90 seconds at 9 am: Surprise interest rate rise in Canada

Trump upsets Republicans agreeing to three-month debt-limit rise; Beige Book report highlights US auto industry concerns; Canadian dollar soars on rate rise; UST 10yr yield at 2.08%; oil up, gold down; NZ$1 = 71.9 US¢, TWI-5 = 74.0

7th Sep 17, 8:07am by Jenée Tibshraeny

Here's my wrap of what’s happened around the world overnight.

US President Donald Trump has sided with Democrats, agreeing to a three-month debt-limit rise as a part of a package to approve relief funding for Hurricane Harvey. His fellow Republicans wanted a longer debt-limit extension, calling Trump’s proposal “unworkable”. By passing the package, Congress avoids two politically contentious September deadlines, for now.

The latest Beige Book report shows the US economy expanded at a “modest to moderate pace” in July and August. Yet the Federal Reserve’s survey didn’t show major signs of accelerating inflation. While manufacturing activity expanded “modestly”, a number of respondents raised concerns about a prolonged slowdown in the auto industry. Despite the labour market being tight, they said wage growth was modest. The report also noted the impact Hurricane Harvey had on energy production in the affected areas.

The Canadian dollar has soared as the Bank of Canada has unexpectedly raised its benchmark interest rate for the second time this year. Increasing the rate by 25 basis points, to 1%, the central bank says economic growth is becoming more broad-based and self-sustaining. It also notes tax and finance policy changes have seen the housing market cool. The bank will pay close attention to how sensitive the economy is to higher interest rates, given how much debt households have.

The amount of freight being transported by air is continuing to sky-rocket. International Air Transport Association figures show volumes increased by 11.4% in July. This was the third double-digit monthly increase in a row. The Association says that while the outlook for the rest of the year is positive, there are signs freight growth may be nearing a cyclical peak.

A group of powerful Zimbabweans is reportedly planning to open the door to the white farmers kicked off their land, as soon as President Robert Mugabe bows out of office. Intelligence reports obtained by Reuters show one of Mugabe’s allies is planning to team up with opposition MP, Morgan Tsvangirai, to lead a transitional government with Zimbabwe’s military and Britain. Their aim is to compensate the farmers whose land was seized, so they can help rebuild the shattered economy.

In New York the UST 10yr yield has fluctuated overnight, to settle at 2.08%.

The price of crude oil has inched up yet again to just over US$49 a barrel. The Brent benchmark has also risen to US$54.

Gold has dropped to US$1,333/oz.

The New Zealand dollar has slipped back again today to just below the 90 Australian cent mark. Other than earlier this month, it hasn't been this low since April last year. The Kiwi's also down to 71.9 US cents and 60.4 euro cents. The TWI-5 index is at 74.0.

If you want to catch up with all the changes from yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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29 Comments

by MikeM | 7th Sep 17, 8:16am 1504728991

"The Canadian dollar has soared as the Bank of Canada has unexpectedly raised its benchmark interest rate for the second time this year. Increasing the rate by 25 basis points, to 1%, the central bank says economic growth is becoming more broad-based and self-sustaining. It also notes tax and finance policy changes have seen the housing market cool. The bank will pay close attention to how sensitive the economy is to higher interest rates, given how much debt households have."

This will be interesting to follow because it will give us insights into what we can expect under future rate rises.

by dictator | 7th Sep 17, 8:48am 1504730882

Canada is also a lot further down the path of ridiculous house prices than what we've achieved here. It will be the place to watch for some time.

by Cowpat | 7th Sep 17, 9:41am 1504734111

Not sure about whether Canada or New Zealand (Auckland) has more ridiculous house prices. Household debt to disposable income in New Zealand 168 percent, Canada which uses net disposable income is 166.7 % (July). Household debt in Canada is 2.041 trillion (July) of which 1.34 trillion is mortgage debt. Canada also has the CMHC in regards to insurance. Adjusted for population New Zealands mortgage debt extrapolates to 1.87 trillion.Numerous international studies put New Zealand top of Ridiculousness.

by dictator | 7th Sep 17, 12:59pm 1504745956

Well all that means is that if it goes horribly wrong in Canada then we're facing a catastrophe.

by linklater01 | 7th Sep 17, 9:18am 1504732731

MikeM,

I am about to spend over a month in Canada,starting in Vancouver and am looking forward to getting the views of people there on these issues. I will report back.

by MikeM | 7th Sep 17, 9:26am 1504733174

Sounds good. Look forward to it.

by Ralph | 7th Sep 17, 10:17am 1504736243

What I find most interesting is that we now see an interest rate rise to the dizzy heights of 1% as quite something.

by Yvil | 7th Sep 17, 11:38am 1504741093

Interesting, yes. Not so sure interest rates will rise in NZ, maybe if Labour gets into government?

by Andrewj | 7th Sep 17, 8:22am 1504729364

https://www.opendemocracy.net/neweconomics/solve-housing-crisis-need-fi…

by Lapun | 7th Sep 17, 8:45am 1504730702

Thank you for posting this. It makes a forceful argument against people like myself who accidentally more than doubled my wealth by buying a house in 2003. The quotes from JS Mill (1848) and Winston Churchill (1909) are relevant to Auckland 2017.

by bw | 7th Sep 17, 8:59am 1504731553

"...it won’t be easy. The task involves taking on the unholy alliance of private developers, banks and – most difficult of all – ordinary homeowners, many of whom now view ever rising house prices as normal and just."

by RickStrauss | 7th Sep 17, 9:23am 1504732996

You can certainly see that's happened. Any discussion of working toward better housing outcomes gets greeted with howls of "theft", "entitlement" or "envy!"

I think people have become completely disconnected from economic, social and political history.

by MikeM | 7th Sep 17, 9:31am 1504733477

Four decades of red and blue indoctrination does that to you.

by meh | 7th Sep 17, 12:04pm 1504742657

Four decades of neo-liberal economic dogma and ideology, four centuries of capitalist dogma and ideology and ultimately four decades of greed and selfishness does that to you. There, fixed it for you.

While the red and blues have enabled the situation the real issue is complete ignorance by we the people.

by MikeM | 7th Sep 17, 1:17pm 1504747022

So true. And that ignorance you speak of reveals itself when NZers demonstrate their understanding of party policy.

by Ralph | 7th Sep 17, 1:51pm 1504749066

Did you know that in the year 1500 the average wage of a Chinese peasant was almost the same as the average European peasant. By the year 1900 European incomes had vastly increased whilst in China there was barely any material increase in quality of life at all.

Not to argue any system is perfect, but four centuries of capitalism indeed.

https://en.wikipedia.org/wiki/Great_Divergence

I might also point out that greed and selfishness are personal character traits that transcend all economic theories.

by murray86 | 7th Sep 17, 11:15am 1504739734

Very good article. Big point for me was Margaret Thatcher moving away from supply side economics to demand side - the outcome? Today the UK subsudises it's housing crisis to the tune of 25 billion pound per year!

Margaret Thatcher was a huge fan of Milton Friedman's free market economic theory - look at what it does! We need to go back to balance regulation of the market. Start with rent controls! (now wait for the reaction!)

by russellj | 7th Sep 17, 1:03pm 1504746227

Free market/milton freedman and govt subsidy of housing does not compute. We subsidise private rentals to the tune of 1.3m dollars covering 60% of the private rental market. And that will only go up on both parties promises. Whilst I fully buy into non kiwis buying has screwed our housing, domestic investor activity on the back of taxpayer funded rent subsidisation also plays a huge part.

by murray86 | 7th Sep 17, 3:13pm 1504754002

No we subsidise house to the tune of in excess of $2 billion and have done for several years! The Government have openly admitted this. This is due to landlord greed demand excessive rents. They make dismal business decisions to pay too much for rental properties so they have to charge exorbitant rents to make any return or offset their costs. they expect the taxpayer to subsidise their rents through accommodation supplements by knowing that too many people being forced to live on the streets will be an unpalatable outcome for our society. They also know that the Government's response will be to provide those supplements rather than to regulate the rental market because they are too wedded to the free market principles.

The only solution that will work immediately is rent controls, along side rental WOFs and not allowing land banking (empty houses as investments), and limiting foreign ownership.

by bw | 7th Sep 17, 8:48am 1504730910

Further to Canada % rates:
" 'Time to raise eurozone interest rates', says Deutsche Bank chief. ‘The the era of cheap money in Europe should come to an end' "
https://www.theguardian.com/business/2017/sep/06/eurozone-european-inte…

by Cowpat | 7th Sep 17, 9:49am 1504734594

Swaps put the odds of rate rise at 47 % prior to meeting. Not unexpected by some. Obviously what is problematic for New Zealand is the possibility we get falling real estate prices, slower growth, bank deposits leaving New Zealand as NZD weakens against multiple currencies as interest rate cycles turn, and are turning and the possibility of having to raise interest rates to combat unexpected inflation.

by Didge | 7th Sep 17, 9:57am 1504735024

Yes have a look at all of the Interest.co currency graphs. Of course time will tell. it may only be a blip.

by Stephen Hulme | 7th Sep 17, 10:15am 1504736156

The latest Beige Book report shows the US economy expanded at a “modest to moderate pace” in July and August.

Indeed.

The U.S. trade deficit widened less than forecast in July as rising energy and aircraft exports helped offset drops in shipments of autos and household goods, Commerce Department data showed Wednesday. Read more and more

The time cost of “modest to moderate pace” is compounding relentlessly

by waymad | 7th Sep 17, 10:27am 1504736854

OT, but a great read: https://www.linkedin.com/pulse/inside-story-what-took-keep-texas-grocer…

the 112-year-old retailer is drawing widespread praise after managing to open 60 of its 83 stores in Houston last Sunday, hours after Hurricane Harvey slammed into Texas as a Category 4 storm. (Now, 79 of the 83 stores are open.)

by antonymouse | 7th Sep 17, 10:34am 1504737268

That's Service, with a capital "S". Well done H-E-B., I'm sure your customers will remember it..

by Stephen Hulme | 7th Sep 17, 10:37am 1504737441

As insurers count the cost of Hurricane Harvey, New Zealanders might be surprised to learn that some of the millions or billions of dollars in payouts will come courtesy of the NZ Super Fund.

The fund’s exposure to American natural disasters is a result of its decision to invest a substantial amount of capital in Insurance-Linked Securities (ILS) in 2010.

In 2010, the fund announced that it would invest US$125 million in catastrophe bonds (or cat bonds, the most common ILS). By 2013, ILS comprised 2 percent of the fund and General Manager of Investments Matt Whineray signalled that it would look to increase its holdings to NZ$400 million, but this has since been scaled back and a spokesperson told me yesterday that cat bonds now constitute just 1 percent of the total portfolio. Read more

Hmmm... reaching for yield on the taxpayer's dime?

In short: a CAT bond is vaguely comparable to selling volatility (aka collecting pennies in front of a steamroller): collect a modest IRR if all works out according to plan, or suffer up to a total loss if, well, a catastrophe occurs. Read more

by J.C. | 7th Sep 17, 2:11pm 1504750305

For the past three or four years crazed consumers and horny housebuyers have accounted for 90% of Canadian economic growth. They’ve financed that with more than $2 trillion in household debt. Astonishingly, new credit continues to expand at three times the rate of inflation. When people take loans to buy stuff they can’t afford with current dollars, they borrow against the future. Consumption from years yet to occur is moved into the present. It’s a bet that five years from now you’ll earn more, still be employed, and able to pay down what you took.

What a gamble.

Most of that debt – two-thirds of it – is in mortgages. Many were taken to acquire properties at their apex of value, when the cost of borrowing had never been lower. Now rates are rising with the assumption that house prices will fall. Add in the new borrowing test, and overall credit is expected to fade by about a fifth.

Oh, and did I ever mention taxes are going up for almost two million small business owners, entrepreneurs and professionals like doctors?

According to StatsCanada, almost 65% of the economy is now the result of people buying things, as opposed to making stuff or selling product beyond our borders. The bulk of that is residential real estate. Never have Canadians invested so much in a single asset class, nor borrowed so extremely to get it. Leverage is off the chart when you consider that the bulk of million-dollar house buyers in Toronto have debt-to-income ratios above 450%.

The last time our economy was this hooked on house porn? That’s right. Never.

So, up it is. Expect consequences.

http://www.greaterfool.ca/

by Boatman | 7th Sep 17, 5:02pm 1504760552

If you thought Auckland was expensive .......... try Vancouver .

Auckland house prices are cheap as chips in comparison

by J.C. | 7th Sep 17, 5:17pm 1504761460

House prices to income are higher in Auckland than Vancouver, depending on your measure.