Going Out Swinging

Steve Saretsky -

The numbers keep getting bigger, mortgage deferrals in Canada have now topped 600,000 since March 17th. Canada’s six largest banks have deferred about 12% of the mortgages in their combined portfolios so far.

Suffice to say bank earnings are taking a beating as loans sour and funding costs increase. I suspect we should see Canadian banks ramp up loan loss provisions when earnings are announced towards the end of May. If US banks are an early indication, JPMorgan Chase & Co. said first-quarter profit tumbled 69% to the lowest in more than six years as credit costs surged and the loan loss provisions climbed to their highest in a decade.

Policy makers are certainly doing their best to mitigate the downside. The Bank of Canada was back at it today, announcing a new extension to their QE program. Asset purchases will now include as much as C$50 billion in provincial bonds and C$10 billion in high-grade corporate bonds.

Interest rates remain unchanged at 0.25%, which the Bank deems to be the effective lower bound. In other words, interest rates have hit a floor, and they feel dropping them any lower, such as negative rates, would be counterproductive.

The news comes on the same day March GDP came in rolling in at a negative 9% for the month of March. That’s the worst monthly decline on record, by a long shot.

Canada GDP March 2020
Canada March GDP falls 9%. Source: Capital Economics

Things are so dire that the Bank of Canada decided, for the first time, to not release an official GDP forecast for Q2. All they could say was that GDP is expected to decline anywhere between 15-30% in the second quarter when compared to the end of 2019.

In what appears to be Governor Poloz’s final speech before he steps down in June, he offered some final words of encouragement for Canadian households currently suffocating on record levels of debt.

“What they have to look forward to, is the lowest interest rates that we’ve seen in a very very long time. So if their plans involve borrowing in order to achieve those plans whether that’s to buy a new vehicle or make a new renovation to their home or buy a house. That those interest rates will be very low and we therefore have a lot of pieces in places for that recovery to be robust. So I think they should be positive about the outlook.”

So there you have it, the solution to your debt problem. Going out swinging, au revoir Mr. Poloz.

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The Saretsky Report. December 2022