarthas, Ottawa and Greater Moncton.

Prices were up 16.6% compared to last January in Montreal. Meanwhile, y-o-y price gains were in the 10-15% range on Vancouver Island, Chilliwack, the Okanagan Valley, Winnipeg, the GTA and Mississauga. Prices rose in the 5-10% range in Victoria, Greater Vancouver, Regina and Saskatoon. Home prices were up 2% and 2.2% in Calgary and Edmonton, respectively.

The rollercoaster that was 2020 left Canada’s housing market more or less where it started the year: full of bidding wars, escalating prices and exasperated buyers unable to find a home they can afford. The pandemic changed some dynamics—it drove many buyers to the suburbs, exurbs and beyond, ground immigration to a virtual halt, triggered a downturn in big cities’ rental markets and caused households to build up their savings—but it didn’t dial down the market’s heat.

The marked shift in housing strength from urban centres–Toronto, Vancouver, Montreal–to perimeter cities is ongoing. For example, Toronto’s prices are up ‘only’ 11.9% y-o-y, but Barrie (+27%) and London (26%) have far outpaced these gains.

Condo price growth has slowed to just 3.1% y-o-y, or a record 14.3 percentage points below the price gains in single-detached homes. That’s by far the widest gap in 20 years and reflects the hunt for space and social distancing.

Housing starts (reported yesterday by CMHC) surged to 282,428 annualized units in January, the second-highest monthly posting since 1990. This figure could be distorted upward by the unseasonably mild January weather in much of the country. But the new high in starts is in line with record sales and solid building permits.

For policymakers, it doesn’t appear that there’s much interest in leaning against a sector that is helping to prop up the economy, especially with years of tightening mortgage rules already in place.

There appears to be little on the horizon to stop sales or prices from reaching new heights in 2021. Yet, cooling signs will emerge as the year progresses, which will come into fuller view next year. The foremost restraining factors will be a rise in new listings, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.

Federal Fiscal Update–Finance Minister Freeland’s Debut

Finance Minister Chrystia Freeland unveiled $51.7 billion of new spending over two years in a mini-budget Monday, led by an enhanced wages subsidy for business. Freeland also pledged, without detailing, another $70 billion to $100 billion of additional stimulus over three years to spur the recovery.

But the finance minister clearly heeded calls for fiscal prudence. She put off any major structural spending announcements, promised any additional stimulus will be temporary and introduced new taxes on digital giants including Netflix, Amazon, and Airbnb, to help pay for it all.

“Our government will make carefully judged, targeted and meaningful investments to create jobs and boost growth,” Freeland said. It will provide “the fiscal support the Canadian economy needs to operate at its full capacity and to stop COVID-19 from doing long-term damage to our economic potential.”

Freeland revised higher the nation’s projected deficit this year to $381.6 billion, or 17.5% of GDP. That’s up from a deficit of 1.7% of GDP last year. According to estimates from the International Monetary Fund, no major economy will show a bigger fiscal swing in 2020.

Based on Monday’s projections, the deficit is seen gradually narrowing to about $51 billion in two years and $25 billion by 2025.

The planned stimulus over the next three years will total no more than 4% of GDP, which the document said is in line with the Bank of Canada’s estimate of the level of slack in the economy. Freeland said, “fiscal guardrails” tied to the labour market would help determine the extent of the additional stimulus.

Among the measures announced today, Freeland boosted the government’s wage subsidy program (Canada Emergency Wage Subsidy, CEWS) to cover as much as 75% of payroll costs for businesses and extended its commercial rent subsidy and lockdown support top-ups until March. Both were slated to run out on December 20. The current cap on CEWS was 65%.

The federal government plans to create a new funding program to help restaurants, tourism companies and other businesses in industries hardest hit by COVID-19.

The Highly Affected Sectors Credit Availability Program (HASCAP), which was announced in the government’s fiscal update Monday, will offer eligible businesses loans of up to $1 million, with a 10-year term.

The money will be lent by banks or other financial institutions, but guaranteed by the federal government.

“We know that businesses in tourism, hospitality, travel, arts and culture have been particularly hard-hit. So we’re creating a new stream of support for those businesses that need it most — a credit availability program with 100-per-cent government-backed loan support and favourable terms for businesses that have lost revenue as people stay home to fight the spread of the virus,” Finance Minister Chrystia Freeland said in her prepared speech to the House of Commons.

As a start, the Liberals are proposing in their fiscal update to spend $420 million in grants and bursaries to help provinces and territories train and retain qualified early childhood educators.

The Liberals are also proposing to spend $20 million over five years to build a child-care secretariat to guide federal policy work, plus $15 million in ongoing spending for a similar Indigenous-focused body.

The money is designed to lay the foundation for what will likely be a big-money promise in the coming budget.

Current federal spending on child care expires near the end of the decade, but the Liberals are proposing now to keep the money flowing, starting with $870 million a year in 2028.

There is also money for action on climate change. The government allocated C$2.6 billion in grants for homeowners to improve efficiency and $150 million over three years for electric vehicle charging stations.

The government also detailed some help for the hard-hit tourism sector, including funding for airports. But with Transport Minister Marc Garneau’s negotiations with airlines underway, there is no specific money for carriers including Air Canada and WestJet Airlines Ltd.

Bottom Line

There will continue to be great concern about the largest budget deficits since World War II. Does Canada really need the proportionately largest COVID fiscal response in the industrialized world?  The outlook is somewhat less dire than when the government released a fiscal snapshot in July. The unemployment rate at 8.9% is down materially from May’s 13.7% high but well above February’s 5.6%. The economy recovered ground through the third quarter, although the second wave of pandemic and ensuing restrictions undoubtedly will topple economic activity this quarter.

There is little worry that the government can sustain a massive deficit this year. It can, given low debt levels entering the crisis and historically low interest rates. But now that it has no fiscal guardrails, there’s a risk debt-to-GDP will continue to rise in the medium term if it continues to spend ambitiously.

The government is adding a new revenue source by taxing large digital companies. Still, in time, with this level of spending, they will be tempted to raise taxes on domestic sources, for example, hikes in the GST and higher capital gains taxes. This would be misguided, given the fragility of the recovery.

There is a greater risk that the government is overdoing the stimulus with vaccines on the horizon than undergoing it. Canada’s programs have been generous and household-focused compared to our G7 peers. The government must be strategic in assuring that new program spending is focused on future growth, beyond the pandemic, so that our debt-to-GDP will resume its downward trend. The risk is that once created; it is difficult to rein in spending.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca

Throne Speech:
Canada’s Response to COVID-19

THE FISCAL PICTURE

There was little opposition earlier this year when the federal government backstopped nearly every economic sector through emergency benefits, wage subsidies, and other programs. But with the federal deficit approaching $400 billion, there are growing calls to temper new spending.

The new Finance Minister, Christia Freeland, has consulted with former prime minister Paul Martin, who erased deficits as finance minister more than 20 years ago. And she claimed this week to be “well aware” of concerns about federal spending and the fiscal balance but said getting more people back to work was a top priority, along with managing a second wave of COVID-19 infections.

“The single most important economic policy of our government and the best thing we can do for our economy is to keep coronavirus under control,” Freeland said. “I can’t emphasize that too much. Some people sometimes like to talk about a trade-off between good health policy and good economic policy. I could not disagree more strongly.”

Today’s throne speech is one of the most highly-anticipated throne speeches in recent memory–amid a slowing economic recovery and rising COVID case counts. Though not an economic blueprint, it lays out Ottawa’s vision for what policy supports it believes are needed to carry the country through the next phase of recovery.

Measures already floated include improved permanent support for the unemployed–building on exceptional levels of policy support delivered over the spring and summer. Estimates for how much all of that will cost will await a fall fiscal update and subsequent budget.

COVID-19 CASE COUNTS TICK HIGHER AS THE ECONOMIC RECOVERY SLOWS
A barrage of reports issued in the past week reinforced what will probably be a historically large, and yet still only partial, bounce-back in economic activity over the summer in Canada. Home resales surged again in August. Reports on retail, wholesale, and manufacturing trade for July left GDP still on track to rebound 40% (at an annualized rate) in the third quarter. But that would only retrace only about 57% of the decline over the first half of the year. And early data – including Royal Bank’s tracking of credit card purchases–continue to flag a slowing pace of recovery.

Meantime, virus case counts are being watched more closely again in Canada, given a faster uptick in recent weeks, particularly in Ontario, Quebec, British Columbia, and Alberta. This latest wave of infections has been more concentrated among less vulnerable age cohorts, meaning fewer hospitalizations. Still, easing in containment measures has already been paused, and in some spots, reversed. At a minimum, the increased spread is another reminder that there are limits to how much the economy will recover while the virus threat remains.

In today’s speech from the throne, the Governor General was expected to lay out the government’s vision for the pandemic recovery. It won’t be easy, with COVID-19 cases on the rise and investor confidence wobbling. While the economy has improved since April lows, the recovery continues to be fragile–especially in the face of a possible second wave. Where should the government focus its investments? And if it survives the confidence vote, what could we expect in its next budget?

Trudeau insisted that he does not want a campaign soon — but would be ready if necessary. “I think it’s irresponsible to say that an election would be irresponsible,” Trudeau told reporters. “Our country and our institutions are stronger than that, and if there has to be an election, we’ll figure it out.”

“I don’t think that’s what Canadians want. I don’t think that’s what opposition parties want, and it’s certainly not what the government wants.”

A MATTER OF CONFIDENCE

Regardless of how many specifics or dollar figures are in the speech from the throne, it will be a confidence test for the Trudeau government, 15 seats shy of a majority in the House of Commons.

Without support from one major opposition party, an election is likely. But it’s not clear if that’s the kind of reset button opposition leaders are ready to press.

NDP Leader Jagmeet Singh wants a pledge to extend the Canada Emergency Response Benefit while the Employment Insurance system is reformed. And he wants a clear pledge to extend access to paid sick leave.

Singh told CPAC he heard no specific commitments from Prime Minister Justin Trudeau when the two spoke last week. But he will be watching for signals from the government, not just in the speech itself, but in the debate and legislation that follows.

From new Conservative leader Erin O’Toole, recently given a positive COVID-19 diagnosis: “Let’s see the plan, and if it’s for the betterment of the country, we’ll support parts of that plan. If we don’t see it, we’ll put forward our own vision”.

The Bloc Quebecois, meanwhile, has threatened to try and force an election over the WE affair unless Trudeau steps down. And the party wants increased health care transfers to the provinces, more support for seniors, respect for Quebec jurisdictions, and support for supply-managed farmers.

But their leader will not be on Parliament Hill as the House of Commons resumes; Yves-François Blanchet has tested positive for COVID-19 and tweeted Tuesday that he and O’Toole would wait to give their formal replies to the speech until after their isolation periods had ended.

ACTUAL MEASURES IN THE THRONE SPEECH

Overcoming pandemic is the key theme of the speech. COVID-19 has been incredibly hard for parents, especially women, young people, older adults, and Black and racialized Canadians. Low wage earners have been hardest hit.

Fight the pandemic and save lives

• Faster testing, short-term closure orders in high-case areas
• Help businesses in those areas
• Additional PPE funding
• More funding to keep schools safe
• Vaccine strategy
• Immunity task force led by scientists

Supporting Canadians Through this Crisis

• Emergency Wage Subsidy extended
• Job loss supports
• Government creates jobs, assists training, youth employment strategy,
• CERB recipients now supported by EI system–broadened to include self-employed and gig workers
• Action Plan for women–child care services, create a Canada-wide early childhood education system, after school programs, support for women entrepreneurs.
• Aid to small businesses
• Improve business credit, assistance to sectors hardest hit

Build back better to create a more resilient Canada

• Stimulus for recovery that is done prudently
• Reduce income inequality by raising taxes stock options and wealth
• Increase taxes on the digital giants that do business in Canada
• Defend the strength of the middle class
• Fighting climate change and commitment to sustainable growth
• Long-term care homes assistance, new standards for care
• Increase Old Age Security at age 75
• Primary care physicians for every region
• Mental Health resources increased
• National Universal Pharmacare
• Telemedicine
• Limiting firearms
• National Action Plan on gender-based violence
• Affordable housing growth
• All Canadians have access to highspeed internet
• Affordable regional air services
• Eliminate chronic homelessness
• Enhance First-time homebuyer incentive
• Address food insecurity and enhance local food supply chains, protect food workers
• Support farmers
• Introduce the most extensive training and education and accreditation programs in Canadian history
• Create good jobs in climate action sectors
• Exceed Canada’s 2030 climate goals
• More transit options, zero-emissions vehicles and batteries, electric charging stations
• Cut corporate tax rate in half for clean technology companies
• Support natural resource and oil companies as they move towards zero-emission and clean-energy goals
• Ban single-use plastics next year
• Clean water and irrigation plans

Stand up for who we are as Canadians–welcoming and fights discrimination

• We take care of each other, welcome newcomers, embrace two official languages
• Address systemic racism
• Help Indigenous, First Nations, and Mate peoples
• Take action on online hate, support employment of Blacks and racialized people
• Reform criminal justice system and law enforcement
• Encourage immigration and family unification
• Invest more in developing economies
• Support human rights, bring detained Canadians home

BOTTOM LINE

This is an ambitious agenda. Many of these proposals are sweeping commitments. Spending details will come later, likely in a fiscal update in November or December.

The speech did not extend the CERB, which the NDP said was a condition of support. Also, the NDP asked for paid sick leave, which was not mentioned.

Quickly following the speech,  the Conservatives’ initial response was that they could not support this proposal. Among other things, they berated that there was no fiscal framework or anchor to prevent further downgrades of Canadian credit ratings. According to deputy leader Candice Bergen, Conservatives will not support a speech from the throne filled with “buzzwords” and “grand gestures” that ignores the ailing energy sector, farmers, the unemployed, and struggling small business owners.

The political posturing will continue.

In the next week, the speech will be debated, during which time, the government can make changes.

Prime Minister Justin Trudeau and other party leaders will address the nation at 6:30 pm ET/3:30 pm PT tonight.