European industrial output surprised analysts with an increase of 0.4% in April. Most analysts expected a decline so this was definitely unexpected. Although the European economy continues struggle, there are minor signs of hope every now and then.
Solid US economic data, including a 5 year low for jobless claims and positive retail numbers, has caused concern that the Federal Reserve will begin to taper off stimulus measures. Although positive economic news is usually enthusiastically welcomed by the markets, the potential withdrawal of a huge stimulus program is making many wonder if the US economy can continue to expand at the current rate without assistance. This good news/bad news scenario is causing the markets to be more volatile than usual and this will continue until a time table for the removal of stimulus programs is set.
In Canada, bond yields have begun to climb, causing most lenders to increase 5 year rates by 0.2% to 0.3% over the past week. This has many wondering if this is the beginning of the end of very low interest rates. It is important to remember that fixed term interest rates have stayed at historic lows for a very long time and even a 0.5% increase will not put rates anywhere near historical average rates. There are two potential scenarios for the future of fixed term interest rates. One scenario is that this latest increase is the first of many rate increases that will continue over the next five to ten years, taking rates back to a 5% level which is more normal in a historical context. The second scenario is that this is just a temporary increase, which will dissipate as number of global factors become more apparent, such as: US stimulus programs stop, Chinese economy continues to weaken or Japan’s controversial loose money program fails. There is no obvious clue on which scenario will be become reality but it is important to maintain perspective. If rates do increase over the next few years to over 5 % for a 5 year fixed term, most consumers would be happy to say that they locked in a long term mortgage rate at well under 4%. Current 5 year rates still provide excellent value and increasing numbers are taking advantage of 10 year fixed terms at 3.69%.
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Jason McLean BSc, AMP
The Mortgage Centre: Garibaldi Mortgage