Chrystia Freeland Resigns On The Day of The Fall Economic Statement

Finance Minister Freeland rocked markets today by submitting her resignation from Cabinet. Trudeau had asked her to take another Cabinet post, but she declined in a scathing letter accusing Trudeau of “costly political gimmicks” like “bribe-us-with-our-own-money cheques for $250 and a two-month GST holiday.

“Inevitably, our time in government will come to an end,” Ms. Freeland said, openly acknowledging what polls have been saying for over a year. “But how we deal with the threat our country currently faces will define us for a generation, and perhaps longer.”

The Federal deficit for 2023-2024 grows from $40 billion to $61.9 billion, partly boosted by a court settlement to pay funds to Indigenous children. The deficit far surpasses Freeland’s guardrail of $40.1 billion for last year’s budget deficit. New spending initiatives were announced amounting to $24 billion over the next six years. The most significant component is accelerated incentives to encourage business investment to improve productivity. This is very similar to a program issued by Finance Minister Frank Morneau years ago.

Dominic LeBlanc has been sworn in as the new Finance Minister.

Bottom Line

Today’s Fall Economic Statement took a backseat to the news that Chrytia Freeland resigned. There is more talk of a Trudeau resignation and an early election. Liberals are suggesting that Trudeau has stayed on too long, likening him to Biden. The caucus is meeting at 5 PM today.

The Surge In Canadian Unemployment Keeps Another Jumbo Rate Cut In Play In December

Before the release of today’s Canadian Labour Force Data, the odds favoured a 25 basis point drop in the overnight policy rate when the Bank of Canada meets again on December 11th. The data showed more substantial than expected job creation, as the country added 51,000 net new positions in November compared to the expected rise of 25,000. However, nearly 90% of the job growth was in the public sector, dampening enthusiasm.

Public sector employment rose by 45,000 (+1.0%) in November and accounted for the majority of the overall employment gain in the month. The number of private sector employees and the number of self-employed people were both little changed in November.

The number of public-sector employees grew by 127,000 (+2.9%) in November compared with 12 months earlier. The increase was driven by the public-sector components of health care and social assistance (+81,000) and educational services (+48,000) (not seasonally adjusted). Over the same period, private-sector employment rose at a slower pace (+1.3%; +173,000).

Despite the sharp rise in employment, the jobless rate surged to its highest level in three years, bolstering the case for the BoC to consider another 50 bps rate cut next week. Statistics Canada said Friday that unemployment jumped 0.3 percentage points to 6.8%. The jobless rate is now the highest since January 2017 excluding the pandemic period.

Interest rates fell on the news. Traders in overnight swaps boosted the odds of a 50 basis-point cut at the Bank of Canada’s decision next week at more than three-quarters, from about a coin flip previously. The report was released at the same time as US nonfarm payrolls, which rose by 227,000 while the unemployment rate rose to 4.2%.

The report underscores ongoing labour market softness that had already convinced the Bank of Canada to ramp up the pace of rate cuts with a 50 basis-point reduction in October.

Other details in the report pointed to a slowing economy. Hours worked dipped 0.2%, posting its third decline in the past four months. Also flagging was wage inflation, which cooled considerably. After remaining very strong for months, wage inflation dipped to 4.1% in November, down from 4.9% in October and marking its slowest pace in two years.

After falling for six consecutive months from May to October, the employment rate—the proportion of the population aged 15 and older who are employed—held steady at 60.6% in November. Employment growth in the month kept pace with growth in the population aged 15 and older in the Labour Force Survey (LFS) (+0.2%). On a year-over-year basis, the employment rate was down 1.2 percentage points.

The proportion of long-term unemployed people has increased along with the unemployment rate. In November, 21.7% had been continuously unemployed for 27 weeks or more, up 5.9 percentage points from a year earlier.

The labour force participation rate—the proportion of the population aged 15 and older who were employed or looking for work—increased by 0.3 percentage points to 65.1% in November, offsetting a cumulative decline of 0.3 percentage points in September and October. The participation rate was down by 0.5 percentage points on a year-over-year basis.

Bottom Line

Monetary policy remains overly restrictive as the 3.75% overnight policy rate remains well above the inflation rate. We expect the overnight rate to fall to 2.5% by April or June of next year. This should continue boosting housing activity, which increased significantly in October and November.

Last week’s GDP data release showed that Canada’s third-quarter GDP grew a mere 1.0%, well below the Bank’s downwardly revised forecast of 1.5%. This, in combination with today’s employment report, bodes well for the Bank of Canada to consider cutting rates by another 50 bps seriously. However, given how aggressive they have been compared to the Federal Reserve, which will undoubtedly cut rates by only 25 bps in late December, they could be satisfied with a 25 bp cut for now.

The Canadian Housing Market Shows Signs of Life

Canadian home sales surged to their highest level in more than two years as the Bank of Canada cut interest rates, bringing buyers back into the market. Home sales rose 7.7% month-over-month (m/m) in October, reaching their highest level since April 2022.

Rising home sales were broadly based, with the Greater Toronto Area and British Columbia’s Lower Mainland recording double-digit increases in October. The buoyant housing demand was likely the result of the surge in new listings in recent months and the fall in mortgage rates arising from the BoC’s easing. The jumbo rate cut, however, was in the last week of October, likely having little bearing on the monthly data released by the Canadian Real Estate Association this morning. Actual monthly housing activity came in 30% stronger than year-ago levels.

New Listings

New listings posted a 3.5% month-over-month decline in October, although that followed a 4.8% jump in September. Thus, new supply remains at some of the highest levels since mid-2022. The national pullback in October was led by a drop in new supply in the GTA.

With sales rising considerably in October and new listings falling, the national sales-to-new listings ratio tightened to 58%, up from 52% in September. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

At the end of October 2024,174,458 properties were listed for sale on all Canadian MLS® Systems, up 11.4% from a year earlier but still below historical averages for that time of year.

As of the end of October, there were 3.7 months of inventory nationwide, down from 4.1 months at the end of September and the lowest level in more than a year. The long-term average is 5.1 months of inventory, with a seller’s market below about 3.6 months and a buyer’s market above 6.5 months.

Home Prices

The National Composite MLS® Home Price Index (HPI) inched up 0.1% from August to September; however, small ups and downs aside, the bigger picture is that prices at the national level have remained mostly flat since the beginning of the year.

The non-seasonally adjusted National Composite MLS® HPI stood 3.3% below September 2023, a smaller decline than the 3.9% declines recorded in July and August. Given the price weakness seen towards the end of 2023, negative year-over-year comparisons will likely continue to shrink.

Bottom Line

The strength in home sales in October likely contributes to the expectation that the central bank will cut interest rates by only 25 bps when it meets again on December 11. Of course, their decision will be data-dependent; next week, we will see the October inflation data on Tuesday and retail sales on Friday. The November Labour Force Survey will be released on December 6. The unemployment rate has held steady at 6.5%, and wage inflation remains high. It would take a significant disappointment in these data to trigger another 50 bps cut.

In the meantime, bond yields continue to rise, triggered by the strong Trump victory and the fear that tax cuts and spending increases will boost government debt and deficits. While US long-term yields have risen nearly 80 basis points, Canadian 10-year yields are up less than half that amount. There is an unprecedented gap between economic activity in the US and Canada. The US dollar continues to strengthen, putting downward pressure on the loonie.

Pent-up demand for housing continues to be strong, and the combination of lower short-term interest rates and rising inventories of unsold homes will spur activity as we move into the all-important spring season. By then, the overnight rate, currently 3.75%, could be at least a full percentage point lower.

Bank of Canada Cuts Policy Rate By 50 BPs

After three consecutive 25 bp rate cuts, the BoC slashed the overnight rate by 50 bps this morning, bringing the policy rate down to 3.75%. The market had priced in 90% odds of a 50 bp move, where consensus coalesced. The combined slower-than-expected GDP growth and back-to-back weak inflation reports solidified the calls for a more significant move. The output gap continues to widen, countering the BoC’s forecast in July, pointing to an even more subdued inflation forecast. A 50 bp cut helps to offset that forecast miss by improving growth prospects faster. Even at 3.75%, monetary policy remains restrictive, as the chart shows below. The overnight rate is 145 bps above the September core inflation measure, and headline inflation moved below the 2% target.

We expect the policy rate to fall to 2.50% by the spring of next year. This morning’s 50 bp cut reinforces speculation of another 50 bp move in December. However, the Bank will likely need to see continued weak economic data and low inflation to prompt another big move. Wage growth remains stubbornly strong, and there might be some lingering concern about reigniting the housing market, especially with mortgage insurance rules poised to change on December 15.

However, the Bank pointed out that lower rates will trigger a rebound in the housing market. According to the Monetary Policy Report (MPR), “Resales and renovations are anticipated to recover as interest rates decline. Renovations should also be supported by a projected rise in house prices. Recent changes to government mortgage insurance rules are expected to bolster housing demand. Although population growth should ease, the level of demand is expected to remain robust and support new construction. Lower interest rates may also facilitate some increase in housing supply by easing financing costs. However, constraints on the amount of land available for new homes, zoning restrictions and a lack of skilled labour are expected to limit the pace of construction, particularly over the near term. As a result, growth in housing demand is expected to outpace increases in supply. Unlike other sectors of the economy that are experiencing excess supply, the housing market is projected to remain tight. House prices are expected to rise, but the pace of increases will likely be restrained because some home buyers will face affordability challenges”.

Effective tomorrow, the prime rate will fall to 5.95%, lowering floating-rate mortgage rates. According to Mortgage Logic News, the lowest nationally advertised 5-year fixed rate is down 10 bps this week to 4.09%.

In its policy statement, the Governing Council reduced its forecast for growth in the second half of this year to 1.75%. Third-quarter GDP growth was revised to 1.5% from 2.8% in the July MPR. Inflation has improved faster than expected, ending the year at 2.1%, with core inflation at 2.3% and falling further in 2025.

Bottom Line

Today’s action is great news for the Canadian economy and housing activity. Market participants are now expecting home resales to pick up sharply in the first quarter of next year. The coming spring housing season should be robust, boosting sales and prices.

Canadian Housing Market Stuck In A Holding Pattern

Following the Bank of Canada’s third interest rate cut of the year, national home sales increased slightly in September compared to August. This follows a similar pattern of gains recorded in the months following the first two rate cuts.

Home sales recorded over Canadian MLS® Systems climbed 1.9% month-over-month in September 2024, reaching their highest level since July 2023. The Greater Toronto Area, Hamilton-Burlington, Montreal and Quebec City, Greater Vancouver and Victoria led the national increase.

“Sales gains are now three for three in the months following interest rate cuts, which is a trend even though the increases weren’t headline-grabbing,” said Shaun Cathcart, CREA’s Senior Economist. “That said, with the pace of rate cuts now expected to be much faster than previously thought, it’s possible some buyers may choose to hold off on a purchase for now. This could further boost the rebound expected in 2025 at the expense of the last few months of this year”.

New Listings

New listings posted a 4.9% month-over-month rise in September, as sellers listed properties in more significant than normal numbers for the first weeks of the month. Gains were broad-based, with most of the country’s biggest markets topping the list.

At the end of September 2024, 185,427 properties were listed for sale on all Canadian MLS® Systems, up 16.8% from a year earlier but still below historical averages of around 200,000 listings for that time of the year.

With sales rising by less than new listings in September, the national sales-to-new listings ratio eased to 51.3%, down from 52.8% in August. This measure could be reversed if all those listings increase sales in October. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

“The beginning of September saw a burst of new supply for buyers to choose from before things generally quiet down for the winter,” said James Mabey, CREA Chair. “While some buyers may choose to take advantage, others may be inclined to wait as the bulk of future rate cuts from the Bank of Canada are now expected to show up in a matter of months as opposed to years.”

At the end of September 2024, there were 4.1 months of inventory nationally, down from 4.2 months at the end of August. The long-term average is 5.1 months of inventory, with a seller’s market below 3.6 months and a buyer’s market above 6.5 months.

Home Prices

The National Composite MLS® Home Price Index (HPI) inched up 0.1% from August to September; however, small ups and downs aside, the bigger picture is that prices at the national level have remained mostly flat since the beginning of the year.

The non-seasonally adjusted National Composite MLS® HPI stood 3.3% below September 2023, a smaller decline than the 3.9% declines recorded in July and August. Given the price weakness seen towards the end of 2023, negative year-over-year comparisons will likely continue to shrink.

Bottom Line

Potential homebuyers remain on the sidelines awaiting further rate cuts by the Bank of Canada. As long as home prices are flat, purchasers have no compelling reason to take immediate action. This should change gradually. With new supply on the market, sales should continue to rise this month.

With weak economic activity expected in Q3 and Q4, BoC rate reductions will continue well into 2025. Given standard seasonal housing activity patterns, we will likely see strong home sales in the spring. Governor Macklem has commented that more significant rate cuts would be forthcoming if the economy weakens too aggressively and inflation falls below the 2% target. This would be welcome news for housing. We expect the overnight policy rate to fall to 2.5% before the end of next year. It is now at 4.25%–well above the current inflation rate.

The September CPI data, released this morning, showed a marked decline in headline inflation to a mere 1.6% y/y. The decline was due to the September downdraft in gasoline prices, reflecting the weakening global economy. However, core inflation measures were unchanged from August to September, and gas prices have risen so far in October owing to stepped-up Middle East tensions. Nevertheless, excluding shelter costs–including mortgage interest payments, rent and renovation costs–inflation last month was 1.8%–below the Bank of Canada’s 1%-to-3% target band. This, combined with the slowdown in GDP growth, may trigger a 50 basis point rate cut at the October 23 Governing Council meeting.

Housing activity will continue to edge upward gradually through the remainder of 2024, accelerating as we approach the seasonally strong spring housing market.

More Good News On The Canadian Inflation Front

The Consumer Price Index (CPI) rose 1.6% year over year in September, the slowest pace since February 2021 and down from a 2.0% gain in August 2024. The main contributor to headline deceleration was lower year-over-year gasoline prices in September (-10.7%) compared with August (-5.1%). The all-items CPI, excluding gasoline, rose 2.2% in September, matching the increase in August for this measure.

Although the rate at which prices increase has slowed, price levels remain elevated. Compared with September 2021, the CPI rose 12.7% in September. Canadians continue to feel the impact of higher price levels for day-to-day basics such as rent (+21.0%) and food purchased from stores (+20.7%), which increased during that same 3-year period.

The CPI fell 0.4% in September after a 0.2% decline in August. Lower gasoline prices led to both the monthly and yearly movement in September. On a seasonally adjusted monthly basis, the CPI remained unchanged at 0.0%.

The central bank’s two core inflation measures remain sticky. Both measures were unchanged in September (see chart below). According to Bloomberg calculations, a three-month moving average of those measures fell to an annualized pace of 2.1% from 2.3% in August.

According to Bloomberg News, “After the release, traders in overnight swaps upped their bets that the Bank of Canada will opt for a larger rate cut at next week’s decision, putting the odds of a half-percentage-point reduction at about 75%. Previously, the odds were around 50%.” The Canadian dollar weakened further on the news relative to the greenback. The loonie has fallen for ten days, the longest streak since 2017. Canadian debt rallied across the yield curve, outperforming US Treasuries and pushing the two-year Canada benchmark yield to 3.03% and the 5-year bond yield to 2.92% by mid-day.

Tuesday’s data marks the first time since February 2021 that inflation is below the central bank’s 2% target and is the ninth straight month of headline rates running within its target range.

With inflationary pressures continuing to ebb and policymakers focusing more on preserving economic growth, the data give the central bank options to reduce rates quicker after cutting borrowing costs at 25 basis points at the past three meetings.

Bottom Line

While the September employment data were stronger than expected, Q3 GDP growth is slated to be roughly 1.8%, well below the Bank of Canada’s 2.8% forecast. Today’s inflation report is the last important data point before the Bank meets again on October 23. Late last month, BoC Governor Tiff Macklem warned that growth may be below policymakers’ previous expectations in Q3.

Excluding shelter costs, the consumer price index rose 0.4% from a year ago compared to 0.5% in August. Mortgage interest costs and rent remained the most significant contributors to the annual inflation rate change. However, rent prices increased at a slower pace in September, rising 8.2% versus 8.9% in August. Tuition fees, priced annually in September, also grew slower, increasing 1.8% compared with 2.5% last year.

Regionally, inflation is now at or below 2% in every province, with prices rising slower in September than in August in all ten provinces. The central bank will release new economic forecasts in the Monetary Policy Report next week. Macklem has said,  “decisive monetary policy action and the unblocking of supply chains” means “uncertainty about costs and inflation are much lower today than two years ago”.

Stronger-Than-Expected September Jobs Report Reduces Prospect Of Larger Rate Cuts

Statistics Canada released September employment data today, showing a marked uptick in job growth and the first decline in the unemployment rate this year. Employment rose by 46,700 in September, following four months of little change.

Despite the employment gain, the employment rate—the proportion of the population aged 15 and older who is employed—fell 0.1 percentage points to 60.7% in September. The employment rate has been on a downward trend since reaching a recent peak of 62.4% in January and February 2023, as growth in the population aged 15 and older in the Labour Force Survey (LFS) outpaced employment growth.

Also, good news: The number of private sector employees increased for the second consecutive month, rising by 61,000 (+0.5%) in September and bringing the year-over-year increase in private sector employment to 193,000 (+1.5%). Public sector employment fell by 24,000 (-0.5%) in September but was up 3.0% (+128,000) compared with 12 months earlier. Self-employment changed little in the month and on a year-over-year basis.

Full-time employment rose by 112,000 (+0.7%) in September, the most significant gain since May 2022. The increase was partially offset by a decline in part-time work (-65,000; -1.7 %).

The unemployment rate fell for the first time since January—a mere 0.1% decline, but we’ll take it, and now stands at 6.5%. This follows a rise of two ticks in August. The jobless rate is well above the 4.9% cycle low when job vacancies were rampant. Discouraged workers have dropped out of the labour force. The labour force participation rate is down 0.7 percentage points year-over-year.

Wage inflation is a big issue for the Bank of Canada, and this time, average hourly wages increased by 4.6%, down from the August rate of 5.0%.  Other measures of wage inflation are now even lower.

Bottom Line
Economists are still divided on whether the Bank of Canada will cut by 25 or 50 basis points. Next week’s inflation data, released on Tuesday, October 15, will become all the more critical. The numbers are expected to be good, meaning low. The economy slowed markedly in the third quarter, and monetary policy remains overly restrictive. Stay tuned!