Market Commentary

Jan 20/03 -Bank of Canada leaves it's rate unchanged again, but hints are higher rates down the road if economic indicators continue to evidence inflation higher than their targeted rate of 2%.The next rate set meeting is March 4.2003.

February 5th/03-Bank of Canada hints again at higher rates down the road earlier than previously forecast .Geo political factors,oil prices and currency fluctuations play havoc with the bond market with money moving in and out of different financial domains in response to daily news.Bond market yields generally trending up over the last two weeks causing ad adjustment in the discount rate on 5 year term mortgages.

February 12/03-risk of the US entering war with Iraq without full UN sanction sends investors looking for more stable investments as both gold and stocks decline.

February 27/03-the war in Iraq weighs heavily on investors minds as they put money into the bond market seen as a safe haven in unsettled economic times.Yields decrease slightly over the past two weeks.Bank of Canada hints at a rate increase at next rate set on March 5/03 as high as .50%.

March 4/03 -Bank of Canada cites inflation as the reason behind their decision to increase the prime lending rate by.25%.Future rate increases will be wholly dependent on the geopolitical climate and the shadow of the war in Iraq.

March 26/03 -the US is now in Iraq for a week and the markets reacted positively early on in the campaign expecting a quick victory.Money moves out of bonds into the stock market and the Dow has one of its biggest run ups in history.This puts pressure on bond market rates resulting in a rate increase on 1-25 year mortgage rates.By the end of the first week,reality has set in with the realization that the war is not going to be a cake walk.The markets retreat a bit and bonds move back in favor but holding their rates as price fluctuate on any war news.

April 7th/03 -bond yields are still trending up but in very small increments but there is still a yo-yo effect on bond yields as the war in Iraq,US economic data and the Sars outbreak leads investors back and forth on where to place their money.

April 23/03 -bond yields move down resulting in lenders lowering their some long term rates by .05%.The move down in long term rates is in direct contrast to a move up in prime.Canada's strong economy,stable political scene and an improving dollar combined with a higher investor yield than any other G7 country has attracted money into the bond markets forcing yields down.The Bank of Canada's policy statement released today still favors increasing rates to bring the slow down inflation but they temper their statements with speculation that the SAR's outbreak combined with an appreciating currency could impact their future rate decisions.Economists are speculating that prime will remain at current levels throughout the summer until the full economic impact of a variety of market influences play themselves out in the economy and it's effect on Canada's growth.

April 29th/03 -The SARS scare seems to have abated somewhat.Canadian dollar goes on a roll again.Bank of Canada reiterates position on raising rates but still in a wait and see position for Junes increase based on economic data.Bond market rates drop resulting in rate decreases on most long term mortgages.

May 22nd/03 -Canada's economy shines attracting further investment in our bond market allowing a softening in rates in all mortgage terms-we could be headed for a sub 5% five year mortgage!!!!

May 23rd/03 -The bond market continues to attract investment and market watchers predict that the Bank of Canada will hold its position on the next rate set on June 3rd.Rates are now at an all time low and could still head lower yet.

June 3rd/03-the Bank of Canada move to hold their rate citing a steep drop in inflation and weak global economic conditions.

June 4-12th/03 -bond market rates fall even further as poor economic news in the European and US economies make Canada an attractive investment for higher returns .

June 13th-27th/03 -bond rates move up in response to positive news on the US economy and a swing of funds back into the stock market-US Fed drops their rate to it's lowest point since 1958 in an effort to further boost the US economy out of its mini recession

June 28th-July 15th/03 -more positive economic news south of the border pushes money out of fixed income securities into the stock market resulting in increases in bond market rates

July 15th/03 -Bank of Canada surprises the market with a .25% drop in their rate to 4.75%.The first move down in about 18 months and hints of a further reduction at the next rate set in September.The impact of Sars,Mad Cow disease and the appreciation of the dollar cited for its impact on our economy and some slack in our economy.In the US Greenspan hints at another reduction to be considered by the FED to provide further economic stimulus south of the border.

August 14/03 -The Fed keeps rates the same citing signals of a slow recovery in evidence in the US.As money moves back into the stock market bond yields increase forcing long term rates up.

September 03/03 -Bank of Canada moves rates down by .25% citing near term economic effects of Sars,Mad Cow and the forest fires in BC.They also hint that the burgeoning US recovery may help Canada rebound in it's wake and signals that there will be no need for further rate decreases.On the other hand,the Canadian dollar jumps up a full cent wiping out any benefit to Canadian exporters.Bond market rates are still on their yo-yo swing in response to the push and pull of the stock market investors resulting in long term mortgage rates bouncing around in swings of .20% -.25% up and down.

September 23/03 -Canadian dollar is back on a roll due to weakening in the US dollar.Bond rates roller coaster continues with the ebb and flow of the stock market and swings caused by the release of positive and negative economic indicators.Bond market rates down marginally as the 5 year mortgage rate drops below 5% once again.

September 29th/03 -Bond market is on a roll with yields dropping for 7 days in a row thereby resulting in a drop in long term rates to levels seen in May 2003 just before their fall to their lowest level in June.Will we have a repeat?

October 24th/03 -The Canadian dollar has been trending up once again leading economists to believe that the Bank of Canada will have no choice but to drop rates if it continues to spiral toward 80 cents.Conflicting economic signals play havoc with the bond market as money moves in an out of bonds and the stock market.The five year mortgage rate dropped below 5% once again in late September and has now moved back just over 5%.Long term mortgage rates have generally added .25% to their lows in September and with the exception of one and two year terms are approximately .50% above their lows in the summer.

December 24/03 -Prime rate looks like it may drop in the new year.the Canadian dollar loses some steam and then picks up again and mortgage rates drop on bond yield reductions.For an up to date year end economic report,you can request a copy by sending an email to mattheyb@kos.net

Summary of 2003

Most people expect that when prime rate increases,so do long term rates, but that is not necessarily the case.Long term rates are based on bond market rates and bond market yields are essentially driven by the level of investment.In it's most simplistic state,when stocks are out of favor,bonds are in and that is where we were for most of 2002.Bond market yields dropped significantlyin 2003 and were at 45 year lows into early June 2003 taking mortgage rates down with them.Long term rates have came up some .50% off their lows in mid 2003.

Prime rate was forecasted to go up up in 2003 but it was entirely dependent on the strength of continued economic recovery .The first rate increase of .25% came with the March 5th rate set.One report cited that 'Canada continues to have the highest forecasted rate of economic growth among the G7 countries for this year and 2003 and is expected to outpace all G8 countries,except the US over the 2004-2007 period."

The Bank of Canada's target rate for inflation is 2% .The March core inflation rate in 2003 dropped to 2.9% from 3.1% inFebruary.Forecasters were expecting that growth to grow to 3.4% in 2003 and to 3.7% in 2004. .In June, the Bank of Canada held it's position and in July suprised the market with a .25% drop. The increase in prime by 1.25% since 2002,together with the increase in the dollar translated to a flow through effect on the economy equivalent to an increase of 5% in prime.Falling gas prices caused the inflation rate to drop to 3% in April from 4.3% in March.Core inflation dropped from 2.9% to 2.1% close to the 2% target set by the Bank of Canada.In April,the effects of Sars,Mad Cow ,the rise of the Canadian dollar and the forest fires in BC reduced our core inflation to below the Bank's target of 2% resulting in further decreases by the Bank of Canada.The Bank dropped it's prime rate another .25% on September 3 and held the rate for the October and December rate set.Prime increased by .50% in 2003 and overall is now only .75% over it's low of 3.75% in 2002.

The see saw battle between the sooth sayers of economic recovery and the voices of skepticism ,coupled with conflicting economic signals resulted in daily swing market as investors move their money into stocks on news of a recovery and then back into bonds on disappointing corporate results, war news or fear of further terrorism.The current major concern in Canada is the rapid rise of the Canadian dollar and it's impact on exports.The actual effect will not be known until the last quarter of this year and early into 2004.Economic growth in the US is suspect but is expected to outperform growth in Canada once again. Market opinion based on current conditons seems to be say that we should see the Bank of Canada reduce prime by at least .25% with the first rate set on January 20/04.Mortgage rates should fluctuate within a band of .25% in response to bond market activity but there is no evidence to suggest that they should experience any rapid upward movement at this point.With the exception of one and two year terms,mortgage rates were up .50-.65% above their lows in June and July of 2003.

Bond Market and Prime Rate Moves in 2003

January 9,2003 -Bond market yields add flexibility to lenders spreads resulting in decreases in 5,7,15,18 and 25 year terms to the lowest rates in 40 years,surpassing the lows achieved in October 2002.The 25 year mortgage is now below 7%!

January 13,2003 -The five year rate falls to a new low of 5.13% from one lender while the rest hold the line at 5.20% to 5.25%

January 27,2003 -Five year rate jumps from a low of 5.15% to 5.45% with two institutions-CIBC and TD/Can Trust.Posted rates do not move and no other terms are affected.Both institutions cite bond market spreads as the culprit but other institutions adopt a wait and see attitude.

Feb 5th/03 -most institutions follow the lead of CIBC and TD/Can Trust but some only increase to 5.35 to 5.39%.While the move is in response to bond market yields,there is some speculation that the move in 5 year only is an attempt to influence the market to locked terms as opposed to floating rate variables.

Feb 13/03 -TD moves 5 year rate down to 5.35% to match other lenders who did not move their rate to 5.45%

Feb 27/03- Bond market yields allow a drop in the 5 year rate with 2 lenders to 5.30%

May 23rd/03-History is made with 5 year rates dropping below 5 %.All rates drop across the board as bond rates continue to fall

June 3rd/03 -Bank of Canada leaves rate unchanged

June 4th/03 -12th-mortgage rates continue to fall across the board on all terms from 1-5 years

June12th-27th/03 -discounted rates lose .10 -.15% off their lows due to an increase in bond market rates.Bond market rates have risen by 10-.18 basis points in the 2-10 year maturities since June 19th.Mortgage rates increases have moved in response.

June 28th/03 - July 15th-bond market rates increase in longer term maturies adding .40-.50% to 5,7,10 year terms

August 14/03 -bond market rates bounce around like a yo-yo but are on an upward trend contributing to increases in rates in the longer terms 5-25 yrs

September 3/03 -Bank of Canada reduces it's prime lending rate by .25%.Prime stands at 4.50% which is now only .75% above its low in 2002.

October 15/03 -No changes by Bank of Canada to prime rate-for an overview of the policy decision go to http://www.bank-banque-canada.ca/fixed-dates/2003/rate_021203.htm