Canadian Inflation Rises Once Again

General Dakota Matias 25 Oct

Prices are Rising Everywhere–Transitory Can Last A Long Time

Today’s release of the September Consumer Price Index (CPI) for Canada showed year-over-year (y/y) inflation rising from 4.1% in August to 4.4%, its highest level since February 2003. Excluding gasoline, the CPI rose 3.5% y/y last month.

The monthly CPI rose 0.2% in September, at the same pace as in the prior month. Month-over-month CPI growth has been positive for nine consecutive months.

Today’s inflation is a global phenomenon–prices are rising everywhere, primarily due to the interplay between global supply disruptions and extreme weather conditions. Inflation in the US is the highest in the G7 (see chart below). The economy there rebounded earlier than elsewhere in the wake of easier Covid restrictions and more significant markups.

Central banks generally agree that the surge in inflation above the 2% target levels is transitory, but all now recognize that transitory can last a long time. Bank of Canada Governor Tiff Macklem acknowledged that supply chain disruptions are “dragging on” and said last week high inflation readings could “take a little longer to come back down”.

Prices rose y/y in every major category in September, with transportation prices (+9.1%) contributing the most to the all-items increase. Higher shelter (+4.8%) and food prices (+3.9%) also contributed to the growth in the all-items CPI for September.

Prices at the gas pump rose 32.8% compared with September last year. The contributors to the year-over-year gain include lower price levels in 2020 and reduced crude output by major oil-producing countries compared with pre-pandemic levels.

Gasoline prices fell 0.1% month over month in September, as uncertainty about global oil demand continued following the spread of the COVID-19 Delta variant (see charts below).

 

Bottom Line

Today’s CPI release was the last significant economic indicator before the Bank of Canada meeting next Wednesday, October 27. While no one expects the Bank of Canada to hike overnight rates next week, market-driven interest rates are up sharply (see charts below). Fixed mortgage rates are edging higher with the rise in 5-year Government of Canada bond yields. The right-hand chart below shows the yield curve today compared to one year ago. The curve is hinged at the steady 25 basis point overnight rate set by the BoC, but the chart shows that the yield curve has steepened sharply with the rise in market-determined longer-term interest rates.

Moreover, several market pundits on Bay Street call for the Bank of Canada to hike the overnight rate sooner than the Bank’s guidance suggests–the second half of next year. Traders are now betting that the Bank will begin to hike rates early next year. The overnight swaps market is currently pricing in three hikes in Canada by the end of 2022, which would bring the policy rate to 1.0%. Remember, they can be wrong. Given the global nature of the inflation pressures, it’s hard to imagine what tighter monetary policy in Canada could do to reduce these price pressures. The only thing it would accomplish is to slow economic activity in Canada vis-a-vis the rest of the world, particularly if the US Federal Reserve sticks to its plan to wait until 2023 to start hiking rates.

It is expected that the Bank will taper its bond-buying program once again to $1 billion, from the current pace of $2 billion.

The Bank will release its economic forecast next week in the Monetary Policy Report. It will need to raise Q3 inflation to 4.1% from its prior forecast of 3.9%.

 

The source of this article is from SherryCooper.com/category/articles/

Insufficient Housing Supply Boosted Home Prices Again In August.

General Dakota Matias 4 Oct

Home Prices Still Rising As Falling Sales Reflect Insufficient Supply

Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell a slight 0.5% nationally from July to August 2021–the fifth consecutive monthly decline. Over the same period, the number of newly listed properties edged up 0.8%, and the MLS Home Price Index rose 0.9% m/m bringing the year-over-year (y/y) rise to 21.3%. Transactions appear to be stabilizing at a more sustainable, but still strong level (see chart below).

Small declines in the GTA and Montreal were offset by gains in the Fraser Valley, Quebec City and Edmonton.

The actual (not seasonally adjusted) number of transactions in August 2021 was down 14% on a year-over-year basis from the record set for that month last August. That said, it was still the second-best month of August in history.

 

New Listings

The number of newly listed homes ticked 1.2% higher in August compared to July. As with sales activity, it was a fairly even split between markets that saw declines and gains. New supply declines in the GTA and Ottawa were offset by gains in Vancouver and Montreal among bigger Canadian markets.

With both sales and new listings relatively unchanged in August, the sales-to-new listings ratio remained a tight 72.4% compared to 73.6% in July. The long-term average for the national sales-to-new listings ratio is 54.7%.

Based on a comparison of sales-to-new listings ratio with long-term averages, a small majority of local markets remain in seller’s market territory. The remainder are in balanced territory.

There were 2.2 months of inventory on a national basis at the end of August 2021, down a bit from 2.3 months in July. This is extremely low – still indicative of a strong seller’s market at the national level and most local markets. The long-term average for this measure is more than twice where it stands today. It was also the first time since March that this measure of market balance tightened up.

 

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.9% month-over-month in August 2021. In line with tighter market conditions, this was the first acceleration in month-over-month price growth since February. While the trend of re-accelerating prices was first observed earlier this summer in Ontario, the reversal at the national level in August was less of a regional story and more of a critical mass story. Synchronous trends across the country have been the defining feature of the housing story since COVID-19 first hit, and that still appears to be the case.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 21.3% on a year-over-year basis in August.

Looking across the country, year-over-year price growth is averaging around 20% in B.C., though it is lower in Vancouver, a bit lower 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 gains were a little over 10% in Manitoba.

Ontario saw year-over-year price growth still over 20% in August. However, as with B.C. big, medium and smaller city trends, gains are notably lower in the GTA, around the provincial average in Oakville-Milton, Hamilton-Burlington and Ottawa, and considerably higher in most smaller markets in the province.

The opposite is true in Quebec, where Greater Montreal’s year-over-year price growth, at a little over 20%, is almost double that of Quebec City. Price growth is running a little above 30% in New Brunswick (higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is in the 10% range on a year-over-year basis (a bit lower in St. John’s).

 

 

Bottom Line

Local housing markets are cooling off as prospective buyers contend with a dearth of homes for sale. Though increasing vaccination rates have begun to bring a return to normal life in Canada, that’s left the country to contend with one of the developed world’s most severe housing shortages and little prospect of much new supply becoming available soon despite all of the election promises. As net new immigration resumes, this excess demand in 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 levels. Federal election promises do not address these issues.

 

The source of this article is from SherryCooper.com/category/articles/