Economic analysis

Households are deep in debt, but by how much?

Your financial and economic news for December 15

MORNING-PLAYBOOK-STORYAs the world watches the hostage drama unfold in Sydney, it’s shaping up to be a nervous trading day in North America. There’s a lot on tap this week. While investors will resume Oil Watch 2014, they’ll also get a check up on major economies: In Canada, third quarter balance sheets will be out, the Fed will talks interest rates, and the Bank of England releases the naughty list for their banking stress test.

The day ahead

Oil is still below $60 though the free fall appears to have abated for the moment. While supply disruptions in Libya gave a boost to Brent crude, the global benchmark, West Texas Intermediate remains is also up slightly US$58.13 a barrel. Oil remains under pressure after OPEC gave no sign it would cut production to create a floor for prices. At the same time the International Energy Agency forecast that supply outside OPEC will continue to grow, even as the agency curbed expectations for demand.

The loonie remains below 87 cents, after hitting a five and a half year low on Friday. Like the price of oil, a minor rebound on Friday wasn’t enough to make up for the drop, and it finished the week at 86.8 cents.

Canadian and US markets dropped on Friday – the S&P composite index had it’s biggest week loss in four years, with the Dow Jones Industrial Index down 1.7 per cent, and drops for the S&P 500 and Nasdaq. The drop comes after record-setting days for American markets in the last couple weeks, on strong jobs and retail numbers. The TSX ended the day down, at 1.25 per cent.

More numbers from Statistics Canada. The National Balance Sheet Accounts and the Financial Flow Accounts for the third quarter will both be released on Monday. The National Balance Sheet Accounts track the balance sheets of households, corporations and the government, while the financial flow measures lending and borrowing across the economy.

The second quarter release in September showed increasing net household income, but also household debt at near-record levels. During the semi-annual financial system review last week by the Bank of Canada, Canadian household debt was one of the biggest potential risks Governor Stephen Poloz flagged last week. Expect to hear more on this today.

Update: Household indebtedness reached a record high in the third quarter. On average Canadians now owe $1.63 in debt for each dollar of disposable income they earn. At the same time, the household debt service ratio, a measure of the interest paid relative to income, fell to an all-time low of 6.8 per cent, as the Bank of Canada maintains low rates and lenders slash interest rates to attract new borrowers.

Stress tests and American interest rates. On Tuesday, Bank of England Governor will announce results of stress tests on British banks. Annual stress tests began earlier this year, with a set of scenarios to be tested on the country’s eight biggest banks. Fears of an overheated housing market in the UK – especially London – will be on everyone’s minds.

Speculation is also mounting about what the U.S. Federal Reserve will do when it meets to set rates this week. On Wednesday Fed Chair Janet Yellen will make her final quarterly briefing of the year. With strong jobs numbers pointing towards a healthier US economy – but low oil prices and flagging growth in China and the Eurozone – the big question is whether it’s time yet to raise interest rates.

More production numbers from the US – more data might help tip the scale. Monday brings industrial capacity numbers, Tuesday brings housing starts and permits, and Wednesday brings the current account deficit and the consumer price index (CPI.)

Will this week bring word of a Greek election? The Greek parliament will have the first round of a presidential election this week that could bring word of a new election, and more volatility in the Eurozone. The Athens stock market had a staggeringly bad week last week, dropping 20% by Friday.

What you missed

Sydney in the grips of a hostage crisis. Details are still sketchy, but roughly 15 people remain trapped in a cafe in Australia after a gunman with a black Islamic flag took them hostage. Five hostages escaped, but so far police don’t have a clear picture of the gunman’s motive or identity. Markets in Asia reacted nervously to the news.

A victory for “Abenomics” after Shinzo Abe won a weekend election in Japan. The prime ministers’ controversial approach to ending deflation appears to have found backing. The Central Bank of Japan meets on Thursday and Friday.

France gets a downgrade. On Friday, Fitch downgraded France one notch to AA. But other economies have it worse – Italy was recently cut down by S&P to just above junk index.





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