BANK OF CANADA RATE ANNOUNCEMENT

Latest News Kim Stenberg 26 Jan

NO RATE HIKE UNTIL MARCH – BANK ASSURES INFLATION WILL RETURN TO 2% OVER 2023-2024

 

While markets were 70% certain the Bank would hike their overnight target rate today, we remained of the view that the Governing Council would hold off until March or April because of the slowdown in first-quarter growth arising from the Omicron restrictions. The Bank announced today that economic slack in the economy had been absorbed more rapidly than expected in late October when they last met. “Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, the Governing Council judges the economy is now operating close to its full capacity.”

Consequently, the Bank now believes that emergency measures arising from the pandemic are no longer necessary. They clearly state that a rising path for interest rates will be required to moderate domestic spending growth and bring inflation back to target. Being mindful that the increasing spread of Omicron will dampen spending in the first quarter, they decided to keep the policy rate unchanged today and to signal that rates will rise going forward. “The timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.”

Notably, the Bank also suggested that another vital policy measure to reduce demand and thereby control inflation is “quantitative tightening” (Q.T.), reducing the central bank’s holdings of Canadian government bonds on its balance sheet. This selling of bonds also raises interest rates. “The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.”

The Bank of Canada is very concerned about maintaining its hard-won inflation-fighting credibility. Remember that while Canadian inflation is at a 30-year high–as it is in the rest of the world–at 4.8%, Canadian inflation pales compared to the 7.0% rate in the U.S. and 6.8% rate in the U.K. (see chart below). It is also below the pace of the Euro area. The Bank stated that “CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.”

Bottom Line

It surprises me that economists in Canada would expect the Bank to hike interest rates during a Covid lockdown without properly measured signalling beforehand. Bay St’s hysteria about inflation seems to have muddied thinking. The Bank will be taking out the big guns to get inflation under control. Overnight rate hikes begin at the next policy meeting on March 2 and then Quantitative Tightening shortly after that. The downsizing of the Bank’s balance could have even more dramatic effects on the shape of the yield curve, hiking longer-term interest rates.

In today’s policy statement and Monetary Policy Report, the Bank emphasized the strength of the housing market and the impact on inflation of the more than 20% rise in Canadian house prices last year. The MPR suggests that housing market activity strengthened again in recent months, led by a rebound in existing home sales. “Low borrowing rates and high disposable incomes continue to contribute to elevated levels of housing activity in the first quarter. At the same time, other factors that support demand, such as population growth, are also now picking up.”

Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five or six times this year. This would take the overnight rate from 0.25% to 1.5% to 1.75%. It was 1.75% in February of 2020 before the pandemic easing began. Markets also expect two more rate hikes in 2023, taking the overnight rate to 2.25%.

Volatility in financial markets has surged this year. The FOMC, the US policy-making body, announces its decision at 2 PM ET today. No rate hike is expected yet, but the Fed will undoubtedly commit to serious rate hikes and balance sheet contraction in the coming months.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

December Home Sales Top Off Record Year

Latest News Kim Stenberg 17 Jan

Housing Affordability Erodes Further With Record-Low Supply

Housing affordability remains a huge political issue and with the Department of Finance working on the upcoming budget, no doubt measures to reduce home prices will be front and center. What we desperately need is dramatic increases in new housing construction, which has been woefully constrained by local zoning and city planning issues. These are not under the auspices of the federal government. So instead, bandaid measures that do not directly address the fundamental issue of a housing shortage will likely be forthcoming. More on that below.

Today the Canadian Real Estate Association (CREA) released statistics for December 2021 showing national existing-home sales rose edged higher on a month-over-month basis, constrained by limited supply. Excess demand pushed home prices up on the month by 2.5%, taking the 2021 home price index up a record 26.6% year-over-year.

Small gains in home sales in November and December followed a 9% surge in activity in October, placing sales in the final quarter of 2021between the highs and lows seen earlier and the year (see chart below). With the exception of month-over-month sales gains in Calgary and the Fraser Valley, most other large markets mirrored the national trend of little change between November and December. The actual (not seasonally adjusted) number of transactions in December 2021 came in 9.9% below the record for that month set in 2020. That said, as has been the case throughout the second half of 2021, it was still the second-highest level on record for the month.

On an annual basis, a total of 666,995 residential properties traded hands via Canadian MLS® Systems in 2021. This was a new record by a large margin, surpassing the previous annual record set in 2020 by a little more than 20%, and standing 30% above the average of the last 10 years.

 

New Listings

The number of newly listed homes fell 3.2% in December compared to November, with declines in Greater Vancouver, Montreal and a number of other areas in Quebec more than offsetting an increase in new supply in the GTA.

With sales little changed and new listings down in December, the sales-to-new listings ratio tightened to 79.7% compared to 77% in November. The long-term average for the national sales-to-new listings ratio is 54.9%.

Almost two-thirds of local markets were sellers’ markets based on the sales-to-new listings ratio being more than one standard deviation above its long-term mean in December 2021. The remaining one-third of local markets were in balanced market territory.

There were just 1.6 months of inventory on a national basis at the end of December 2021 — the lowest level ever recorded. The long-term average for this measure is a little more than 5 months.

Home Prices

In line with the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) was up another 2.5% on a month-over-month basis in December 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by a record 26.6% on a year-over-year basis in December.

Looking across the country, year-over-year price growth has crept back above 25% in B.C., though it remains lower in Vancouver, close to on par with the provincial number in Victoria, and higher in other parts of the province.

Year-over-year price gains are still in the mid-to-high single digits in Alberta and Saskatchewan, while gains are running at about 12% in Manitoba.

Ontario saw year-over-year price growth remain above 30% in December, with the GTA continuing to surge ahead after trailing other parts of the province for most of the pandemic.

Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City was only about half that.

Price growth is running above 30% in New Brunswick (higher in Greater Moncton, lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 11% year-over-year.

Bottom Line–We Are In The Political Season

The Bank of Canada conducted a recent study of residential mortgage originations at federally regulated financial institutions since 2014 to determine the share and financial characteristics of mortgage-financed homebuying by type of purchaser: first-time homebuyers; repeat buyers (the so-called move-up market); and investors.

First-time homebuyers are the largest group, generally accounting for roughly half of all mortgage purchases since 2014. Repeat homebuyers (those that discharged their previous mortgage when they took a new mortgage) comprised 31% of all mortgaged buyers over the same period. Investors having multiple mortgages represent 19% of purchases since 2014. Investors without mortgages are not included in the data, so foreign investors who might have borrowed money outside of Canada are not included.

The chart below shows that since 2015, the share of first-time homebuyers has fallen from over 52% to less than 48% of all mortgaged homebuying, while the share of repeat buyers is up slightly, and the share of investors has risen from under 18% to over 20%. Most of the rise in investor activity was in 2017 and 2021.

The Bank of Canada concludes that the increased presence of investors in the housing market has augmented demand and “may reflect a belief that house prices will continue to rise in value…By exacerbating so-called boom-bust cycles in housing markets, investors could thus be a source of instability for the financial system and the economy more broadly. At the same time, investors are an important source of housing rental supply. We need to do further research to examine the delicate balance between adding to rental supply while removing new builds and resale supply in a housing market that already has supply constraints.”

The Ministry of Housing and Diversity and Inclusion, in partnership with the Canada Mortgage and Housing Corporation (CMHC), according to a Financial Post article dated January 12, is concerned about “speculative investing” in housing, “prompting Canadians to overbid on properties, borrow beyond what they can afford, and push home prices even higher.”

“By developing policies to curb excessive profits in investment properties, protecting small independent landlords and Canadian families, and reviewing the down payment requirements for investment properties, we are targeting the issues the market is facing from multiple angles.” Currently, investors must make a 20% down payment.

It looks like the Feds may well raise the minimum down payments on investment property loans. They are also considering a limitation on the sources of funding for these properties.

What the Canadian housing market needs is substantial new affordable housing construction. Impeding this is the long and tortuous planning process and local government zoning rules. Actions taken to reduce housing demand in the face of nearly a million new immigrants coming to Canada in 2021 and 2022, if severe enough, could throw the whole economy into recession, particularly given that the Bank of Canada is on the precipice of hiking interest rates. The wealth and liquidity of millions of Canadian households are tied up in housing, so the government must take care not to push demand restrictions too far, especially since condo investments augment the very tight rental markets.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Strong December Jobs Report in Canada

Latest News Kim Stenberg 7 Jan

Statistics Canada released the December Labour Force Survey this morning, reporting employment gains of 54,700 last month–double market expectations. The unemployment rate fell to 5.9% from the 6.0% rate posted in November and is only 0.2 percentage points above the 5.7% rate posted in February 2020 before the pandemic began.

More people were working full-time in December, particularly core-aged men aged 25 to 54. Most of the employment growth was in Ontario. Nationally, gains were driven by the construction and educational services industries.

After having regained its pre-COVID level for the first time in November, total hours worked were little changed in December.

Full-time employment rose by 123,000 (+0.8%) in December, with most of the increase occurring among men of core working age (+95,000; +1.6%). In comparison, the number of people working part-time declined (-68,000; -1.9%). Since June, full-time employment has trended up and was 248,000 (+1.6%) higher than its pre-pandemic February 2020 level in December. In contrast, part-time employment has been mostly flat since June and remained at virtually the same level as in February 2020.

Average hourly wages increased 2.7% (+$0.80) on a year-over-year basis in December, similar to the average pace of wage growth observed from 2017 to 2019 (+2.6%). However, inflation accelerated considerably in 2021.

The number of Canadians unemployed for 27 weeks or more fell for the second consecutive month (-25,000; -8.0%) and stood at 293,000 in December. While long-term unemployment fell in each of the previous two months, it accounted for a substantially higher share of total unemployment in December (24.1%) than in February 2020 (15.6%), before the onset of the pandemic.

The labour underutilization rate—the proportion of people in the potential labour force who are unemployed; want a job but have not looked for one; or are employed but working less than half of their usual hours—fell 0.4 percentage points to 12.0% in December, the lowest rate observed since the onset of the pandemic. While this remained 0.6 percentage points above the record low of 11.4% immediately before the pandemic in February 2020, it is within the range of monthly rates observed through 2018 and 2019, ranging from 11.5% to 12.2%.

In December, the decline in the labour underutilization rate was driven by a decrease in the number of people working less than half of their usual hours. The share of the population aged 15 years and older participating in the labour market held steady at 65.3% in December, virtually the same as before the pandemic.

Hence, there is little doubt that Canada is very close to full employment. This is what the Bank of Canada has been looking towards in making its first post-pandemic rate-hike decision.

Bottom Line 

The December Labour Force Survey was conducted before the recent Omicron restrictions. I believe it is unlikely that the Bank of Canada’s Governing Council will hike rates at its next meeting on January 26. Though some market participants are betting on a January lift-off, The Bank’s forward guidance remains no sooner than Q2 action, and there is little reason, at this uncertain time, for them to accelerate that decision. Moreover, if they want to prove their inflation-fighting credibility, they could hike at the following meeting on March 2. Odds are the likelihood of an April 13 lift-off.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Economic and Fiscal Update

Latest News Kim Stenberg 17 Dec

Federal Fiscal Update: Canada has Weathered the Pandemic Storm Relatively Well

Finance Minister Chrystia Freeland extolled the performance of the Canadian economy in response to the extraordinary support provided by the federal fiscal authorities and the Bank of Canada in the past 21 months. The economic recovery has been the second strongest in the g-7, and the death rate from Covid-19 was the second-lowest. Emergency spending by the federal government was enormous, but the federal government maintained its triple-A credit rating. The Canadian government on Tuesday cut its deficit forecast for the current fiscal year, citing higher tax revenues and less emergency aid spending while earmarking new funds to fight the Omicron coronavirus variant.

“As we look ahead, we are mindful of elevated inflation,” Freeland said in the forward of the update. “We know inflation is a global phenomenon driven by the unprecedented challenge of re-opening the world’s economy. Turning on the global economy is a good deal more complicated than turning it off. We, like other countries, are experiencing the consequences of a time unlike any other.”

Here are some of the key forecasts presented in the fiscal update:

  • The budget deficit came in at $327.7 billion in the last fiscal year (FY) 2020-21–almost $27 billion less than forecast in the spring budget. As it turns out, revenue came in $20 billion stronger than expected, while expenses were $6 billion lower than expected.
  • This year’s red ink is expected to be $144.5 billion versus the $154.7 billion forecast in April.
  • Canada’s debt-to-GDP ratio at 47.5% last FY will peak at 48% this FY versus 51.2% expected in April and fall subsequently to 44% in FY 2026-27. This compares to the pre-pandemic levels of roughly 31%.

“It has been a hard 21 months,” said Freeland. “As we brace ourselves for the rising wave of Omicron, we know that no one wants to endure new lockdowns,” Finance Minister Chrystia Freeland said in prepared remarks.

The Trudeau Liberals are pointing to improvements in the labour market, personal incomes and corporate profits as it forecasts tens of billions of dollars in additional revenue annually through 2026.

There is $13 billion in additional spending since the budget aimed at “finishing the fight against COVID-19” and another $4.5 billion in provisions for any Omicron response this fiscal year. There is $1.7 billion for rapid COVID tests in the fiscal update and $2 billion for COVID therapeutics and treatments. In a nod to the persistence of COVID, the previously announced extensions of the wage, rent and recovery benefits in the fall will put another $6.7 billion on the COVID tab this fiscal year.

When it comes to feeding Canada’s economic growth in the years to come, Ottawa is touting the importance of immigration to address labour shortages. The fiscal update earmarks $85 million in the 2022-23 fiscal year to speed up the application process to bring in workers for key industries hit by labour shortage coming out of the pandemic.

The “Underused Housing Tax Budget 2021” announced the government’s intention to implement a national, annual 1.0% tax on the value of non-resident, non-Canadian-owned residential real estate in Canada that is considered vacant or underused. It is proposed that the tax be effective for the 2022 calendar year.

 

Bottom Line

Today’s fiscal update document may well be most notable in what it omitted. There was no mention of the many new spending promises marked in the summer’s Liberal election platform. Those promises added up to $78 billion over five years.

The Opposition parties in the House of Commons harped on rising inflation and its negative impact on Canadian households and businesses. To be sure, the Trudeau government is not responsible for the surge in global inflation arising from the supply disruptions, labour shortages and enormous pent-up demand. Still, with the Bank of Canada poised for rate hikes next year, the Liberals could well be accused of stoking inflation with additional fiscal stimulus. We will undoubtedly hear more on the election promises when the government’s 2022 budget is announced, likely sometime this spring.

 

Dr. Sherry Cooper
Chief Economist – Dominion Lending Centres

Canadian Homebuyers Trying to Beat Rate Hikes

Latest News Kim Stenberg 16 Dec

Housing Demand Outpaces Supply

Today the Canadian Real Estate Association (CREA) released statistics showing national existing-home sales rose 0.6% in November following the whopping 8.6% surge the month before. Sales could have been higher had it not been for the limited supply of homes for sale. Homebuyers are anxious to finalize purchases before the Bank of Canada hikes interest rates next year.  Across the country, sales gains in Calgary, Edmonton, the B.C. interior, Regina and Saskatoon offset declines in activity in the GTA and Montreal.

The actual (not seasonally adjusted) number of transactions in November 2021 was firm historically, edging down a scant 0.7% on a year-over-year basis, missing the 2020 record for that month by just a few hundred transactions.

On a year-to-date basis, some 630,634 residential properties have traded hands via Canadian MLS® Systems between January and November 2021, far surpassing the annual record 552,423 sales for all of 2020.

“The fact is that the supply issues we faced going into 2020, which became much worse heading into 2021, are even tighter as we move into 2022. Interest rate hikes will make it even harder for new entrants to break into the market next year, even though activity may remain robust as existing owners continue to move around in response to all of the changes to our lives since COVID showed up on the scene. As such, the issue of inequality in the housing space will remain top of mind. One wildcard will be what policymakers decide to do with the national mortgage stress test, which could act as a kind of cushion against rising rates for young and/or first-time buyers. It could also make things that much harder for them,” said Shaun Cathcart, CREA’s Senior Economist.

New Listings

The number of newly listed homes rose by 3.3% in November compared to October, driven by gains in a little over half of local markets, including the GTA, Lower Mainland, Montreal, and many markets in Ontario’s Greater Golden Horseshoe.

With new listings up by more than sales in November, the sales-to-new listings ratio eased a bit to 77% compared to 79.1% in October. The long-term average for the national sales-to-new listings ratio is 54.9%.

About two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio being more than one standard deviation above its long-term mean. The other one-third of local markets were in balanced market territory.

There were just 1.8 months of inventory on a national basis at the end of November 2021, tied with March 2021 for the lowest level ever recorded. The long-term average for this measure is more than 5 months.

Home Prices

In line with some of the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) was up another 2.7% on a month-over-month basis in November 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by a record 25.3% year-over-year in November.

Year-over-year price growth has crept back up to nearly 25% in B.C., though it remains lower in Vancouver, on par with the provincial number in Victoria, and higher in other parts of the province.

Year-over-year price gains are still in the mid-to-high single digits in Alberta and Saskatchewan, while gains have risen to about 13% in Manitoba.

Ontario saw year-over-year price growth hit 30% in November, with the GTA continuing to surge ahead after trailing most other parts of the province for most of the pandemic.

Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City was only about half that.

Price growth is running above 30% in New Brunswick (higher in Greater Moncton, lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 10% year-over-year (lower in St. John’s).

Bottom Line–Lots of News Today

Canada continues to contend with one of the developed world’s most severe housing shortages; as our borders open to a resurgence of immigration, excess demand for housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal and provincial levels. Liberal Party election promises do not address these issues.

Inflation pressures are mounting everywhere. The US posted a year-over-year inflation rate for November at 6.8%, up from 6.2% posted the month before. This undoubtedly led the US Federal Reserve to issue a hawkish statement today, intensifying their battle against inflation. They announced that they will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020.

According to Bloomberg News, “The faster pullback puts Powell in a position to raise rates earlier than previously anticipated to counter price pressures if necessary, even as the pandemic poses an ongoing challenge to the economic recovery. The Fed flagged concerns over the new omicron strain, saying that risks to the economic outlook remain, including from new variants of the virus.”

On more positive news, Canada’s inflation rate held steady at 4.7% y/y in November, well below the pace in the US. Excluding food and energy products, CPI ticked slightly lower to 3.1% from a year ago in November, or 2.7% on an annualized seasonally adjusted basis relative to the pre-shock February 2020 level. Roughly half of that 2.7% can still be attributed to rising expenses related to home-owning and car purchase or leasing. But the breadth of inflation pressure has also widened, with 58% of the consumer basket seeing faster-than-2% annualized growth in November from pre-pandemic (2019) levels on average over the last three months. That compares to 47% in February 2020. The broadening is expected to carry on in 2022 as rising input, transport and labour expenses continue to flow through supply chains for a wider swath of goods and services. Further disruptions to supply chains and energy markets from Omicron and the BC flood later in November are expected to add to price uncertainties in the near term.

In a speech today, Governor Tiff Macklem of the Bank of Canada assured the public that the Bank of Canada would remain the country’s number-one inflation fighter. Macklem clarified that flexibility in their new mandate won’t apply in situations — like now — when inflation is considerably above target.

At a press conference after the speech, Macklem noted he wasn’t comfortable with current elevated levels of inflation and the “time is getting closer” for policymakers to move away from the forward guidance. Markets are pricing in five interest rate hikes next year by the Bank of Canada.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

BANK OF CANADA RATE ANNOUNCEMENT: Holds Rate Target Steady until April to September 2022

Latest News Kim Stenberg 8 Dec

The Bank of Canada decided to keep its target for the overnight rate at 0.25%, in line with forecasts and to maintain its forward guidance, which sees a rise in the overnight rate sometime in the middle quarters of 2022. Until then, policymakers vowed to provide an adequate degree of monetary stimulus to support Canada’s economy and achieve the inflation target of 2%. On the price front, the ongoing supply disruptions continue to support high inflation rates, but gasoline prices, which have been a significant upside risk factor, have recently declined. Still, the BoC expects inflation to remain elevated in the first half of 2022 and ease towards 2% in the second half of the year. Finally, recent economic indicators suggested the economy had considerable momentum in Q4, namely in the labour and housing markets. Still, the omicron variant of the coronavirus and the devastation left by the floods in British Columbia has added to downside risks.

The Bank’s press release went on to say, “The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022. We will provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.”

In October, the Bank ended its bond-buying program and is now in its reinvestment stage. It maintains its Government of Canada bonds holdings by replacing securities as they mature.

Bottom Line

Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five times next year. This would take the overnight rate from 0.25% to 1.5%. I think this might be overly hawkish, expecting a more cautious stance of three rate hikes next year to a year-end level of 1.0%. This expectation has already had an impact on economic activity. According to local real estate boards reporting in the past week, November home sales were boosted by buyers hoping to lock in mortgage rates before they rise further next year.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Great News on the Labour Front in Canada

Latest News Kim Stenberg 6 Dec

Another Blockbuster Jobs Report in November

Statistics Canada released the November Labour Force Survey this morning, reporting employment gains of 153,700 last month–four times bigger than expectations. The unemployment rate fell to 6% from the 6.7% rate posted in October and is only 0.3 percentage points above the 5.7% rate posted in February 2020 before the pandemic began. This, along with the solid third-quarter GDP report released earlier this week, locks in expectations for a Bank of Canada interest rate hike next year.

Employment is now 186,000 jobs above pre-Covid levels. November’s report marks the sixth straight month of job gains. Markets are already pricing in five Bank of Canada interest rate hikes next year.

Employment increased in both the services-producing and goods-producing sectors in November. Both full-time (+80,000; +0.5%) and part-time (+74,000; +2.1%) work increased, and employment gains were spread across six provinces.

Total hours worked increased 0.7% and returned to the pre-pandemic February 2020 level for the first time. Hours rose across most industries, led by manufacturing, wholesale and retail trade, and construction. Despite increasing in November, hours in the goods-producing sector were still below their pre-pandemic level (-3.6%). All of the growth compared with February 2020 was in the services-producing sector (+1.3%), most notably in professional scientific and technical services (+12.5%).

Record high employment rate among core-aged women

More than 8 in 10 (80.7%) core-aged women aged 25 to 54 were employed in November, the highest employment rate recorded since comparable data became available in 1976 and 1.0 percentage points higher than in February 2020. In November, employment among core-aged women grew 66,000 (+1.1%), primarily in full-time work (+47,000; +0.9%), with growth spread across several industries.

Employment rose by 48,000 (+0.7%) among core-aged men in November, with gains entirely in full-time work. The employment rate for men aged 25 to 54 increased 0.5 percentage points to 87.1%, which is on par with the recent high in September 2019, and 0.5 percentage points higher than in February 2020.

Unemployment rate declined for the sixth consecutive month

The unemployment rate fell 0.7 percentage points to 6.0% in November. This was the sixth straight monthly drop and the most significant decline since March 2021. Before the pandemic, the unemployment rate had hit a record low of 5.4% in May 2019 and was 5.7% in February 2020.

First decline in long-term unemployment since August

The number of Canadians unemployed for 27 weeks or more fell 62,000 (-16.2%) in November, the first monthly decline in long-term unemployment since August 2021. Long-term unemployment fell more for women (-43,000; -24.2%) than for men (-19,000; -9.4%), with the decline spread across the core-aged and 55 and older age groups. The decline was particularly sharp for those who had been unemployed for 52 weeks or more (-56,000; -23.4%).

Long-term unemployment as a proportion of total unemployment fell 2.2 percentage points to 25.6% in November, following four months of little change. The share remained elevated compared with the level of 15.6% observed before the pandemic.

Wage rates rise 5.2% over two years after adjusting for employment composition

Average hourly wages were 5.2% higher (+$1.46 to $29.57) in November 2021 compared with two years earlier, controlling for the unprecedented changes in the composition of employment since February 2020. The October CPI indicated an increase of 5.3% from two years earlier. In comparison, fixed-weighted average wages had increased 5.1% from October 2019 to October 2021, or 7.5%, without controlling for composition changes.

Not surprisingly, wages increased more for recent hires than for established employees. The record-high job vacancies in September have continued to focus attention on the question of whether employers in some industries might raise wages to address recruitment and retention challenges. Average wages increased faster for new employees than for employees who have been in their current job for 18 months or longer.

Bottom Line 

When the Bank announces its policy decision next week, Governor Macklem will undoubtedly confirm that the economy has bounced back from its Q2 weakness. Though the omicron variant has increased uncertainty regarding the pandemic outlook, the economy is rapidly approaching full employment. Moreover, as inflation remains well above target and wage pressures are mounting, the Bank will be mindful of its commitment to normalize interest rates next year. If anything, today’s labour market report may accelerate expectations for a BoC rate hike to the first quarter of next year rather than the second.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Economy Bounced Back Sharply in Q3

Latest News Kim Stenberg 1 Dec

In line with the Bank of Canada’s forecast, the economy rebounded sharply in the third quarter following the weak performance in Q2. Stats Canada announced this morning that GDP grew by a whopping 5.4% in Q3 following the downwardly revised 3.2% earlier in Q2. As pandemic restrictions phased out and businesses resumed normal operations, consumer spending accelerated, growing at a 17.9% annual rate. Expenditures on clothing (+26.8%) and footwear (+30.3%) surpassed pre-pandemic spending. Expenditures on services rose 27.8%, led by a jump in accommodation and food services sales. Transport services (+40.3%), recreation and culture services (+26.1%), food, beverages and accommodation services (+29.0%), and personal grooming services (+35.8%) all showed significant increases.

Exports rebounded after a sharp decline in Q2. Business investment barely changed, hampered by supply chain disruptions.

Consumers remained flush with cash as incomes grew, boosted by wage gains and government transfer payments. The household saving rate fell from 14.0% in the second quarter to 11.0% in the third quarter, still strong from a historical perspective. Although spending surpassed income this quarter, this was the sixth consecutive quarter with a double-digit savings rate. The rate also remained higher than in the pre-pandemic period. The household savings rate is aggregated across all income brackets. In general, savings rates rise with income.

Housing Investment Declines

After four consecutive quarters of solid growth, new construction and renovations fell in the third quarter. The 5.2% (not annualized) drop in new construction was the most significant drop since the second quarter of 2009. The decrease in investments for the new construction of detached and multiple-unit dwellings was substantial, especially in Newfoundland and Labrador and Prince Edward Island. Nationally, there were $96.3 billion additions to the stock of homes in the third quarter.
Housing investment in new construction and renovations

Ownership transfer costs (-10.0%) fell for the second consecutive quarter as activity in the resale market slowed. The decrease was widespread, and only Newfoundland and Labrador and Yukon posted increased ownership transfer costs.

The remarkable accumulation of residential mortgage liabilities in the previous quarter continued, with households adding $38 billion in the third quarter, more than double that two years earlier.

Bottom Line

Today’s release is, in some respects, ‘ancient history.’ Monthly GDP by industry data released this morning for September showed a modest uptick of 0.1%. And preliminary information indicates that real GDP rebounded in October, up 0.8% with increases in most sectors. Manufacturing led the growth after contracting in September due in part to the effects of the semiconductor shortage. Other notable increases were in the public sector, construction, finance and insurance, and transportation and warehousing.

All in, GDP in Canada is still below its pre-pandemic level. And uncertainty has increased with the announcement of the new Omicron variant. Traders are betting that the Bank of Canada will begin hiking the key overnight rate by April of next year and markets are currently pricing in five rate hikes in the next 12 months. Inflation remains a troubling concern, and Fed Chairman Jay Powell said today in testimony before Congress that he would accelerate his plan to taper all bond purchasing. In addition, according to Bloomberg News, “Powell also told a Senate banking committee that it’s time to stop using the word “transitory” to describe inflation”.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Inflation Hits 18-Year High

Latest News Kim Stenberg 17 Nov

Inflation Surge is No Need for Hysteria

StatsCanada today reported that consumer price inflation rose to 4.7% from year-ago levels in October, compared to 4.4% in September. This is in line with market expectations and is well below the US’s 6.2% pace reported for the same period. Inflation is rising all over the world, the direct result of extreme weather events and supply chain chaos generated the creaky reopening of economies around the world. With pent-up demand surging, delays in production and transportation have led to price hikes in many sectors. Extreme weather conditions have exacerbated these price pressures, driving up food, energy and other commodity prices. The pandemic and climate change are unprecedented exogenous forces and should not be compared to the inflation surge in the 1970s. Nor should we assume that traditional monetary tightening would ease these pressures unless we are willing to run the risk of recession.

Last month, prices rose in all eight major components on a year-over-year basis, primarily driven by the surge in gasoline prices, which spiked 47.1% from year-ago levels. Extreme drought, especially in China, led to a dearth of hydroelectric power and shortages in other energy sources such as coal and natural gas. The shift to oil for power generation boosts the cost of oil and gasoline. It also caused a domino effect in shortages of other essential materials that require intensive energy use in their production, such as fertilizer and aluminum. These feed into shortages of food and metal components that raise the price of many consumer goods. Combine this with disruptions at the ports, in trucking and on the rail lines. It is no wonder that increasing costs and excess demand are driving up consumer prices worldwide.

The question is, would central bank tightening reduce this kind of inflation. I doubt it. Instead, we are likely to see these pressures ease over time (see chart below). The problem is we have repeatedly underestimated the time it would take to work this all out, leading some to call for a quicker response by the Bank of Canada and the Fed, among other central banks, for fear that the inflation will become embedded.

Embedded inflation, caused by rising wages and inflation expectations, led to wage-price spiralling in the 1970s and early 1980s. In Canada, inflation remained high well into the early 1990s because of substantial federal and provincial budgetary spending. I do not believe we are anywhere near that reality today. To be sure, fiscal policy in response to the pandemic has generated extraordinary budgetary red ink, but price pressures today are not the result of budgetary actions.

Bottom Line

Market-driven interest rates have already surged and are reflected in the rise in fixed mortgage rates. Maintaining a steady overnight rate at its effective lower bound has kept the prime rate and variable mortgage rates stable at extremely low levels. Undoubtedly, these rates will rise in time. The Bank of Canada has been clear that it will occur soon than they initially thought. They are nervous about inflation and are now saying a return to the 2% target will not happen until the end of next year.

Just this week, senior leadership at the Bank has taken to the news waves to suggest we are getting closer to full employment. Traders are now betting that the overnight rate target will rise 1.5 percentage points in 2022, beginning in April. Rates will increase, but we are not on the precipice of runaway inflation.

Dr. Sherry Cooper – Chief Economist, Dominion Lending Centres

 

 

Canadian Home Sales Surge in October

Latest News Kim Stenberg 15 Nov

Today the Canadian Real Estate Association (CREA) released statistics showing national existing-home sales rose a whopping 8.6% in October, its most robust month-over-month pace since July 2020, when the first lockdown eased briefly. This was on the heels of a modest uptick in September–the first gain since March of this year.

Sales were up month-over-month in about three-quarters of all local markets and in all major cities.

The actual (not seasonally adjusted) number of transactions in October 2021 was down 11.5% on a year-over-year basis from the record for that month set last year. That said, it was still the second-highest ever October sales figure by a sizeable margin.

On a year-to-date basis, some 581,275 residential properties traded hands via Canadian MLS® Systems from January to October 2021, surpassing the annual record of 552,423 sales for all of 2020.

“2021 continues to surprise. Sales beat last year’s annual record by about Thanksgiving weekend, so that was always a lock, but I don’t think too many observers would have guessed the monthly trend would be moving up again heading into 2022,” said Shaun Cathcart, CREA’s Senior Economist. “A month with more new listings is what allows for more sales because those listings are mostly all still getting gobbled up; however, with demand that strong, the supply of homes for sale at any given point in time continues to shrink. It is at its lowest point on record right now, which is why it’s not surprising prices are also re-accelerating. We need to build more housing.”

The basic story hasn’t changed, even with the rise in fixed mortgage rates: Housing demand remains well more than supply. Inventories of unsold properties are at historic lows. While the Trudeau government promised to address the massive supply shortage, in reality, housing construction is under the auspices of provincial and local government planning and zoning bodies. Moreover, the resurgence of immigration will widen the excess demand gap for homes to buy or rent.

New Listings

The number of newly listed homes rose by 3.2% in October compared to September, driven by gains in about 70% of local markets. With so many markets starved for supply, it’s not surprising to see sales go up when new listings rise.

As of October, about two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean. The sales-to-new listings ratio tightened again last month to 79.5% compared to 75.5% in September and 73.5% in August. The long-term average for the national sales-to-new listings ratio is 54.8% (see chart below).

There were just 1.9 months of inventory on a national basis at the end of October 2021, down almost half a month from three months earlier and back in line with the all-time lows recorded in February and March of this year. The long-term average for this measure is more than five months.

Home Prices

In line with some of the tightest market conditions ever recorded, the Aggregate Composite MLS® Home Price Index (MLS® HPI) accelerated to 2.7% on a month-over-month basis in October 2021.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 23.4% on a year-over-year basis in October, a more significant gain than in the three previous months.

Year-over-year price growth in B.C. has crept back above 20%, though it is lower in Vancouver, on par with the 20% provincial gain in Victoria, and higher in other parts of the province.

Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while they are currently at about 10% in Manitoba.

Ontario saw year-over-year price growth closing in on 30% in October, with GTA surging forward. Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City is now at 13%.

Price growth is running a little above 30% in New Brunswick (a little higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 10% year-over-year (a bit lower in St. John’s).

Bottom Line

Canada continues to contend with one of the developed world’s most severe housing shortages. As our borders open to a resurgence of immigration, excess demand for housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal level. Liberal Party election promises do not address these issues.

Inflation pressures are mounting everywhere. The US just posted a year-over-year inflation rate for October at 6.2%–higher than expected. This Wednesday, Canada’s CPI data will be released. We saw a y/y inflation rate of 4.4% in September. Undoubtedly, the October data will surpass that level. Maybe that is why Tiff Macklem wrote an op-ed in the Financial Times today reiterating that the Bank of Canada is getting closer to raising interest rates as slack in the economy dissipates. This is in line with the hawkish BoC policy statement last month.

“For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed,” Macklem wrote. “We are not there yet, but we are getting closer.”

According to Bloomberg News, Macklem reiterated that the Bank of Canada’s view is still that recent inflationary pressures will ease. Yet, he acknowledged that a high level of uncertainty remains. “Supply disruptions appear to be lasting longer than we thought, and energy price increases are adding to current inflation rates,” he wrote.

“While our analysis continues to indicate that these pressures will ease, we have taken them into account for the dynamics of supply and demand,” Macklem said. “What our resolve does mean is that if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust.”

 

Dr. Sherry Cooper – Chief Economist, Dominion Lending Centres
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