Canada’s Inflation at 6.9% in October Supports a December Rate Hike

Latest News Kim Stenberg 16 Nov

Bank of Canada Will Not Be Happy With This Inflation Report

 

Not only did the headline CPI inflation rate stall at 6.9% last month, but the core CPI numbers remain stubbornly high. Food inflation–a highly visible component–edged down slightly. Still, prices for food purchased from stores (+11.0%) continued to increase faster year over year than the all-items CPI for the eleventh consecutive month. Bonds fell on the news, with Canada’s two-year yield rising to 3.877% at 8:43 a.m. Ottawa time, about 3.5 basis points (bps) higher than its level before the data release. The yield on 5-year Government of Canada bonds spiked temporarily on the release of these disappointing inflation data. This was in direct contrast to the US, which posted a better-than-expected inflation reading for October last week.

Less than two weeks after a stronger-than-expected jobs report, the inflation numbers continue to show the economy in overheated territory. Bank of Canada Governor Tiff Macklem has said that rates will need to continue to rise further while acknowledging the end of this tightening cycle is near.

Traders are pricing at least a 25 basis-point increase at the next policy decision on Dec. 7, with a 50-50 chance of a half percentage point hike. The central bank has increased borrowing costs by 3.5 percentage points since March, bringing the benchmark overnight lending rate to 3.75%.

A significant factor in the Bank’s decision process is the continued rise in wage inflation to a 5.6% annual pace in October. If inflation expectations remain robust, wage-price spiralling becomes a real threat.

Bottom Line

Price pressures might have peaked, but today’s data release will not be welcome news for the Bank of Canada. There is no evidence that core inflation is moderating despite the housing and consumer spending slowdown. The average of the Bank’s favourite measure of core inflation remains stuck at 5.3%. The central bank slowed reduced its rate hike at the October 26th meeting to 50 bps, and while some traders are betting the hike in December will be 25 bps, there is at least an even chance that the Governing Council will opt for an overnight policy target of 4.25%.

Inflation is still way above the Bank’s 2%-target level. Ultimately, it will take a higher peak interest rate to break the back of inflation. I expect the policy target to peak at about 4.5% in early 2023 and to remain at that level for an extended period despite triggering a mild recession in early 2023.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Home Sales Edged Upward in October, as Prices Continued to Decline

Latest News Kim Stenberg 15 Nov

Statistics released today by the Canadian Real Estate Association (CREA) show home sales were up 1.3% on a month-over-month basis in October. Still, monthly activity remained a whopping 36% below the October pace in 2021. The housing correction continues in response to the Bank of Canada’s massive rate hikes, but the speed of the correction is slowing.

“October provided another month’s worth of data suggesting the slow down in Canadian housing markets is winding up,” said Shaun Cathcart, CREA’s Senior Economist. “Sales actually popped up from September to October, and the decline in prices on a month-to-month basis got smaller for the fourth month in a row.”

You can see from the chart below just how slight the uptick in October home sales was, but at this stage, it shows that a housing crash is not occurring.

New Listings

The number of newly listed homes was up 2.2% on a month-over-month basis in October, with gains in the Greater Toronto Area (GTA) and the B.C. Lower Mainland offsetting declines in Montreal and Halifax-Dartmouth.

With sales up by a little less than new listings in October, the sales-to-new listings ratio fell to 51.6% compared to 52% in September. The long-term average for this measure is 55.1%.

There were 3.8 months of inventory on a national basis at the end of October 2022, up slightly from 3.7 months at the end of September. While the number of months of inventory is still well below the long-term average of about five months, it is also up quite a bit from the all-time low of 1.7 months set at the beginning of 2022.

 

 

 

 

 

 

 

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) edged down 1.2% month-over-month in October 2022, the smallest decline since June.

The national average transactions price fell 9.9% y/y  in October, while the MLS HPI dipped 0.8% y/y with downward momentum continuing on a month-to-month basis. The HPI is now down eight months or an even 10% from the February high. With mortgage rates across the spectrum pushing above 5% as the Bank of Canada tightens further, this downward price discovery will probably persist well into next year.

In Ontario, for example, the sales-to-new listings ratio has weakened to just above the 40% level. In some markets outside the core of the GTA, benchmark prices are easily down 15%-to-20% from their early-year highs already. It’s a similar situation in B.C. where, while Vancouver is correcting, markets 1-to-2 hours outside the core are doing so even faster—none of this is a surprise given how sharply these exurban markets ballooned during the pandemic. Meantime, Atlantic Canada is holding up relatively well thanks to an ongoing population influx, while Alberta (and the Prairies more broadly) still look pretty solid.

 

 

The table below shows the decline in average home prices in Canada and selected cities since prices peaked in March when the Bank of Canada began hiking interest rates. More details follow in the second table below. The largest price dips are in the GTA and the GVA, where the price gains were spectacular during the COVID-shutdown.

 

 

Bottom Line

The Bank of Canada slowed its tightening pace to 50 bps when it met in late October. Since then, the US inflation has slowed a bit, causing longer-term bond yields to fall meaningfully. Tomorrow, Canada will release its latest inflation report. All eyes will focus on core inflation (which excludes food and energy prices) in the hopes that evidence will also validate a slowdown in those measures.

The Bank of Canada’s policy announcement date is not until December 7th, when another rate hike is widely expected. Tomorrow’s inflation report will give us a better sense of whether a 25-bps hike might be possible.

 

Shockingly Strong Employment Report in Canada Starts Q4 off with a Bang

Latest News Kim Stenberg 4 Nov

Today’s Labour Force Survey for October was surprisingly strong, boosting wage inflation to an eye-popping 5.6% year-over-year pace. While good news for the economy, this is terrible news for the inflation fight–just when the Bank of Canada eased its foot on the brakes. The two-year and five-year Government of Canada bond yields spiked on the news, calling into question the Bank of Canada’s decision last week to trim the rate hike to 50 bps rather than the 75 bps that was expected. While one month’s data is not enough to draw too fine a point, this does call into question the assumption that fourth-quarter growth will be substantially less than 1%.

Following four months of declines or little change, employment rose by 108,000 (+0.6%) in October. This increase—widespread across industries, including manufacturing, construction, and accommodation and food services—brought employment back to a level on par with the most recent peak observed in May 2022. All of the gain in October was in full-time work, another indicator of economic strength. This was the first gain among private sector employees since March when the Bank of Canada began hiking interest rates.

After declining in September, the unemployment rate remained at 5.2% in October, 0.3 percentage points above the record low of 4.9% observed in June and July. The adjusted unemployment rate—which includes people who wanted a job but did not look for one—was virtually unchanged in October at 7.1%.

In October, the labour force—or the total number of people who are either employed or unemployed—was 110,000 (+0.5%) more significant than in September. The labour force participation rate rose 0.2 percentage points to 64.9% in October but fell 0.5 percentage points short of the recent high of 65.4% in February and March 2022.

 

Employment rebounded in construction and manufacturing. The number of people working in construction rose by 25,000 (+1.6%) in October, with increases in five provinces, including Quebec (+17,000; +5.9%) and British Columbia (+6,000; +2.5%). Despite this increase, employment in construction was virtually unchanged in October compared with March 2022, consistent with the latest data on gross domestic product showing slowing economic activity in the industry over a similar period.

Employment rose by 24,000 (+1.4%) in manufacturing, mainly offsetting the decrease of 28,000 (-1.6%) recorded in September. Most of the increase was attributable to British Columbia (+12,000; +6.9%) and Nova Scotia (+3,700; +11.6%). On a year-over-year basis, employment in manufacturing was little changed.

The number of people working in accommodation and food services increased by 18,000 (+1.7%) in October, the first increase in the industry since May. According to the latest data from the Job Vacancy and Wage Survey, the industry had a higher job vacancy rate than all other industries in August.

Employment in professional, scientific and technical services rose by 18,000 in October (+1.0%), the third increase in six months. The number of people working in the industry has followed a long-term upward trend since June 2020, and in October was 297,000 (+19.3%) above its pre-pandemic level.

In October, the number of people working in wholesale and retail trade declined by 20,000 (-0.7%). Employment in the industry last increased in May and was little changed on a year-over-year basis in October. According to the latest data on retail trade, while retail sales increased 0.7% to $61.8 billion in August, advance estimates suggest that sales decreased 0.5% in September.

Of paramount importance to the Bank of Canada’s endeavours to wrestle inflation to a 2% pace, average hourly wages last month were 5.6% higher than one year earlier, accelerating from a rate of 5.2% in September. Despite average wages growing by more than 5% on a year-over-year basis in each of the past five months, they have not kept pace with inflation, which was 6.9% in September, contributing to concerns about affordability and the cost of living for many Canadians.

In separate news, the US employment data for October were also released today, showing stronger-than-expected hiring and wage gains, while the jobless rate ticked up a bit more than expected.

Bottom Line

Today’s labour force data in Canada throws into question the widespread assumption that the Bank of Canada can ease off the brakes very soon. I believe Governor Tiff Macklem will hike rates by another 50 bps in December and continue with 25 bp increases early next year. Today’s employment report raised the odds of the peak in the policy target of 4.5%.

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres