New numbers give hope for early recovery

Julian BeltrameThe Canadian Press
OTTAWA -- The hair-raising plunge in the world and Canadian economies this winter is showing signs of levelling off as new evidence emerged yesterday pointing to improving conditions.
Economic growth is still months away, say economists, but with each "less bad'' indicator that is posted, fear of continued free-fall is being replaced by cautious optimism.
"I'm in the glass half-full camp,'' said Bank of Montreal deputy chief economist Douglas Porter. "The way the financial markets are going, I think it's quite possible we'll see a recovery sooner than the end of the year. It seems the optimism is becoming more infectious around the world, and that's a good thing.''
The glass half-empty camp argues that financial markets, while much improved, remain risk adverse and that the recovery may be too dependent on temporary massive government stimulus to be sustained.
Yesterday saw more reasons to support a growing consensus that sees global economies starting to come out of the nightmare of the past few months.
* Canada's inflation rate fell to a near 15-year low of 0.4 per cent in April, a clear signal of economic weakness but because the plunge was due to a single-factor -- lower gasoline prices compared to last year -- the steep drop was not worrisome.
* The country's leading indicator of future economic activity rose 0.5 per cent last month over March, the first sign of life in eight months.
* As significant, a survey of 220 fund managers by Bank of America-Merrill Lynch showed the bulls are waking from their slumber, with 57 per cent of managers forecasting a stronger global economy in the next 12 months.
"The unrelenting gloom of a mere three months ago has been replaced by a fairly typical early-cyclical sentiment, with the only hint of potential irrational exuberance in emerging markets,'' the global investment bank said.
The May survey showed that fund managers are still reluctant to jump into the market with both feet as asset allocations remain underweight in securities by six per cent, but that is less than the minus-17 per cent number found in the April survey.
Merrill Lynch analysts said there is still a risk of "too much, too soon'' with the stock markets rally of the past two months, but noted that unlike last fall and early 2009, investors now appear willing to shrug off bad news in expectation the economy will indeed recover.
The past month has seen the emergence of a number of so-called "green shoots'' that point to an improving economic landscape.
After a correction last week, Toronto's stock exchange was back over the 10,000-point line this week.
More bad news is on the way as countries start reporting first-quarter gross domestic product retreats in the next few weeks.
Japan said yesterday its economy contracted a massive 15.2 per cent, the most since it began to keep records in 1955.
The Bank of Canada forecasts Canada's first quarter GDP contraction will top seven per cent when all the data is available in two weeks, also the worst performance since records began in 1961.
But these numbers represent a rear-view mirror of the economy, say analysts, something markets have already left behind.
Economists also judged that the Bank of Canada is now less likely to resort to extraordinary measures because the risk of further steep contraction has diminished.
In a speech Tuesday, Bank of Canada deputy governor John Murray said the bank's action of dropping the policy rate to 0.25 per cent -- and vowing to keep it there for the next year -- has succeeded in improving credit.

Bond Yield affects Fixed Mortgage Rates

Bond yields were down yesterday to 2.07, a drop of 0.07. Four weeks ago it was 1.85. The spread is now 1.71%.
Here is some information from Merix economist, John Bordignon, on the rates:

Spreads have really come down and not sure how long this is going to last. If bond yields get any higher I would say that rates are going to start to move up. I think the Big Banks are keeping the rates artificially low because of the spring season and don’t wish to be perceived as making things harder for consumers. I anticipate that the stock market will be down today (which it was) so we may see an easing on the bond yield side (bond yield will drop). Keep watching them and if they continue to rise, I believe we will see a rate increase.

21 month convertible mortgage

The Merix 21 month rate special made the news at www.canadianmortgagetrends.com. Here is the article:

May 07, 2009
A Variable Alternative
Most variable-rate mortgages are still at prime + 0.60% to prime + 0.80%. That rate premium is part of the reason people aren’t as jazzed up about variables anymore. Many think prime is going up in the next year as well.
If you’re one of these people, and don’t want to commit to locking in a 5-year variable at those high premiums, Merix offers a solution: a 21-month fixed-rate promotion at 2.90%!
This secures you a great variable-equivalent rate for 1.75 years. At that point, you can then hopefully move into a variable at prime (or even prime minus if the mortgage gods allow). It’s also convertible any time into a 5-year fixed at discounted broker rates.
This product is not perfect for everyone, but it’s a solid choice for variable-lovers in the crowd.
The fine print:
Only available for high ratio CMHC-insured financing (i.e., those with less than 20% down payments)
No pre-approvals or switches
Must close by May 29, 2009 (That means applications should be submitted by next week to allow 10 days after approval to close.)
Other conditions apply. Speak with any mortgage planner for complete information.