FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo
May 24, 2019
By Mumal Rathore
BENGALURU (Reuters) – The Bank of Canada is done raising interest rates until at least the end of next year, with a serious risk of a cut by then as policymakers become more wary of slowing growth and global trade tensions, a Reuters poll showed on Friday.
The central bank, which last raised its overnight rate in October, abandoned its tightening bias last month, putting it more in line with peers like the U.S. Federal Reserve and the European Central Bank.
All 40 economists in the latest poll taken May 21-23 said Governor Stephen Poloz and fellow policymakers would hold rates at 1.75% at the May 29 meeting.
While median forecasts show rates unchanged from here on, forecasters were split in three directions starting from the fourth quarter of this year. By end-2020, about two-thirds who provided a view said rates would be either unchanged or lower.
While the BoC cut its near-term growth outlook in last month’s quarterly monetary policy review, it expects the economy to rebound in the second half of this year.
But not everyone is convinced that is about to happen.
“We see little impetus for policymakers to resume rate hikes over our forecast horizon, as sluggish growth and lingering slack in the economy will continue to warrant leaving some policy accommodation in place,” wrote Morgan Stanley economists in a note.
“If growth fails to show any convincing signs of a rebound in 2H19, we think the risks of rate cuts will increase, and given our sluggish outlook, we place a subjective 40% probability that the BoC will deliver at least one 25 basis point rate cut over the next 12 months.”
Asked about the probability of a cut by the end of this year, the median from a smaller sample of economists in the Reuters poll put it at 23%. But that rose to 40% by the end of 2020, with nearly a third predicting more than 50% chance of a cut by then.
Chances of a rate cut this year are a little less than 20 percent, according to market speculators.
One major concern is the U.S.-China trade war, which has heated up over the past month. A Reuters poll taken earlier in May found the risk of recession in the U.S., Canada’s largest trading partner, had risen this month. [ECILT/US]
“If they (the BoC) cut, it is more likely to be on global weakness – generated by U.S.-China tensions most likely – than weakness specifically in Canada,” said David Sloan, senior economist at Continuum Economics, a consultancy.
But there are still some forecasters who expect the BoC to raise rates again. Out of the 30 contributors who provided an end-2020 view, 11 forecast a hike by the end of next year, including four respondents who expect two.
“The Canadian economy faces tail risks, but its labor market is historically tight and the Bank of Canada’s policy rate sits below trend real GDP growth,” said William Adams, senior economist at PNC Financial Services.
“The Bank of Canada’s next move will be a hike unless the U.S. or Canada fall into recession in the next 12 months.”
Chances of a recession in Canada in 12 months were 20%, rising to 27.5% in the next two years, a Reuters poll taken in April found. [ECILT/CA]
Separately, a Reuters survey of property market experts published earlier this week showed Canada’s housing market will stay stuck in the doldrums, with average prices stagnating this year and then rising 1.7% next year. [CA/HOMES]
(Polling by Sujith Pai and Indradip Ghosh; Editing by Ross Finley)
Last week we highlighted the rising level of auto loan delinquencies and the growing number of student loan borrowers who can’t make their payments.
This week, we got some more bad news for lenders. Subprime credit card charge-offs remain at levels reminiscent of the Great Recession.
In the first quarter of this year, credit card charge-off rates at all but the largest 100 banks remained above 7% for the sixth quarter in a row. During the peak of the recession, the charge-off rate at these banks was above 7% for just four quarters, and not consecutively.
The Q1 charge-off rate ticked down slightly to 7.37%, but that wasn’t a big enough drop to push it below that 7% level.
The credit-card charge-off rate at the largest 100 banks rose to 3.78%, according to the latest data released by the Federal Reserve. That’s the highest level since the first quarter of 2013. For all commercial banks combined, the charge-off rate rose to 3.83%, the highest since Q4 2012.
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Smaller banks hold much of the subprime credit card debt. In order to compete with the bigger banks, small financial institutions need to take on greater risk to build their credit base. As a result, delinquency rates and charge-offs tend to run higher for these small-bank credit cards.
Delinquency rates at all but the 100 smallest banks declined to 5.43%, after having spiked to 6.2% in the third quarter. This is a function of banks cleaning up their books and charging off bad accounts. But at 5.43%, the delinquency rate is still historically high. It topped out at 5.9% at the peak of the Great Recession.
As WolfStreet put it, “Some smaller banks that have gone way out on the subprime limb are now getting bogged down in losses on their credit-card loan books.”
America’s small banks hold only a small fraction of credit card balances, so the rising delinquency rates don’t pose any real threat to the banking system. But they should still raise concern.
Currently, Americans carry over $1 trillion of credit card debt, and total consumer debt rose $10.3 billion in March, hitting a record-setting total of $4.05 trillion.
In other words, Americans are loaded up on debt. And it looks like this economic “boom” was built on credit. What happens when the credit cards are completely maxed out? Consider that the last time subprime credit card delinquency rates were this high, the economy was in the midst of a massive recession with unemployment spiraling toward 10%. Today, we’re supposedly enjoying a robust economy with unemployment near historic lows.
WolfStreet gave a pretty good overview of what will likely happen as Americans begin to hit their credit limits.
“Credit card losses already have an impact on the economy, on retail sales, and on the most vulnerable consumers – and this is just the beginning. As banks tighten their lending standards in response to the rising losses, and as more credit-card accounts become delinquent and prevent their holders from buying on credit, the credit flow to the most vulnerable consumers gets throttled. And they have less money to spend. And so they will spend less. This is already the case with subprime auto loans that are now blowing out and that have forced lenders to tighten their lending standards, which is causing a decline in new vehicle sales that is now in its third year.”
This is the proverbial tip of the iceberg. Riskier borrowers with less stable financial positions feel the pain first. Then the problems climb up the ladder. The growing number of people struggling to pay their bills could be a canary in the coal mine.
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European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach
May 23, 2019
FRANKFURT (Reuters) – European Central Bank policymakers are concerned that economic growth in the euro zone is even weaker than feared, eroding their confidence in a long-projected recovery in the second half of the year, the accounts of their April 10 meeting showed on Thursday.
With growth unexpectedly weak for months now, the ECB has raised the prospect of more support for the economy but argued that more analysis was needed to see if the rapid loss of economic momentum is persistent or temporary.
But action is all but certain in June, with the ECB expected to support growth by giving banks very generous terms at its upcoming tender of ultra cheap loans to ensure that credit continues to flow to the economy.
“It was acknowledged that some recent data had turned out even weaker than expected,” the accounts of the meeting showed. “There was now somewhat less confidence in the baseline scenario (for growth) and that the range of other possible outcomes had widened.”
Policymakers said that the terms of the new banks loans, called targeted longer-term refinancing operations or TLTROs, would be decided at one of the upcoming meetings but the accounts provided few details about their thinking.
“Some arguments were put forward in favor of pricing the new operations so they would primarily serve as a backstop, providing insurance in times of elevated uncertainty,” the accounts showed.
“Other arguments supported the view that the TLTRO-III operations should be seen as a potential tool for adjusting the monetary policy stance,” the ECB added.
In any case, the pricing will take into account economic growth and how well banks transmit the ECB’s policy stance to the real economy, the minutes showed.
But policymakers did not appear to have any significant discussion about the impact of negative rates on banks and the need for compensation.
One form of mitigation, the introduction of a multi-tier deposit rate, could help banks with abundant excess reserves but policymakers speaking on and off the record have not voiced any enthusiasm for such a scheme.
Indeed, the minutes only showed a discussion about the need for a future discussion on whether the side effects of negative rates need to be mitigated.
In a possible hint about the direction of such a conversation, policymakers noted that the negative ECB deposit rates was still contributing to increased lending volumes in all loan categories.
Although fresh ECB measures could prop up the economy, the ECB’s problem is that the bloc’s troubles are largely outside its sphere of influence.
With global trade slowing on the ripple effects of the trade war between the United States and China, the bloc’s troubles are largely imported, contributing what ECB chief Mario Draghi called “pervasive uncertainty”.
Indeed, fresh business data on Thursday pointed to increasing weakness in the manufacturing sector, suggesting that its recession is persistent, and analyst predict even more pain.
“The global outlook remained subject to the continued risk of an escalation of trade conflicts and the uncertainty surrounding the withdrawal of the United Kingdom from the EU,” the ECB said in the minutes.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa)
FILE PHOTO: A worker of German steel manufacturer Salzgitter AG stands in front of a furnace at a plant in Salzgitter, Germany, March 1, 2018. REUTERS/Fabian Bimmer
May 23, 2019
BERLIN, (Reuters) – Activity in Germany’s services and manufacturing sectors fell in May, a survey showed on Thursday, reflecting the toll that unresolved trade disputes are having on Europe’s largest economy.
IHS Markit’s flash Purchasing Managers’ Index for manufacturing fell to 44.3 from 44.4 in April, the fifth monthly reading in a row below the 50 mark that separates growth from contraction.
Markit economist Chris Williamson said the slight fall suggested that a recession in the sector, which is more vulnerable to trade frictions than services, was bottoming out.
Markit’s flash services PMI fell to 55.0 from 55.7 in the previous month. The first fall after four straight rises indicates that the sector, which has been providing the economy with growth impetus as manufacturing cools, was showing signs of stress.
“It looks like the manufacturing downturn has passed its peak and is moving toward a period of stabilization but there is still a long way before we return to growth in the manufacturing economy,” Williamson said.
Signs that the worst may be over for German manufacturers were evident in a slower contraction in output, new orders and export sales, the survey showed.
As a result, IHS Markit’s flash composite Purchasing Managers’ Index (PMI), measuring activity in the services and manufacturing sectors that together account for more than two-thirds of the economy, rebounded to 52.4, a three-month high.
After nine successive years of growth, the German economy is facing headwinds from trade disputes between major trading blocks that manufacturers rely on for export growth.
This has prompted the German government to slash its growth forecast for this year for the second time in three months. It has halved its 2019 growth estimate to 0.5 percent.
The economy grew by 0.4 percent in the first quarter after stagnating in the last three month of last year. Private spending and construction were the main drivers of growth.
Williamson said the PMI data pointed to a growth rate of 0.2 percent in the second quarter.
But the survey showed that both manufacturers and services providers were pessimistic about their business outlook.
“It is manufacturers who remain the most downbeat about the outlook amid lingering global trade tensions, though the survey highlights that fears of a slowdown may have started to spread to services, where confidence is now at its joint-lowest since 2014,” said Phil Smith, principal economist at IHS Markit.
(Reporting by Joseph Nasr; Editing by Catherine Evans)