On Friday the S&P 500 and the Toronto stock exchange were each down 1.5%.
Markets reacted negatively to the strong jobs report in the U.S because it adds fuel to predictions that the FED will raise interest rates even more than previously thought.
And markets and particularly bank stocks declined on news that the Silicon Valley Bank was effectively in receivership, taken over by the FED to be wound down. This was a private bank – not listed on the stock exchange. It suffered a run on deposits after it released some bad financial news. There is no indication that the problems at this bank have any relevance to any Canadian Bank.
Almost all the stocks I follow were down on Friday. American Express was noticeable with a 3.7% decline because of its banking operations. Dollarama was among the very few that bucked the trend as it managed a 0.2% gain.
In the U.S. the short term Treasury Bills yields (interest rates) declined very slightly on Friday. That may indicate something of a flight to quality. Longer term treasury bond yields declined noticeably. This could indicate predictions of lower interest rates ahead – in 2024 and beyond.
In Canada, a large volume of variable rate mortgage payers have seen or are about to see huge increases in their monthly payments. For CMHC insured mortgages (which is most of them) the banks With the approval of CMHC) are allowing the amortizations to be extended to 40 years to mitigate the payment increases. The change from 25 years to 40 years is going to going to help a lot actually. But there are still some big increases.
If the interest rate changes from 2% to 6% and the mortgage is extended to 40 years from 25, the payment goes up 29%. If the existing payment is $2000 then the new payment is $2580. If the amortization stayed at 25 years, the payment goes up 51%! Here’s a link to a mortgage calculator that goes to 40 years.
A lot of people on variable rate mortgages are going to have to hope that they qualify for an extension to a 40 year term.
Even with the mitigation the banks are offering, I suspect these far higher interest rates are going to lead to defaults and that the fall-out has not yet even begun. I am not suggesting widespread disaster but surely there is going to be some noticeable impacts.
People who suddenly find themselves paying 6% on a mortgage should look at any way possible to pay down the principle. That could mean using savings, selling surplus assets, cutting back on expenses, working overtime or getting a second job. People have to do what they have to do.