Inflation rose 2.2% year over year in February, according to Statistics Canada. The mortgage interest cost increased 2.3% from the prior year as the Bank of Canada pulled the trigger on an early interest rate hike in January. In Ontario, food prices at restaurants rose 6.6%, while child care and housekeeping services increased 10.6% and personal care services rose 5.5%. Ontario instituted the first of two minimum wage increases in January of this year, bringing it to $14 per hour.
The report has a positive impact on what has been a softening Canadian dollar in 2018. However, the specter of weaker retail sales in December and January coupled with volatility in the Canadian stock market demonstrate that a second rate hike is not a certainty just yet. In March, the head of Canadian fixed income at BlackRock, Inc., the largest asset manager in the world, projected only one more rate hike in Canada in 2018.
The eighth round of NAFTA negotiations are also set to commence on April 8. United States President Donald Trump has threatened to remove exemptions on steel and aluminum tariffs on Mexico and Canada if talks have not reached a satisfactory point by May 1. Meetings have been positive thus far in 2018, and the results of the early April discussions will likely have an impact on Bank of Canada’s decisions.
If rates are raised again in April, Canadian consumers and a struggling housing market will face more pressure. Alternative lenders have been clobbered in 2018 thus far. Equitable Group Inc. (TSX: EQB) stock has plunged 25.6% in 2018 after it reported record net income of $160.6 million in 2017 and mortgages under management hit an all-time high of $23.2 billion.
Home Capital Group Inc. (TSX: HCG) stock has dropped 22.9% in 2018 as of close on March 27. The company returned to profitability in the third quarter of 2017, but growth has been severely curbed year over year due to internal restructuring and a near-collapse in the spring of last year. Alternative lenders have the potential to see a boost in business as credit conditions tighten for many Canadians seeking financing. However, slumping home sales and new mortgage rules will likely make it a tough environment for Home Capital and Equitable Group to produce solid loan growth in 2018.
News may not be good for alternative lenders, but there is one stock that could benefit from this changing rate environment.
Goeasy Ltd. (TSX: GSY) is a Mississauga-based company that provides alternative financial services to consumers, including unsecured installment loans. Goeasy stock has increased 1.4% in 2018 thus far. It recorded an impressive 2017 as adjusted net income rose 27.2% to $42.2 million. Loan originations hit a record $176.4 million in the fourth quarter, representing a 50.1% jump from the prior year.
Goeasy offers financing for products like household furnishings and home electronics. Tightening credit conditions could drive customers into its arms and the retail environment has remained fairly strong in Canada year over year, even in light of weakness in December and January. Goeasy also offers a dividend of $0.90 per share representing a 1.9% dividend yield.
