Market Commentary

With a double deficit to worry about ,the US seems poised to let their dollar free fall which has been a boon to the Canadian dollar that hit it's highest level since 1992 on Friday to just over 85 cents. This has been a boon to the bond market where bond rates have fallen off their highs in September. The 5 year bond peaked around 4.171 in early September and five year mortgage rates were around 5.25%. The 5 year bond on Friday dropped to 3.762, it's lowest rate since early August. The five year bond is now .54 basis points over it's low recorded it April of this year.In fact, long term mortgages for 7 years and 10 years are only .41BPs and .21BPs over their lows recorded in April this year!

Take a look at our rates page at www.mortgageprokingston.com/rates.html as we now have 25 year mortgages below 6% once again!It is interesting to note that the Canadian dollar was trading at 1.317 back in April and that has now dropped to 1.18!Anyone travelling to the US soon?

The US fed seems to be still committed to raising their prime rate to curb inflation brought on by a recovering economy although the economic signals south of the border are still mixed. In Canada, the expected rate increase by the Bank of Canada may not be a sure thing anymore.For the latest on what David Dodge has to say go to http://www.bankofcanada.ca/en/speeches/2004/state04-8.htm.
It seems the rise in the dollar may have an effect on the economy down the road that may dampen any inflationary trend without any need for an increase in rates or any other economic factors.We will see what happens in December.

Canadian inflation remains very subdued leaving the Bank of Canada some room when making their rate increase decision in December. The Canadian dollar continues it's roll as the US greenback gets sideswiped in the market.

Current sentiment is leaning toward the Bank of Canada adopting a wait and see position in December until the effect of the increase in the dollar is starting to work it's way through the economy.If they raise the rate by another .25%,most economists agree that it will be the last increase for some time if the current economic trends continue. In the midst of everyone talking about higher rates on the short term mortgage spectrum,long term rates are falling as the bond market yields on longer terms have been trending down.

If you go to our rates page,(www.mortgageprokingston.com/rates.html)you will see that long term rates (5 year terms and up)are not far off their all time lows. Variables are still a great place to be, especially in a falling rate market for long term mortgages.

FOR IMMEDIATE RELEASE
19 October 2004 CONTACT: Annie Portelance
(613) 782-8782
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Bank of Canada raises overnight rate target by 1/4 percentage point
to 2 1/2 per cent

OTTAWAöThe Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 2 1/2 per cent. The operating band for the overnight rate is correspondingly increased, and the Bank Rate is now 2 3/4 per cent.

The Canadian economy is operating near its production capacity and continues to adjust to global economic developments. Recently, world oil prices have risen well above the Bank's earlier assumptions and the Canadian dollar has appreciated further.

Looking ahead over the period to the end of 2006, the Bank's base-case projection calls for aggregate demand for Canadian goods and services to expand, on average, at about the same rate as potential output. Given the effects of higher oil prices and the past appreciation of the Canadian dollar, the Bank projects growth to be slightly less than 3 per cent in 2005, and slightly more than 3 per cent in 2006. With the economy expected to remain near its production capacity throughout this period, core inflation is projected to move back to the 2 per cent target by the end of 2005. Reflecting higher world oil prices, total CPI inflation is projected to move well above core inflation in the first half of 2005 and fall slightly below core inflation in 2006.

Against this background, the Bank decided to raise its target for the overnight rate. Further reduction of monetary stimulus will be required over time to keep inflation on target, with the pace depending on the Bank's continuing assessment of the prospects for factors that affect pressures on capacity and, hence, inflation. The details of the Bank's outlook for output and inflation and an analysis of the significant risks and uncertainties associated with this outlook will be discussed in the Monetary Policy Report, to be released on 21 October 2004.

Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 7 December 2004.

There has been a lot of talk by the Bank of Canada to returning rates to a neutral position in view of the improvement in our economy. A neutral position is a position where rates neither stimulate nor dampen economic growth . There are still a lot of clouds on the horizon that are providing economic storm warnings such as the increase in oil prices and the rise of the Canadian dollar and itâs effect on exports and still there is no clear economic trend in sight.. So what is one to do? Well, how about a little crystal ball gazing?

The chart below gives you an overview of the performance of the 5 year bond market, posted mortgage interest rates ,discounted mortgage rates and prime since 1998 in a high/low spectrum. It allows you to see the interaction between the bond market and 5 year mortgages and the spreads that are typical held over the bond market in setting mortgage market rates,

The period 1999 to 2000 and into early 2001 is the build up of inflation due to the dot.com era.During that time ,prime remained relatively consistent dropping in late 2001 when the bottom dropped out of the dot.com market and a recession became the issue of the day.. You can see since then that prime has operated in a narrow band up and down reacting to perceived inflationary issues.
So where is that neutral position the Bank of Canada keeps talking about?Well if you consider the highs in the chart above representing climbing inflation and the lows representing economic stimulus in the absence of inflation, your mid market position for prime should be around 5-5.50%.Thatâs 1.50% above todays position. For anyone in a variable with a discount from .40-75%,that still equates to a rate of 4.75% to 5.10% which is less than or equal to todays 5 year discounted mortgage rate. How long will it take to get there ?Thatâs anyone guess at this point. The only sure bet at this point is that we expect the Bank of Canada to raise their rate to 4.50% by December and the ongoing growth of the economy or lack of growth will determine the Bank of Canadaâa future direction.The Bank of Canada is betting that the increase in prime in the next two rate sets will be sufficient to contain any inflationary pressures while continuing to foster steady economic growth.If they are right,we may hit the mid market position on prime around 4.50-5.00% making the variable still the most attractive place to be

Year

Month

5 year Bond rates highs and lows

5Year posted mortgage rates highs and lows

5.62

7.15

1.53

6.50

4.69

6.75

2.06

7.00

6.20

8.25

7.24

2.05

1.04

6.25

4.76

6.90

6.01

2.14

1.25

6.75

6.36

8.55

7.44

2.17

1.06

6.50

5.30

7.95

6.75

2.65

1.45

7.50

5.61

7.75

6.50

2.14

.89

6.25

4.08

6.90

5.75

2.82

1.67

4.50

5.28

7.30

6.10

.2.02

.82

3.75

4.06

6.70

5.35

2.64

1.29

4.50

4.47

6.85

5.54

2.38

1.07

4.75

3.55

5.80

4.49

2.25

.94

5.00

5.00

7.24

6.11

2.24

1.03

5.77

4.76

6.90

6.05

2.15

1.07

6.25

4.06

6.30

5.05

2.25

1.01

4.00