Inflation Held Steady In November

General Kimberly Coutts 20 Dec

 

Today’s inflation report was stronger than expected, unchanged from October’s 3.1% pace. While some had forecast a sub-3% reading, the November CPI data posted a welcome slowdown in food and shelter prices. Increases in recreation and clothing offset this–both are discretionary purchases. Cellular services and fuel oil prices declined on a year-over-year basis.

The CPI rose 0.1% from October to November, the same growth rate as in October. The steady pace of annual inflation resulted from the base effects in the energy sector. Gasoline prices fell to a lesser extent month over month in November (-3.5%) than in October (-6.4%). Base effects will also inflate next month’s year-over-year data as well.
 

Core prices aligned with the headline figures, as the Bank of Canada’s favourite core measures came in at roughly 3.5%. Even excluding food and energy, the core rose 3.5% y/y. The core data were more favourable at three-month trends, posting at about 2.5%.
 

Bottom Line

Today’s CPI data show why Governor Tiff Macklem is cautious about rate cuts, but judging from the past three months, core inflation is on a downward trend.

In a speech on Friday, Bank of Canada Governor Tiff Macklem said inflation could get “close” to the bank’s 2% target by late next year, though he also said it was “still too early to consider cutting our policy rate.”

The economy is slowing, labour markets have eased, and price pressures are slowing. The road to 2% inflation will be bumpy, but it remains likely that monetary tightening has peaked, and rate cuts will begin by the middle of next year.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Housing Markets Prepare For A 2024 Rebound

General Kimberly Coutts 18 Dec

 

Before we get into the details of the November housing market data released this morning by the Canadian Real Estate Association (CREA), big positive news for housing occurred yesterday. The US Federal Reserve gave its clearest signal yet that its historic policy tightening campaign is over by projecting more aggressive interest-rate cuts in 2024. This ignited one of the biggest post-meeting rallies in bonds and stocks in recent memory. Global shares spiked higher. Short-term Treasuries posted their best day since March, while world currencies surged against the US dollar and corporate bonds rallied. Canadian markets followed suit. If anything, Canada is far more interest-sensitive than the US, and our economy is far weaker.

As the charts below show, monthly mortgage payments relative to after-tax income are far higher in Canada than in the US, even more so given the tax deductibility of mortgage interest and property taxes south of the border. The US economy grew by a whopping 5.2% in the third quarter compared to a decline of 1.1% in Canada.  Therefore, the Bank of Canada will likely cut interest rates sooner and more aggressively than in the US, improving housing affordability.
 

The CREA data for November showed a bottoming housing market. Home sales recorded over Canadian MLS® Systems edged down by 0.9% from October to November 2023, the smallest decline since July.
 

New Listings

Sellers move to the sidelines as well. The number of newly listed homes fell 1.8% month-over-month in November. This followed a 2.2% decline in October.

With new listings down by more than sales in November, the national sales-to-new listings ratio tightened slightly to 49.8% compared to 49.4% in October. It was the first time this measure has increased since April. The long-term average for the national sales-to-new listings ratio is 55.1%.

There were 4.2 months of inventory nationally at the end of November 2023, up only slightly from 4.1 months at the end of October. As such, this measure also looks to be stabilizing and is still almost a full month below its long-term average of nearly five months of inventory.

The second chart below shows that we are definitely in a buyers’ market.
 

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) declined by 1.1% month-over-month in November 2023, reflecting softer market conditions since the end of the summer. Prices often react with a slight lag, so it will be interesting to see if month-over-month declines get smaller or stop getting larger in December in response to a stabilizing demand-supply balance.

While price declines remain mainly an Ontario phenomenon, home prices are now softening in the Fraser Valley, Winnipeg, and Halifax. Elsewhere in Canada, prices are mostly holding firm or, in some cases (Alberta, Saskatchewan, New Brunswick, Price Edward Island, Newfoundland and Labrador), continuing to climb. The Aggregate Composite MLS® HPI was up 0.6% on a year-over-year basis.
 

Bottom Line

The Bank of Canada policymakers will meet again on January 24th. While it will likely be several months before the Bank begins to cut the policy rate, market-driven interest rates have fallen sharply. Fixed mortgage rates have also come down but more moderately. I expect to start easing monetary policy in the spring, taking the overnight rate down by roughly 100 bps by yearend 2024. Housing activity will strengthen in 2024 and 2025, although the economy will be burdened by a substantial rise in monthly mortgage payments as many renewals or refinancings rise, peaking in 2026.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada hold prime rate for 3rd consecutive meeting.

General Kimberly Coutts 6 Dec

As we expected the Bank of Canada has held it’s overnight lending rate steady at 5% (this is the rate that the B of C utilizes to lend money to other banks).  What this means is that the Bank of Canada Prime stays at 7.2%, which is what affects us consumers.  It has been the third pause in a row which I’m sure we are all collectively very happy about.  Especially for those of us that have Variable Rate Mortgages, Home Equity Lines of Credit or any other sources of debt that are attached to the Prime Lending Rate.

The expectation by economists, is that the B of C will begin cutting the overnight rate sometime in 2024 and as early as April.  Over the last couple of weeks, conversations around variable rate options are coming back given this insight.

If you are up for renewal in the next 6 months and have questions of which direction to go in, please set up a Strategy Call to discuss.  It’s not always best to sign the first offering from the lender and I’m happy to review options.  Over the last few weeks, we’ve seen a steady stream of emails from lenders reducing their 3, 4 & 5 yr fixed rates.

I’m fortunate enough to receive economist commentaries so for those of you that want a bit more in-depth analysis, the below comments are from James Orlando, TD CFA, Director & Senior Economist

Slowing economy keeps the Bank of Canada on hold in December

  • The Bank of Canada maintained the overnight rate at 5.0%, while stating that it will continue with Quantitative Tightening (QT).
  • The Bank highlighted the slowing in economic momentum stating, “economic growth stalled through the middle quarters of 2023 (and that) higher interest rates are clearly restraining spending”. The Bank also noted that the labour market has cooled, as “job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly.”
  • On the improvement in inflation, it stated that “the slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices”. It did hedge this by stating that “shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs.”
  • On the future path of policy, the Bank “is still concerned about risks to the outlook for inflation” and maintained the statement that it “remains prepared to raise the policy rate further if needed”.

Key Implications

  • A hold today was the only option for the BoC. Given the economic backdrop, the BoC has likely gained greater confidence that its policy stance is sufficiently restrictive. There has been obvious weakness emanating from the housing market for a while now, but more recently, consumer spending has slowed alongside a further cooling in the labour market. But with inflation still above 3%, we get why the BoC isn’t ready to declare victory. Instead, the BoC seems like it is preparing to sit on the sidelines for the next couple of months while maintaining its cautious rhetoric.
  • Markets don’t think the BoC will be able to get too comfortable. The next move is clearly a cut, with odds pointing to the first move in April. We agree. The next few months are going to be challenging given our expectation that the unemployment rate will continue to rise, which will hit consumer spending and bring inflation down along with it. No wonder the Canada 2- and 10-year yields have fallen approximately 90 basis points over the last two months.

Mark your calendars as the scheduled dates for the interest rate announcements for 2024 are as follows:

  • Wednesday, January 24*
  • Wednesday, March 6
  • Wednesday, April 10*
  • Wednesday, June 5
  • Wednesday, July 24*
  • Wednesday, September 4
  • Wednesday, October 23*
  • Wednesday, December 11