The Table Is Set For Rate Cuts in 2024

Latest News Chris Houston 30 Nov

The Table Is Set For Rate Cuts In 2024
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.
Written by: Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Good News On the Inflation Front Suggests Policy Rates Have Peaked

General Chris Houston 21 Nov

Good News On the Inflation Front Suggests Policy Rates Have Peaked
Today’s inflation report showed a continued improvement, mainly due to falling year-over-year (y/y) gasoline prices. The October Consumer Price Index (CPI) rose 3.1% y/y, down from the 3.8% rise in September. There were no surprises here, so markets moved little on the news. Excluding gasoline, the CPI rose 3.6% in October, compared to 3.7% the month before.

The most significant contributors to inflation remain mortgage interest costs, food purchased at stores, and rent.
Canadians continued to feel the impact of rising rent prices, which grew faster (y/y) in October (+8.2%) than in September (+7.3%). The national increase reflected acceleration across most provinces. The most significant increases in rent prices were seen in Nova Scotia (+14.6%), Alberta (+9.9%), British Columbia (+9.1%) and Quebec (+9.1%).
Property taxes and other special charges, priced annually in October, rose 4.9% yearly, compared with a 3.6% increase in October 2022. The national increase in October 2023 was the largest since October 1992, with homeowners paying more in all but one province, as municipalities required larger budgets to cover rising costs. Property taxes in Manitoba (-0.3%) declined for the third consecutive year, mainly due to reduced provincial education tax.

While goods prices decelerated by -1.6% as prices at the pump fell, prices for services rose 4.6% last month, primarily driven by higher prices for travel tours, rent and property taxes.

While grocery prices remained elevated, they also continued their trend of slower year-over-year growth, with a 5.4% increase in October following a 5.8% gain in September. While deceleration continued to be broad-based, fresh vegetables (+5.0%) contributed the most to the slowdown.
Excluding food and energy, inflation fell to 2.7% in October, down a tick from the September reading. Two other inflation measures closely tracked by the Bank of Canada–the so-called trim and median core rates–also eased, averaging 3.6% from an upwardly revised 3.8% a month earlier
Bottom Line

According to Bloomberg calculations, another critical measure, a three-month moving average of underlying price pressures, fell to an annualized pace of 2.96% from 3.67% a month earlier. It’s an important metric because Bank of Canada Governor Tiff Macklem has said policymakers are tracking it closely to understand inflation trends.

Today’s news shows that tighter monetary policy is working to bring down the inflation rate. In its Monetary Policy Report last month, the Bank of Canada expected the CPI to average 3.5% through mid-2024. Cutting its economic forecast, the Bank forecasted it would hit its 2% inflation target in the second half of 2025.

Given today’s data and the likely significant slowdown in Q3 GDP growth, released on November 30, and the Labour Force Survey for November the following day, policy rates have peaked. Governor Tiff Macklem will give a speech on the cost of high inflation in New Brunswick tomorrow, and the subsequent decision date for the Governing Council is December 6th. The Bank’s inflation-chopping rhetoric may be relatively hawkish, but the expectation of rate cuts could spur the spring housing market.

The economists at BMO have pointed out that “three provinces now have an inflation rate below 2%, while only three are above 3%, so much of the country is already seeing serious signs of stabilization. (Unfortunately, the two largest provinces have the fastest inflation rates—Quebec at 4.2% and Ontario at 3.3%).” There is no need for the Bank to raise rates again, and they could begin to cut interest rates in the second quarter of next year.
Written by: Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Experts predict lower mortgage rates next week as bond yields plunge

General Chris Houston 7 Nov

Experts predict lower mortgage rates next week as bond yields plunge

This week alone, the 5-year Government of Canada bond yield slid over 30 basis points to 3.79%. It’s now down more than 60 bps—or 0.60%—from its recent high of 4.42% reached in early October.

Rate watchers say that should translate into some rate relief by next week given that bond yields typically lead fixed mortgage rate pricing. However, don’t expect any rate drops to match the decline in yields.

“The old saying is: [rates take the] elevator on the way up and the stairs on the way down,” Ron Butler of Butler Mortgage told CMT.

“Fixed rates will start to fall next week, likely 20 to 40 bps over the next two weeks, depending on the term,” he added.

Ryan Sims, a TMG The Mortgage Group broker and former investment banker, gave a similar forecast.

“Rates will come down for mortgages, but not nearly as much as they should,” he said. That’s because lenders and mortgage providers are likely to keep risk premiums baked into their pricing given the potential for an economic downturn in the near term.

“Banks have proven in the past that at the first hint of problems they will not hesitate to raise spreads to cushion the blow,” Sims noted. “We last witnessed this in March of 2020 when interest rates plummeted in a week, and 5-year fixed mortgage rates went up by 30 bps.”

He said a similar scenario played out in 2008 during the Financial Crisis when the spread over bond yields grew from about 200 bps to 325 bps in order to compensate for the added market risk.

Markets are moving up calls for rate cuts

What’s driving this latest plunge in yields? In short, each new release of economic data is pointing to a weakening economy, and growing signs that no further rate hikes are on the horizon by both the Bank of Canada and the Federal Reserve.

In Canada, we’ve seen headline inflation continue to fall, a slowdown in consumer spending, household credit growth and housing activity, and most recently weakening employment data and a rise in the unemployment rate.

This is all having an impact on rate forecasts. Following today’s release of October employment figures, markets went from pricing in a 10% chance of a rate hike at the December 6 Bank of Canada meeting to a 7% chance of a rate cut.

While most big bank forecasts don’t expect the Bank of Canada to begin cutting rates by the middle of 2024, markets are betting a weak economy will force the central bank’s hand a little sooner.

Bond markets are pricing in 83% odds of a quarter-point rate cut by March 2024, and 81% odds of 50 bps worth of cuts by June.

“There is no scenario priced in now that shows any rate hikes at all,” Sims notes. “It looks like it is straight downhill from here, although timing will be the issue.”

Earlier this week, Deputy BoC Governor Carolyn Rogers confirmed the central bank could start cutting interest rates before inflation reaches its target rate of 2%, which is officially expected by mid-2025, according to the Bank’s latest Monetary Policy Report.

While testifying this week before the House of Commons finance committee with BoC Governor Tiff Macklem, Rogers said monetary policy is forward-looking and that “we don’t need to wait until inflation is all the way back to 2%.”

“If we get signs that we can be confident that inflation is coming down and will remain down, then we would start thinking about lowering interest rates, but we’re just not there yet,” she said.

Written by: Steve Huebl

Weak October Jobs Report Likely Takes Further BoC Rate Hikes Off The Table

General Chris Houston 3 Nov

Weak October Jobs Report Likely Takes Further BoC Rate Hikes Off The Table
Today’s StatsCanada Labour Force Survey for October was weak across the board. Total job gains were meagre, full-time jobs fell, hours worked were flat, wage inflation eased (a bit), and the unemployment rate rose.

Employment changed little in October, up only 17,500 (0.1%), after rising 64,000 in September and 40,000 in August. The employment rate—the proportion of the working-age population with a job—fell 0.1 percentage points to 61.9% in October, as the population aged 15 and older increased by 85,000 (+0.3%).
Most notably, the unemployment rate rose 0.2 percentage points to 5.7%–its fourth monthly increase in six months and its highest level in 21 months, adding evidence to a weakening economy. The latest monthly GDP figures released earlier this week point to a flat to negative growth rate for the third quarter this year. Final data will be released later this month, but today’s numbers suggest that the overnight policy rate at 5.0% has peaked. The pace of employment gains is running below labour force growth from record population increases. It indicates that labour demand is cooling while supply is catching up quickly. The Bank of Canada expects the economy to move into modest excess supply in the fourth quarter, helping to reduce consumer price inflation.

As unemployment has increased and job vacancies have decreased in recent months, the labour force participation rate—the proportion of the population aged 15 and older that was either employed or looking for work—has remained relatively high. The participation rate in October (65.6%) was unchanged from the previous month and up 0.2 percentage points on a year-over-year basis.
The most significant job gains were in construction, rising by 23,000, more than offsetting a decline of 18,000 in September. The most economically sensitive sectors posted job losses. These included manufacturing, wholesale and retail trade, finance, insurance, real estate, and rental and leasing, as well as accommodation and food services.

Wage inflation continues to be troubling for the central bank. On a year-over-year basis, average hourly wages rose 4.8% in October, following an increase of 5.0% in September.
Bottom Line

The Bank of Canada meets once again on December 6th. Before then, we will see another CPI inflation report on November 21, Q3 GDP on November 30 and the November Labour Force Survey on December 1. Given the Bank’s general reluctance to hike rates just before the holiday season, the Bank of Canada will remain on the sidelines.

Judging by today’s weaker-than-expected employment report in the US as well, the Fed will also hold their pause for the remainder of this year.

Rate relief, however, is still many months away. The central banks will want to see inflation at 2% with the belief that it will remain there before they begin to cut interest rates. That will happen, but probably not before next summer. According to Bloomberg News, “Traders in overnight swaps brought forward their expectations for when the Bank of Canada will start loosening policy, and are now betting policymakers will cut interest rates by 25 basis points in July, from September a day ago.”
Written by: Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca