10 Apr

BANK OF CANADA RATE DECISION: Rates Hold Steady for Sixth Consecutive Meeting

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Posted by: Kim Stenberg

The Bank of Canada Cautious, but a Rate CUT in June is Possible

Today, the Bank of Canada held the overnight rate at 5% for the sixth consecutive meeting and pledged to continue normalizing its balance sheet. Governor Macklem confirmed that inflation is moving in the right direction, labour markets are easing, and wage pressures appear to be dissipating. In today’s release of the April Monetary Policy Report (MPR), the central bank forecasters lowered their 2024 inflation forecast to 2.6% from 2.8%. However, the Governing Council needs more evidence to be confident that the downtrend in inflation is sustainable.

In contrast, the US CPI data released today for March showed that underlying inflation topped forecasts for the third consecutive month, and the US jobs data also beat estimates. This is in direct contrast to the news of better-than-expected inflation in Canada and the easing of labour markets. The Canadian economy is far more interest-rate sensitive than the US because mortgage terms are far shorter. Over 60% of all outstanding mortgages are up for renewal in the next two to three years, adding to monthly mortgage payments. That process has already begun.

While the Canadian economy slowed at the end of last year, more recent data suggest a bounceback in the first quarter. The Bank revised up its forecast for GDP growth in the first half of 2024 but reduced its economic outlook for next year. The Bank expects inflation to hit its 2% inflation target in 2025.

Bottom Line

Governor Macklem’s prepared opening statement at today’s press conference was more dovish on inflation than in prior months. “We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained,” Macklem said in the prepared text.  If things go according to today’s MPR forecasts, policymakers are likely to begin cutting the overnight rate in June.

Still, Macklem called further declines in core inflation “very recent,” adding that the bank wants to “be assured this is not just a temporary dip.”

“While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months,” officials said in the policy statement.

The next decision date is June 5, when overnight swaps traders pared their bets to about a 50-50 chance of a 25 basis point cut at that meeting, down from over two-thirds before today’s data release. A July rate cut is fully priced in. 

We will know more this coming Tuesday when the March CPI data (along with the federal budget) are released. April CPI will be posted on May 21.  As the chart below shows, inflation data in Canada is rapidly approaching the 2% target, well ahead of the US, although set backs can’t be ruled out. For example, gasoline prices have risen since early February. However, the proportion of CPI sectors showing less than 1% gains is rising as those showing more than 3% increases are falling fast.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
8 Apr

March’s Weak Jobs Report Sets the Stage for a June Rate Cut

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Posted by: Kim Stenberg

The StatsCanada Labour Force Survey for March is much weaker than expected. Employment fell by 2,200, and the employment rate declined for the sixth consecutive month to 61.4%.

Total hours worked in March were virtually unchanged but up 0.7% compared with 12 months earlier.

The details were similar to the headline: as full-time jobs dipped, total hours worked fell 0.3%, and only two provinces managed job growth. Among the type of worker, a 29k drop in self-employment was the primary source of weakness, while private sector jobs managed a decent 15k gain. The issue for the Bank of Canada is that wage gains are not softening even with a rising jobless rate. Average hourly wages actually nudged up to a 5.1% y/y pace, now more than two percentage points above headline inflation. With productivity barely moving, these 5% gains will feed into costs and threaten to keep inflation sticky.

The unemployment rate in Canada jumped to 6.1% in March of 2024 from 5.8% in the earlier month, the highest since October of 2021, and sharply above market expectations of 5.9%. The result aligned with the Bank of Canada’s rhetoric that higher interest rates have a more significant impact on the Canadian labour market, strengthening the argument for doves in the BoC’s Governing Council that a rate cut may be due by the second quarter. The unemployed population jumped by 60,000 to 1.260 million, with 65% searching for jobs for over one month. Unemployment rose to an over-seven-year high for the youth (12.6% vs 11.6% in February) and grew at a softer pace for the core-aged population (5.2% vs 5%).In March, fewer people were employed in accommodation and food services (-27,000; -2.4%), wholesale and retail trade (-23,000; -0.8%), and professional, scientific, and technical services (-20,000; -1.0%). Employment increased in four industries, led by health care and social assistance (+40,000; +1.5%).

Average hourly wages among employees rose 5.1% (+$1.69 to $34.81) year over year in March, following growth of 5.0% in February (not seasonally adjusted). This is still too high for the Bank of Canada’s comfort.

Bottom Line

The central bank meets again on Wednesday, and a rate cut is unlikely. I still expect rate cuts to begin at the following meeting in June. The Canadian economy, though resilient, will suffer from rising mortgage costs as many mortgages come under renewal over the next two years. Delinquency rates have already risen. Moreover, the planned reduction in temporary residents will also slow economic activity.

With the US jobs market still booming, it is likely the BoC will begin cutting rates before the Fed.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
19 Mar

Canadian Home Sales Stop Falling in February as Prices Hold Steady

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Posted by: Kim Stenberg

February data bode well for a strong spring housing market

The Canadian Real Estate Association announced today that national home sales dipped 3.1% m/m in February while home prices were flat, ending a five-month price decline that began last fall.

It was noteworthy that prices remained unchanged from January to February, given that they dropped 1.3 from December to January. The MLS Home Price Index tends to be relatively stable, so a shift in pricing behaviour this large is quite unusual. It has happened only three other times in the past two decades. All three times were in the past four years when demand was poised to rise sharply: May 2020, right after the initial COVID slump; January 2022, before interest rates were increased; and April 2023, when people thought the Bank of Canada would continue to pause. The rebound in home sales in 2023 led the central bank to hike interest rates two more times.

There is significant pent-up demand for housing owing to strong population growth and first-time homebuyers’ fears that prices will rise sharply once the Bank of Canada cuts interest rates.

New Listings

The number of newly listed homes edged up 1.6% m/m in February. Depending on how many owners prepare to list their properties for sale this spring, gains may rise in the months ahead.

“After two years of mostly quiet resale housing activity, there’s a feeling that things are about to pick up,” said Larry Cerqua, Chair of CREA. “At this point, it’s hard to know whether buyers are going to wait for a signal from the Bank of Canada or whether they’re just waiting for the spring listings to hit the market.

With sales edging down and new listings inching up in February, the national sales-to-new listings ratio eased a bit to 55.6%. The long-term average is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

At the end of February 2024, there were 3.8 months of inventory nationwide, up slightly from 3.7 months at the end of January. The long-term average is about five months of inventory.

Bottom Line

With pent-up demand for housing rising with every rent increase, the spring housing season is likely to be robust, even before the central bank cuts interest rates. We believe the BoC will begin reducing the policy rate in June. Tomorrow, we will get the CPI data for February. The US CPI data for February, released last week, were disappointing as gasoline prices increased headline inflation and core measures remained well above 3%.

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
6 Mar

BANK OF CANADA ANNOUNCEMENT: Holds Rates Steady Waiting to See Further Declines in Core Inflation

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Posted by: Kim Stenberg

Today, the Bank of Canada held the overnight rate at 5% for the fifth consecutive meeting and pledged to continue normalizing the Bank’s balance sheet. Policymakers remain concerned about risks to the outlook for inflation. The latest data show that CPI inflation fell to 2.9% in January, but year-over-year and three-month measures of core inflation were in the 3% to 3.5% range. The Governing Council projects that inflation will remain around 3% over the first half of this year but also suggests that wage pressure may be diminishing. The likelihood is that inflation will slow more rapidly, allowing for a rate cut by mid-year. 

The Bank also noted that Q4 GDP growth came in stronger than expected at 1.0% but was well below potential growth, confirming excess supply in the economy.

Employment continues to rise more slowly than population growth. During the press conference, Governor Macklem said it was too early to consider lowering rates as more time is needed to ensure inflation falls towards the 2% target.

Bottom Line

The Bank of Canada expects that progress on inflation will be ‘gradual and uneven.’ “Today’s decision reflects the governing council’s assessment that a policy rate of 5% remains appropriate. It’s still too early to consider lowering the policy interest rate,” Macklem said in the prepared text of his opening statement. The Bank is pushing back on the idea that rate cuts are imminent.

High interest rates are dampening discretionary spending for households renewing mortgages at much higher monthly payments. As the economy slows in the first half of this year, the BoC will signal a shift towards easing. This could happen at the next meeting on April 10, when policymakers update their economic projections. This could prepare markets for a June rate cut.

“We don’t want to keep monetary policy this restrictive longer than we have to,” Macklem said. “But nor do we want to jeopardize the progress we’ve made in bringing down inflation.”

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
29 Feb

No Recession in Canada, as Q4 GDP Growth Rose 1%

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Posted by: Kim Stenberg

Still No Recession in Canada Thanks to Huge Influx of Immigrants

Real gross domestic product (GDP) rose a moderate 1.0% (seasonally adjusted annual rate), a tad better than expected and the Q3 contraction of -1.2% was revised to -0.5%. This leaves growth for 2023 at a moderate 1.1%. Monthly data, also released today by Statistics Canada, showed that December came in flat, well below the robust flash estimate, while the January preliminary estimate was a strong +0.4% (subject, of course, to revision). The January uptick was driven by the return of Quebec public servants and a mild winter.

The fourth quarter growth was fuelled by higher oil exports and was moderated by a significant decline in business investment. Housing investment declined again in Q4–a sixth decline in the last seven quarters. Despite increased activity in Q4 new residential construction and renovations, it was more than offset by a large drop in home ownership transfer costs, reflecting the weakening resale market across Canada. Single-family units and apartments led the rise in new construction, as all provinces and territories, except Prince Edward Island, post a rise in housing starts.

Investment in non-residential structures fell sharply, as did spending on machinery and equipment, especially on aircraft and other transportation equipment. Even government spending declined.

Bottom Line

This is the last major economic release before the Bank of Canada meets again on March 6. The central bank will hold interest rates steady at next week’s meeting, and while some are suggesting the first rate cut this cycle will be as soon as the April confab, the consensus remains at June. With the uptick in growth in Q4, there is no urgency for the Bank to ease.

Policymakers will wait for their favourite core inflation measures to fall within the 1%-to-3% target band. They know that GDP per capita is falling and that mortgage renewals at higher interest rates will dampen household discretionary income. That’s why a June rate cut is widely expected.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
20 Feb

Great News on the Inflation Front Cause Big Bond Rally

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Posted by: Kim Stenberg

Canadian Inflation Falls to 2.9% in January, Boosting Rate Cut Prospects

The Consumer Price Index (CPI) rose 2.9% year-over-year in January, down sharply from December’s 3.4% reading. The most significant contributor to the deceleration was a 4% decline in y/y gasoline prices, compared to a 1.4% rise the month before (see chart below). Excluding gasoline, headline CPI slowed to 3.2% y/y, down from 3.5% in December.

Headline inflation of 2.9% marks the first time since June that inflation has moved into the Bank of Canada 1%-to-3% target band and only the second time to breach that band since March 2021.

Grocery price inflation also decelerated broadly in January to 3.4% y/y, down from 4.7% in December. Lower prices for airfares and travel tours also contributed to the headline deceleration. Prices for clothing and footwear were 1.3% lower than levels from a year ago, potentially reflecting the discounting of winter clothing after a milder-than-usual winter in much of the country.

The shelter component of inflation remains by far the largest contributor to annual inflation. The effect of past central bank rate hikes feeds into the CPI with a lag. The y/y growth in mortgage interest costs edged lower in January but still posted a 27.4% rise and accounted for about a quarter of the total annual inflation. Inflation, excluding mortgage costs, is now at 2.0%. Home rent prices continue to rise, but another component under shelter – homeowners’ replacement costs inched lower on slower house price growth.

On a monthly basis, the CPI was unchanged in January, following a 0.3% decline in December. On a seasonally adjusted monthly basis, the CPI fell 0.1% in January, the first decline since May 2020.

The Bank of Canada’s preferred core inflation measures, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trim slowed three ticks to 3.4%, and the median declined two ticks to 3.3% from year-ago levels, as shown in the chart below.

Notably, the share of the CPI basket of goods and services growing at more than 5% has declined from the peak of 68% in May 2022 to 28% in January 2024.

Bottom Line

The next meeting of the Bank of Canada Governing Council is on March 6. While January’s inflation report was better than expected and shows that the breadth of inflation is narrowing, it is still well above the level consistent with the 2% inflation target.

Shelter inflation will remain sticky as higher mortgage rates over the course of last year filter into the index and the acute housing shortage boosts rents.

The Bank of Canada will remain cautious in the face of still-high wage gains and core inflation measures above 3%. I hold to my view that the Bank will begin cutting rates in June.

Dr. Sherry Cooper  |  Chief Economist, Dominion Lending Centres
14 Feb

Canadian Home Sales Continued to Rise in January as Markets Tightened

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Posted by: Kim Stenberg

Canadian Home Sales Continued Their Upward Trend in January as Prices Fell Modestly

The Canadian Real Estate Association announced today that home sales over the last two months show signs of recovery. National sales were up 3.7% between December 2023 and January 2024, building on the 7.9% gain in December. The chart below shows that despite the two-month rise, sales remain 9% below their ten-year average. According to Shaun Cathcart, CREA’s Senior Economist, “Sales are up, market conditions have tightened quite a bit, and there has been anecdotal evidence of renewed competition among buyers; however, in areas where sales have shot up most over the last two months, prices are still trending lower. Taken together, these trends suggest a market that is starting to turn a corner but is still working through the weakness of the last two years.”

National gains were once again led by the Greater Toronto Area (GTA), Hamilton-Burlington, Montreal, Greater Vancouver and the Fraser Valley, Calgary, and most markets in Ontario’s Greater Golden Horseshoe and cottage country.

The actual (not seasonally adjusted) number of transactions was 22% above January 2023, the most significant year-over-year gain since May 2021. While that sounds like a resounding rise in activity, January 2023 posted the weakest transaction level in nearly twenty years.

There is pent-up demand for housing, and recent buyers are lured back into the market by the recent price decline and the fear that prices could rise significantly once the Bank of Canada starts cutting interest rates.

New Listings

The number of newly listed homes increased 1.5% month-over-month in January, although it remains close to the lowest level since last June.

“The market has been showing some early signs of life over the last couple of months, probably no surprise given how much pent-up demand is out there,” said Larry Cerqua, Chair of CREA.

With sales up by more than new listings in January, the national sales-to-new listings ratio tightened further to 58.8% compared to under 50% just three months earlier. The long-term average for the national sales-to-new listings ratio is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

There were 3.7 months of inventory on a national basis at the end of January 2024, down from 3.8 months at the end of December and 4.1 months at the end of November. The long-term average is about five months of inventory.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) fell by 1.2% month-over-month in January 2024, adding to the 1.1% price decline in December.

Price descents of late have been predominantly in Ontario markets, particularly the Greater Golden Horseshoe and, to a lesser extent, British Columbia. Elsewhere in Canada, prices are mostly holding firm or, in some cases (Alberta and Newfoundland and Labrador), continuing to rise.

The Aggregate Composite MLS® HPI was up 0.4% year-over-year in January 2024, similar to readings over the past six months.

Bottom Line

Sales in December and January generally run at about half the peak spring season pace. That could be especially true this year, with interest rates likely to begin falling by mid-year. A strong housing rebound is coming. Housing markets have bottomed, buyer sentiment is improving and fixed mortgage rates have started declining.

Housing markets in Toronto, Vancouver and Montreal are relatively balanced again, and with the spring season, we will see a rise in new listings.

In other news, the inflation data released yesterday in the US were higher than expected, pushing rate-cut forecasts further out. With the strength in the US economy, the 5-year government of Canada bond yield has quietly risen more than 50 basis points this year.

Canada’s Housing Minister, Sean Fraser, said he expects the fall in interest rates this year to encourage builders to ramp up their activity, helping to alleviate some of the country’s crunched housing supply. At a news conference yesterday, the minister said, “My expectation is if we see a dip in interest rates over the course of this year, a lot of the developers that I’ve spoken to will start those projects that are marginal today.”

Sean Fraser, asked whether he’s concerned that Bank of Canada rate cuts will unleash pent-up demand and higher home prices, said lower borrowing costs should also lead to an increase in supply. Fraser said whatever happens with rates, the government’s course of action will remain the same. “We need to do everything we can as quickly as we can to build as many homes as we can. And that’s going to be true today and six months from now, regardless of what may happen in the interest rate environment that we’re dealing with.”

At a news conference last week, Bank of Canada Governor Tiff Macklem said that while he’s heard from developers who’ve indicated higher rates are delaying projects, lowering rates would have a more significant impact on demand.

“It’s very clear in the data that the effects of interest rates on demand are much bigger than those on supply,” he told reporters.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
24 Jan

BANK OF CANADA HOLDS RATES STEADY and Expects Rate Cuts Later This Year

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Posted by: Kim Stenberg

Today, The Bank of Canada held the overnight rate at 5% for the fourth consecutive meeting but provided an outlook suggesting that monetary easing will begin by mid-year. The Bank forecasts a soft landing for the Canadian economy, with inflation falling to 2.5% by the end of this year. While some economists predict a recession, the Bank suggests that “growth will likely remain close to zero through the first quarter of 2024” and “strengthen gradually around the middle of 2024.” This would be a soft landing.

While inflation ended 2023 at 3.4%, owing mainly to high and sticky shelter costs, “the Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.”

The press release says that the “Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”  The Bank now believes the economy is in excess supply, inflation expectations and corporate pricing behaviour are moving in the right direction, and wage demands, at 5.4% year-over-year in the last reading–are still too high. Wages are a lagging indicator and with job vacancies returning to pre-pandemic levels, wage pressures are likely to dissipate as the year progresses.

Today, the tone was much more optimistic, suggesting that policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, Bank officials want to see more progress on core inflation before it begins to ease. It said, “The Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.”

The central bank focuses on “the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour” and remains resolute in restoring price stability.

Bottom Line

This was a more upbeat Bank of Canada statement. There is a good chance that monetary tightening has done its job, and inflation will trend downward in the coming months. As we have seen, the road to 2% inflation is bumpy, but we are heading there probably sooner than the Bank expects. As predicted, they are staying the course for now, but multiple rate cuts are likely this year. The scheduled dates for announcing the policy rate are March 6, April 10, June 5 and July 24. The Bank of Canada will begin cutting the overnight rate somewhere in there.

For now, my bet is on the June meeting, but if I’m wrong, it will likely be sooner rather than later. Once they begin to take rates down, they will do so gradually, 25 basis points at a time, and over a series of meetings. We could well see rates fall by 100-to-150 bps this year. Risks to the outlook remain, as always.

I do not expect the overnight policy rate to fall as low as the pre-Covid level of 1.75% this cycle. Inflation averaged less than 2% in the five years before COVID-19, depressed by increasing globalization and technological advances. Those forces are now reversed.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
18 Jan

Canadian Inflation Rises to 3.5% Y/Y in December – A Bumpy Road to the Inflation Target

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Posted by: Kim Stenberg

Canada’s headline inflation number for December ’23 moved up three bps to 3.4%, as expected, as gasoline prices didn’t fall as fast as a year ago. These so-called base effects were also evident in the earlier US inflation data for the same month.

Additional acceleration came from airfares, fuel oil, passenger vehicles and rent. Prices for food purchased from stores rose 4.7% yearly in December, matching the increase in November (+4.7%). Moderating the acceleration in the all-items CPI were lower prices for travel tours.

On a monthly basis, the CPI fell 0.3% in December after a 0.1% gain in November. Lower month-over-month price movements for travel tours (-18.2%) and gasoline (-4.4%) contributed to the monthly decline. The CPI rose 0.3% in December on a seasonally adjusted monthly basis.

Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — increased, averaging 3.65%, from an upwardly revised 3.55% a month earlier. That’s faster than the 3.35% pace expected by economists. The trim rate rose due to the movements of rent and passenger vehicle prices.

Another important indicator, a three-month moving average of underlying price pressures, rose to an annualized pace of 3.63% in December from 2.94% in November, according to Bloomberg calculations. The Bank of Canada follows this metric closely because it reveals shorter-term inflation trends.

According to Bloomberg News, following the release of today’s CPI data, “the yield on two-year Canadian government bonds rose about four basis points to 3.857%…Traders in overnight swaps pushed back bets on when the Bank of Canada will start cutting rates to July, from as early as April before the release.”

Bottom Line

This is the last major data release before the Bank of Canada meets again on January 24th. I concur with the widely held view that the rate pause will continue at the next meeting despite evidence that the economy is slowing. Governor Tiff Macklem will err on the side of caution before beginning to cut overnight rates. The last reading on wages showed a 5.4% y/y rise, and yesterday’s housing release showed a bump in sales. Macklem and Co. will keep their powder dry until they see an all-clear signal that core inflation is sustainably below 3%.

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
30 Nov

Economic Slowdown: The Table is Set for Rate Cuts in 2024

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Posted by: Kim Stenberg

Q3 GDP Weaker Than Expected Paving the Way for Future Rate Cuts

The Canadian economy weakened far more than expected in the third quarter, down 1.1% annually. However, the Q2 figures were revised up significantly from a 0.2% decline to a rise of 1.4%. Such are the vagaries of economic data. The Canadian economy is contracting despite the positive impetus of rapid population growth. Household consumer spending flatlined, and the savings rate rose, confirming that the central bank’s aggressive interest-rate hikes are doing their job to slow economic activity.

Statistics Canada also released preliminary data suggesting that GDP grew 0.2% in October, boosted by residential construction and increased oil and gas extraction and retail trade, after the better-than-expected 0.1% expansion in September.

The economic contraction was broadly based. Household spending hasn’t been this weak since 2009, except during the pandemic lockdowns. In addition, business investment was particularly feeble, down 14.4% for business equipment and -7.7% for nonresidential construction. Exports also declined 5.1% over the same period.  Investment in residential construction rose 8.3% annualized, the first increase since the beginning of 2022.

Job vacancy data, also released today, posted another decline, confirming that the economy has weakened and excess demand has been eliminated. On a per capita basis, Canada’s economy has contracted for the second consecutive quarter.

Tomorrow, Statistics Canada will release the labour market report for November.

Bottom Line

Today’s release is welcome news for the Bank of Canada. Tiff Macklem said last week that the Bank’s interest rate hikes were doing their job to return inflation to its 2% target. The Governing Council meets once again on December 6th. We expect a more dovish press release suggesting that the policy rate has likely peaked. Market-driven interest rates have fallen sharply since early October, taking fixed mortgage rates down significantly (see chart below).

Traders in overnight swaps are betting the Bank of Canada will loosen monetary policy as early as April 2024, little changed from before the release. I expect that the Bank of Canada will gradually cut interest rates beginning in the second quarter of next year, taking the overnight rate down 200 basis points to 3.0% by year’s end.

 

Dr. Sherry Cooper  |  Chief Economist, Dominion Lending Centres