Tag Archives: inflation

Canadians’ Debt grew to all-time high in second quarter: TransUnion

Posted By |
Source: TransUnion Canada consumer credit database.

The double whammy of Inflation and rising interest rates are starting to be reflected in higher debt levels for Canadians, according to data released by TransUnion on Tuesday.

The  Q2 2022 Credit Industry Insights Report reveals that Canadians are vulnerable to payment shock as a result of high interest rates and inflation challenges: “While there have still been gains in GDP growth and low unemployment, they are being offset by higher interest rates and cost of living. This lead to higher credit balances and increased costs of mortgages and loans.”

The report shows total debt grew to an all-time high at $2.24 trillion, up 9.2% year-over-year (YoY) and up 16.4% from pre-pandemic levels observed at the end of 2019. The number of consumers with a credit balance has increased by 2.1% YoY to 27.6 million and is up 2.5% from pre-pandemic levels (Q4 2019).

You can find the full press release here.

Among the highlights:

  • Household finances were worse than planned for 41% of consumers, with 48% reporting they had cut back on discretionary spending. A startling 26% of consumers expect to be unable to repay their bills and loans.
  • Total debt grew to an all-time high at $2.24 trillion, up 9.2% from the same time in 2021 and up 16.4% from pre-pandemic levels at the end of 2019.
  • Consumer delinquency on personal loans has returned to pre-pandemic levels, up 19 base points (bps) YoY to 0.93%. Credit card delinquency is also up six bps from the prior year same quarter.
  • Increased balance growth was observed across all risk tiers, with super prime consumers continuing to build overall outstanding balances (+5.1% YoY).

In the release, TransUnion director of financial services research and consulting Matt Fabian says: “With the combination of higher cost of living and higher spend driving up credit balances, along with the recent surge in mortgages and auto loans, many Canadian consumers are under pressure from higher debt service obligations … We’ve seen an increase in miminum payment amounts of up to 10% in the first half of 2022, depending on the combination of products consumers hold, along with a slight deterioration in payment behaviours.”

As shown in the chart below, all major credit products saw an increase in average balance per borrower, which TransUnion says indicates the consumer need to leverage credit.

Fabian added that “During the pandemic we saw a decline in credit participation among below prime consumers, so this marks a re-engagement of this segment as potentially the effects of inflation and interest rates have driven demand, while lenders have increased their risk appetite in this space.”

The report shows that overall, consumer-level delinquencies (borrowers more than 90 days past due on any account) increased by four basis points (bps) over the prior year same quarter, but still remain below pre-pandemic levels. “Consumer delinquency on personal loans has returned to pre-pandemic levels, up 19 bps YoY, to 0.93%.” Credit card delinquency (90 days or more past due) is higher by six bps from the prior year same quarter.

TransUnion says the increase in consumer delinquencies is partially explained by accelerated lender origination activity, especially in the below-prime space: “The YoY rises in delinquencies are generally small and not a major concern, given the increased credit activity observed post pandemic. As credit activity recovers and grows further, consumer credit performance is expected to return to near pre-pandemic levels.”

Fed Pivot turned into a Divot

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It was a more than interesting week. Not much mattered until Jerome Powell (the U.S. Federal Reserve Chair) delivered comments on Friday. He came clean. Or at least he helped to reverse the delusion created by stock market enthusiasts that the Fed would ‘pivot’ and reverse course on the market-unfriendly series of rate hikes. Rates are going higher and they will stay higher. There will be some pain for consumers and business. Inflation must be crushed. They will do what it takes. The Fed pivot turned into a divot. The markets were not happy with the reality check.

In a Seeking Alpha article published just days before the Powell presser, Michael J Kramer of Cott Capital Management offered …

The futures, bond, and currency markets are already telling the world that there is no dovish pivot, and quite frankly, there probably never was a dovish pivot. The only market out there that hasn’t gotten the message appears to be the equity market.

If Powell can deliver a message that even a golden retriever (I own two goldens) can understand, then the equity markets’ day of reckoning will arrive in short order.

Also from Michael …

The futures knew it, bonds knew it, and the dollar knew it. Once again, the only market living on an alternate planet was equities …

Powell finally delivered a direct message

In his Jackson Hole speech, in the opening paragraph, he made it clear that his remarks would be shorter and the message would be more direct. That it was.

Very simply, rates still have further to rise, and once there, they will stay there for some time. In the following paragraphs, I have borrowed from Michael and others, I will avoid quotes for readability. My own commentary is in the mix.

Powell offered that reaching an estimate of the longer-run neutral rate is not a place to pause or stop. He said the June FOMC projections suggest rates would rise to just below 4% through the end of 2023 and that history warned against loosening policy too soon.

It’s evident that the Fed is aware of the mistakes made in the 1970s and 1980s with the stop-and-go monetary policy approach that led to even higher rates, and the Fed appears determined not to repeat those mistakes. There can be no 70’s show rerun.

Fed Chair Jay Powell said:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

Powell noted that fighting inflation will take a sustained period of below-trend growth and a softening labor market, which could bring pain to households, and are the costs of reducing inflation. In the third paragraph of his speech, it’s right there. The Fed is willing to sacrifice growth and face rising unemployment to bring inflation down. He is telling the market there will be no “pivot” anytime soon.

Inflation is driving the bus

The Fed chair said central banks need to move quickly, warning historical episodes of inflation have shown that delayed reactions from central banks tend to come with steeper job losses.

“Our aim is to avoid that outcome by acting with resolve now,” Powell said.

The following image is not a live video, but an example of the headlines that ‘spooked’ the markets.

Federal Reserve Chairman Jerome Powell on Friday said the central bank’s job on lowering inflation is not done, suggesting that the Fed will continue to aggressively raise interest rates to cool the economy.

Get the inflation-killing job done

“We will keep at it until we are confident the job is done,” Powell said in remarks delivered at the Fed’s annual conference in Jackson Hole, Wyoming.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said Friday.

The central bank has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the Fed’s largest moves since 1994. By raising borrowing costs, the Fed hopes to dampen demand by making home buying, business loans, and other types of credit more expensive. Continue Reading…

Infrastructure as an Alternative Investment

Posted By |
BMOETFs.ca

By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

At a time when market volatility, rising rates and high inflation are a common denominator, investors are looking for alternative solutions that can boost returns, while diversifying their asset mix away from traditional assets and fixed income.

In 1991, an investor with a portfolio of only Canadian bonds could have earned an annualized return of ~11% over 5 years. [1] Investors have increasingly had to look to alternative assets to add diversification, for growth and income generation, and enhanced returns with more challenging market environments

Alternative investments include non-traditional assets, like real estate and infrastructure. Investors can access these types of investment through ETFs that invest in public securities to give exposure to alternative investments offering greater diversification to a portfolio.

Infrastructure defined

When focusing on infrastructure as an alternative investment, it is important to first define what infrastructure actually is. One way to think of it is that infrastructure is the essential underpinning of modern industrial societies: all the core physical structures that allow us to function and enjoy modern life. Examples of such modern physical structures are transportation (roads, bridges, railroads etc.), energy infrastructure (energy transmission lines and pipelines), telecom infrastructure (cell phone towers) etc.: the things that allow all commerce to occur across the globe.

These core assets to modern life are staples for society and you don’t see demand vary much with the economic cycle. This lends to a few key attractive characteristics that makes infrastructure good to look at from an investment perspective.

So why Infrastructure?

One of the aspects that makes Infrastructure a good hedge or offset to the cost of inflation is the nature of the underlying business. These businesses are often supported by long-term contracts with governments, municipalities, or cities. This could lead to relatively steady cash flow with a potential yield component. Another important aspect to consider is that the high barrier to entry in the marketplace which does not encourage competition to emerge easily (mostly monopolistic businesses).

In a lot of the cases, contracts are linked to inflation or the operators have the ability to pass on the inflation to the end consumers. Because of the nature of the services being provided, people aren’t going stop paying the costs associated with services and products. You can rely on income being generated. So essentially, there is baked-in inflation protection.

Continue Reading…

How to take advantage of rising interest rates

Posted By |

By Bob Lai, Tawcan

Special to the Findependence Hub

Lately, the talk of the town seems to be rising interest rates. In April, the Bank of Canada raised the benchmark interest rate by a whopping 0.5% to 1%, making it the biggest rate hike since 2000. Given the high inflation rate, it is almost a given that these rate hikes will continue throughout 2022 and beyond. [On July 13, 2022, the BOC hiked a further 1%: editor.]

But before you freak out, let’s step back and look at the big picture. At 1%, the benchmark interest rate is still relatively low compared to the past interest rates.

I still remember years ago before the financial crisis, being able to get GIC rates at around 5%. And some people may remember +10% interest rates in the 80s or early 90s. Back then, interest rates were much much higher than measly below 1% rates we’ve been seeing the last decade.

Historical BoC overnight rates
What’s going to happen to the stock market? Well the general rule is that when Bank of Canada or the Federal Reserve cuts interest rates, the stock market goes up. When Bank of Canada or the Federal Reserve raises interest rates, the stock market goes down.

Continue Reading…

Maintaining Balance in Volatile Markets

Posted By |
Franklin Templeton/Getty Images

By Ian Riach, Portfolio Manager,

Franklin Templeton Investment Solutions

(Sponsor Content)

It’s been a volatile first half of the year for the world’s capital markets. In many countries, both equities and fixed income have declined, which has led to the second-worst performance for balanced portfolios in 30 years. Typically, bonds outperform stocks in down markets, but not this time. In fact, this has been the worst start to the year for fixed income in the past 40 years, thanks to higher inflation and the resultant rise in interest rates.

Supply-side inflation harder to tame

Central banks use rate hikes as a tool to curb demand for goods and services; but the current inflation is being driven more by supply-side issues stemming largely from the COVID-19 pandemic and exacerbated by the Russia/Ukraine war. Unfortunately, central banks have little influence over supply. All they can do is try to dampen demand with an aggressive interest-rate adjustment process, but they must be careful not to overshoot. Raising rates too quickly runs the risk of tipping weak economies over the edge into recession territory.

Canada’s most recent inflation imprint, released in June, showed an increase to 7.7% year-over-year. One negative consequence is that real incomes are being squeezed as inflation continues to accelerate.

Rates are rising quickly

Both the U.S. Federal Reserve (Fed) and Bank of Canada (BoC) have increased their overnight lending rates from essentially 0% prior to March of this year to 1.5%-plus in June. The Canadian futures market had priced another 75-basis point (bp) increase at BoC meeting in July, which ended up an even higher 100-bps with indications of more to come in September.

Rising interest rates are hurting several sectors of Canada’s economy, notably real estate — especially risky for the economy as housing and renovations have been leading Gross Domestic Product (GDP) growth for the past few years. A significant correction in that sector could lead to a recession.

If there is any silver lining in the current situation, it may be in the Canadian dollar versus its U.S. counterpart. Short-term rates in Canada have moved higher than in the United States. This differential, along with the direction of oil prices, affects the value of the Canadian dollar against the U.S. dollar. If the differential widens and stays higher in Canada, the loonie will likely benefit.

Recession risks are growing

The likelihood of recession is hotly debated within our investment team. Recession in North America is not our base case, but a soft landing will be very difficult. We are currently in a stagflationary environment and recession risks are increasing daily. Europe may already be in recession.

The stock market is a good leading economic indicator, and its recent decline indicates the risk of recession is rising. In addition, the yield curve is very flat, which typically portends an economic slowdown. These market signals have somewhat altered our team’s thinking. Given the current environment, we are reducing risk in our portfolios. In fact, we recently went slightly underweight equities.

Regionally, we are reducing the Europe weighting as that region is more exposed to the negative headwinds associated with war. We are slightly overweight the U.S. but acknowledge that valuations are subject to disappointment with declining earnings growth. We are overweight Canada, which continues to benefit from rising resource prices. Continue Reading…