House prices too high, as oil heads south of $65

House prices are high, and the loonie is low – as oil dipped below $65 yesterday for both U.S. and global benchmarks, the TSX sunk, and the Bank of Canada warned (again) of an overheated housing market.

The Day Ahead

Oil heads south of US$65. Oil prices are under $65 for the first time in five years, and despite some small gains this morning, remain between that five-dollar range. Brent lost almost five per cent yesterday alone, bouncing back slightly to close at US$64.24, while West Texas Intermediate ended the day at $60.94. They were both up less than a dollar around 3 a.m. Toronto time.

Big reserves, lowered demand. The price drop was blamed on new information yesterday from both the U.S. and OPEC. Remember when oil jumped last week on a belief that U.S. reserves weren’t as large as expected? That was a red herring – the U.S. Energy Information Administration said Wednesday that the country’s oil inventories actually rose by 1.5 million barrels last week – when analysts had predicted a decrease of twice that amount. Meanwhile, OPEC revised its demand forecast for next year down half a million barrels from 2014, after refusing to cut their production targets in the face of a glut of American oil.

The TSX/S&P Composite Index had its biggest drop in 18 months – breaking a record set on Monday. The index fell 2.4 per cent, or 342 points, on Wednesday on falling energy stocks, leaving the market just 1.7 per cent above where it started at the beginning of the year.
American markets also ended the day down, with the S&P500 and the Dow Jones industrial index both down about 1.5 per cent, though the losses are pretty minor in light of record-breaking gains the last couple of months.
Markets in Asia and the Pacific have had some losses this morning, but are fairly even-keeled, including the notoriously volatile Shanghai composite, while markets in Europe are actually up a touch this morning.

Of course, the loonie is down. The Canadian dollar closed at 87.11, which is still a little higher than it closed on Monday (at 87.09). Oil prices were part of the reason, but the loonie may also have weakened on yesterday’s financial system review from the Bank of Canada, which issued more warnings (albeit fairly gentle ones) about a Canadian housing bubble.

More output, housing, numbers out today. This morning will bring some data from Statistics Canada, including industrial capacity utilization rate for October – the number that represents how well the economy is doing rates relative to its potential. This rate has generally been increasing for the last five years, with second quarter numbers in September at 82.7 per cent.
We’ll also see the monthly housing price index for October, which is especially relevant in light of the Bank’s statements yesterday. This, too, has been on a very steady increase for the last five years. Prices grew 0.1 per cent across the country in September, with the biggest gains in Toronto and Oshawa.

U.S. spending bill, retail numbers, out today. The House of Representatives will look at the $1.1 trillion spending bill today, and while it’s expected to go relatively smoothly, it provides an opportunity to look back on the messy U.S. government shutdown over this same issue last year. As usual, nobody’s that happy about the bill – Republicans are crying foul on immigration, while some Democrats are unhappy about measures they say could weaken financial regulation.

As for the retail numbers, This could be what’s fuelling some optimism in the European markets this morning, after last week’s U.S. jobs report proved to be a market-boosting blockbuster. November is also the heyday of holiday shopping for the U.S., combining Black Friday with, of course, Christmas.

 

What you missed

Canadian housing prices are overvalued by as much as 30 per cent, according to the Bank of Canada’s financial systems review. The biannual announcement is a rundown of everything that’s worrying the Bank’s governor, and in this case, it focused heavily on house prices and high levels of household debt. The Bank said the housing market is overpriced by 10 to 30 per cent, noting that the anticipated soft landing for housing prices has “not yet” occurred.

The Bank also pointed to Canadians with major debt loads – about 12 per cent of households – as especially worrying. Given the majority of household debt in Canada is in mortgages, that means large numbers of households are vulnerable to a rise in interest rates, expected around next fall.

But plunging oil prices don’t pose a major threat at the moment, according to Bank governor Stephen Poloz. He noted they had downgraded their growth forecast for next year down by only a third of a per cent, according to Bloomberg. Other risks include pains in the global economy, including any reversal in American fortunes, slowing growth in China, and trouble in the eurozone.

Low-income numbers for 2012 came out yesterday, released as part of the new Canadian income survey. Because the data can’t be compared to other years, its use is limited – but it does give some tidbits about income disparity across the country. That year, 13.8 per cent of households across the country were considered low income, though rates were much higher for children living in one-parent homes headed by a woman (almost 45 per cent of such households), and for seniors living alone (28.5 per cent). Median after-tax income was the highest in Alberta, for both couples and people living alone.

Inflation rates floating lower across the eurozone. Monthly numbers are coming out for several European countries this morning. So far, France, Germany and Sweden (which uses the krona, not the euro) have reported national inflation at or below 0.5 per cent for November. The new numbers will ramp up pressure on the European Central Bank to stave off deflation in 2015. The central bank is already giving ultra-low loans to banks to try to prod them to offer more credit to small businesses.