Finally Some GOOD NEWS on the Inflation Front

Latest News Kim Stenberg 11 Aug

It was widely expected that US consumer price inflation would decelerate in July, reflecting the decline in energy prices that peaked in early June. The US CPI was unchanged last month following its 1.3% spike in June. This reduced the year-over-year inflation rate to 8.5% from a four-decade high of 9.1%. Oil prices have fallen to roughly US$90.00 a barrel, returning it to the level posted before the Russian invasion of Ukraine. This has taken gasoline prices down sharply, a decline that continued thus far in August. Key commodity prices have fallen sharply, shown in the chart below, although the recent decline in the agriculture spot index has not shown up yet on grocery store shelves. US food costs jumped 1.1% in July, taking the yearly rate to 10.9%, its highest level since 1979.

 

 

 

The biggest surprise was the decline in core inflation, which excludes food and energy prices. The shelter index continued to rise but did post a smaller increase than the prior month, increasing 0.5 percent in July compared to 0.6 percent in June. The rent index rose 0.7 percent in July, and the owners’ equivalent rent index rose 0.6 percent.

Travel-related prices declined last month. The index for airline fares fell sharply in July, decreasing 7.8%. Hotel prices continued to drop, falling 2.7% on the heels of a similar decrease in June. Rental car prices fell as well from historical highs earlier this cycle.

Bottom Line

The expectation is that the softening in inflation will give the Fed some breathing room. Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.

Treasury yields slid across the curve on the news this morning while the S&P 500 was higher and the US dollar plunged. Traders now see a 50-basis-point increase next month as more likely than 75. Next Tuesday, August 16, the July CPI will be released in Canada. If the data show a dip in Canadian inflation, as I expect, that could open the door for a 50 bps rise (rather than 75 bps) in the Bank of Canada rate when they meet again on September 7. That is particularly important because, with one more policy rate hike, we are on the precipice of hitting trigger points for fixed payment variable rate mortgages booked since March 2020, when the prime rate was only 2.45%. The lower the rate hike, the fewer the number of mortgages falling into that category.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

Canada’s Jobs Market May Be Weakening

Latest News Kim Stenberg 8 Aug

The Canadian Economy is Slowing — Job Markets Will Begin to Shift

 

The July employment report, released this morning by Statistics Canada, is a real head-scratcher. The job numbers fell for a second consecutive month, but so did the number of job seekers, so the unemployment rate remained unchanged at a historic low of 4.9%. I have been pondering the profusion of labour market data for longer than usual today to decide where I come out on this. My bottom line is the Canadian economy is slowing in response to the whopping rise in interest rates. Labour markets across the country are still very tight as massive job vacancies continue, but the market’s tenor (or mood) is shifting.

There are still labour shortages in businesses that need customer-facing employees–think restaurants, hotels, travel, retail, household services, as well as in construction and the trades. But we are also now hearing of layoffs and cutbacks in businesses that boomed during the lockdowns. Many of those over-expanded and are currently cutting back. A great Canadian example is Shopify, but the same can be said of major retailers like Walmart and Target, which now find themselves overstocked.

The housing markets in Canada are slowing sharply, especially in the highest-cost regions around the Greater Vancouver and Toronto areas.

Central banks worldwide took interest rates down to near-zero levels in the early days of the pandemic, triggering a massive boom in housing. Canada’s boom was second to none, reflecting the long-standing housing shortage. Since 2015, home construction for rent and purchase in Canada has paled compared to the rising demand generated by surging immigration targets. First-time buyers’ FOMO, combined with record-low mortgage rates, especially on variable rate loans, triggered a buying frenzy. Millennial parents helped by tapping their homeowner equity to make those down payments possible. Some of those parents could be left with the legacy of home equity loans whose monthly payments have sky-rocketed with the prime rate. Cabin fever during lockdown generated a host of other buyers who just wanted more space and were willing to move to the exurbs and beyond to afford it. Investors, long tantalized by the surge in condo prices and the growing demand for rental properties, piled on.

Central banks kept interest rates too low for too long. They should have started to raise them when inflation percolated. They thought inflation was transitory, and we all thought vaccines were the magic bullet to end the Covid pandemic. The Russian invasion of Ukraine created the perfect storm, exacerbated by China’s zero Covid policy. Supply chains crumbled further, and commodity prices surged.

Now that oil prices below $90 a barrel have returned to pre-war levels, and gasoline prices have fallen since early June, inflation might have peaked. But central banks must continue tightening to return policy interest rates to normal levels. This means an overnight rate in Canada of roughly 3.5% and nearly 5% in the US. That’s still a far cry from today’s level of 2.5%. And the central banks will not and cannot return rates to last year’s lows. Not soon, and possibly not ever. Unless you believe an equivalent global shutdown will be required sometime in the foreseeable future.

The economy lost 30,600 jobs last month, adding to a loss of 43,200 jobs in June. Canada’s job market is losing momentum as the broader economy is cooling. The job loss also reflects labour shortages and insufficiently trained new workers. Just look at the chaos at Pearson Airport. Labour market conditions are still very tight, and wage rates are rising, up 5.2% y/y last month.

In Direct Contract, US Employment Surged in July 

In other relevant news today, Bloomberg reports that “US employers added more than double the number of jobs forecast, illustrating rock-solid labour demand that tempers recession worries and suggests the Federal Reserve will press on with steep interest-rate hikes to thwart inflation.” So much for a Fed pivot. The idea that the bond market rallied on the premature news of a US recession made no sense at this point in the cycle.

Similarly, the Bank of Canada is still likely to hike the policy rate by 75 basis points when they meet again on September 7. That would take the prime rate up to 5.45%. Currently, the 5-year government of Canada bond yield is 2.87%, well below its peak of 3.6% in mid-June. Consequently, we may see variable mortgage rates rise above fixed rates before year-end.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Tips to Create a Monthly Budget

Mortgage Tips Kim Stenberg 2 Aug

One of the quickest ways to take back control of your finances and understand where your money is going is to create a monthly budget. This will help you get a snapshot of your income compared to your spending, and provides an avenue to review outgoing costs and determine areas for improvement to help you increase your monthly cashflow or just feel less stressed!

Step 1: Calculate Your Income

The very first step to creating any budget is determining your income – knowing exactly how much money do you bring in, per month, is important to understanding what you have available to spend. Remember to focus on NET INCOME versus gross salary as thinking you take home more than you do can lead to overspending and failed budgets.

Step 2: Track Your Spending

Once you have determined your income, you will want to take a look at your spending. Reviewing and categorizing all your monthly bills can help you breakdown exactly where your money goes and your priorities to see where changes can be made.

To start, first list out your fixed expenses – these are things like car payments, loans, rent or mortgage costs that do not change on a monthly basis.

Next, you will want to take a look at your variable expenses – things like groceries, gas, entertainment, etc. and determine your average spend. This is typically the area where people are able to cut back.

Step 3: Set Realistic Goals

Realistic goals are vital for long-lasting financial health. It is important to determine what you cannot live without and where you can cut costs or scale back on spending.

Ideally, when it comes to your monthly budget, you want to consider the 50/30/20 rule, which applies the following:

  • 50% of your spending is for NEEDS such as rent or mortgage payments, car payments, utilities and groceries
  • 30% of your income goes to WANTS such as shopping, vacations, streaming services, etc.
  • 20% of your income goes to SAVINGS OR DEBT such as emergency funds, retirement, child’s education and/or credit card payments

Step 4: Make a Plan

Once you have your goals set, you can now make a plan to tackle your financial position and ensure a healthy cashflow each month.

There are a few different ways you can plan to handle your monthly budget. For some, setting realistic spending limits for each category works well. For others, taking a look at the importance of the items on their expenses list and re-prioritizing can free up funds.

Step 5: Adjust Your Spending

Now that you have determined how much money you bring in per month and what you spend it on, you can take a look at adjusting your spending to ensure you remain on budget. Taking a look at any wants is a great place to cut out frivolous spending beyond a reasonable amount.

This is also a great time to review your fixed expenses. Perhaps you can save money by getting a better interest rate on your mortgage or changing your payment schedule for your loan.

Be sure to connect with a Dominion Lending Centres mortgage expert before making any changes!

Step 6: Stay on Track

Lastly, once you’ve tracked all your spending and income and determined your monthly budget, you will want to stay on track. Tracking your budget on a monthly basis is important to catch any changes in your spending habits. As well, it is a good idea to conduct an annual review and take into account any increase in expenses or wages that may require shifts in your overall plan.

Remember! A healthy, well thought-out budget is key to financial freedom and comfort.

 

DLC Marketing Team