Canada’s Jobs Market May Be Weakening.

General Dakota Matias 7 Aug

The Canadian Economy Is Slowing–Job Markets Will Begin To Shift

The July employment report, released this morning by Statistics Canada, is a real head-scratcher. The job numbers fell for a second consecutive month, but so did the number of job seekers, so the unemployment rate remained unchanged at a historic low of 4.9%. I have been pondering the profusion of labour market data for longer than usual today to decide where I come out on this. My bottom line is the Canadian economy is slowing in response to the whopping rise in interest rates. Labour markets across the country are still very tight as massive job vacancies continue, but the market’s tenor (or mood) is shifting.

There are still labour shortages in businesses that need customer-facing employees–think restaurants, hotels, travel, retail, household services, as well as in construction and the trades. But we are also now hearing of layoffs and cutbacks in businesses that boomed during the lockdowns. Many of those over-expanded and are currently cutting back. A great Canadian example is Shopify, but the same can be said of major retailers like Walmart and Target, which now find themselves overstocked.

The housing markets in Canada are slowing sharply, especially in the highest-cost regions around the Greater Vancouver and Toronto areas.

Central banks worldwide took interest rates down to near-zero levels in the early days of the pandemic, triggering a massive boom in housing. Canada’s boom was second to none, reflecting the long-standing housing shortage. Since 2015, home construction for rent and purchase in Canada has paled compared to the rising demand generated by surging immigration targets. First-time buyers’ FOMO, combined with record-low mortgage rates, especially on variable rate loans, triggered a buying frenzy. Millennial parents helped by tapping their homeowner equity to make those down payments possible. Some of those parents could be left with the legacy of home equity loans whose monthly payments have sky-rocketed with the prime rate. Cabin fever during lockdown generated a host of other buyers who just wanted more space and were willing to move to the exurbs and beyond to afford it. Investors, long tantalized by the surge in condo prices and the growing demand for rental properties, piled on.

Central banks kept interest rates too low for too long. They should have started to raise them when inflation percolated. They thought inflation was transitory, and we all thought vaccines were the magic bullet to end the Covid pandemic. The Russian invasion of Ukraine created the perfect storm, exacerbated by China’s zero Covid policy. Supply chains crumbled further, and commodity prices surged.

Now that oil prices below $90 a barrel have returned to pre-war levels, and gasoline prices have fallen since early June, inflation might have peaked. But central banks must continue tightening to return policy interest rates to normal levels. This means an overnight rate in Canada of roughly 3.5% and nearly 5% in the US. That’s still a far cry from today’s level of 2.5%. And the central banks will not and cannot return rates to last year’s lows. Not soon, and possibly not ever. Unless you believe an equivalent global shutdown will be required sometime in the foreseeable future.

The economy lost 30,600 jobs last month, adding to a loss of 43,200 jobs in June. Canada’s job market is losing momentum as the broader economy is cooling. The job loss also reflects labour shortages and insufficiently trained new workers. Just look at the chaos at Pearson Airport. Labour market conditions are still very tight, and wage rates are rising, up 5.2% y/y last month.

In Direct Contrast, US Employment Surged in July 

In other relevant news today, Bloomberg reports that “US employers added more than double the number of jobs forecast, illustrating rock-solid labour demand that tempers recession worries and suggests the Federal Reserve will press on with steep interest-rate hikes to thwart inflation.” So much for a Fed pivot. The idea that the bond market rallied on the premature news of a US recession made no sense at this point in the cycle.

Similarly, the Bank of Canada is still likely to hike the policy rate by 75 basis points when they meet again on September 7. That would take the prime rate up to 5.45%. Currently, the 5-year government of Canada bond yield is 2.87%, well below its peak of 3.6% in mid-June. Consequently, we may see variable mortgage rates rise above fixed rates before yearend.

 

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

Another Red-Hot Employment Report in Canada.

General Dakota Matias 12 Jun

Canadian Labour Market Is Much Too Tight–Adds To Inflation Pressure

Today’s Labour Market Survey for May 2022 showed that hiring continued at a rapid pace last month in an increasingly tight labour market, driving the jobless rate to another record low and fueling a sharp acceleration in wage gains. The economy added 39,000 jobs in May, surpassing expectations. The unemployment rate fell to 5.1%, far below the noninflationary rate of joblessness. Job vacancies are at a record high, and wage inflation accelerated to 3.9%, from the 3.2% pace posted in April.

Another sign of a red-hot jobs market was a shift from part-time employment to full-time. Full-time employment jumped by 135,400, with part-time jobs down by 95,800.

The excess supply of jobs continues to push wages higher and will undoubtedly cause the Bank of Canada to continue to hike rates aggressively. The Governing Council of the Bank will release their next decision on July 13, as money market traders now see an even chance that the central bank will increase the overnight policy rate by 75 bps next month.

 

The employment rate, which measures the percentage of the population aged 15 years and older that has a job, increased to almost 62% in May, from 59.4% cent a year earlier.

 

Bottom Line 

In other relevant news today, the US released its CPI inflation report for May showing inflation accelerated to a whopping 8.6%, up from 8.3% in April. Investors increased bets on a 75 bp hike after the release showing inflation is at a fresh 40-year high. Both headline and core inflation rose more than expected.

Market rates shot up on today’s news, with the Canadian 5-year government bond yield now at 3.3%.

 

 

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

The Bank of Canada Hikes Rates Again By 50 bps.

General Dakota Matias 2 Jun

Another Jumbo Rate Hike, Signalling More To Come

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points once again today, marking the third rate hike this year. The two back-to-back half-point increases are without precedent, but so were the dramatic pandemic rate cuts in the spring of 2020. Indeed, with the surge in Canadian inflation to 6.8% in April, the Bank of Canada is still behind the curve. The chart below shows that inflation remains well above the Bank’s forecasts. Today’s press release suggests they now estimate that inflation rose again in May and could well accelerate further.

Today’s policy statement emphasized that “As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”

“The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022.”

The Bank said that “Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid”.

 

Bottom Line

The Bank of Canada couldn’t be more forthright. The concluding paragraph of the policy statement is as follows: “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”

The Bank of Canada has told us we should expect at least another 50 bps rate hike when they meet again on July 13. It could even be 75 bps if inflation shows no sign of decelerating. The Bank estimates that the overnight rate’s neutral (noninflationary) level is  2%-to-3%. Traders currently expect the policy rate to end the year at roughly 3%.

This was a very hawkish policy statement. The central bank is defending its credibility and will undoubtedly continue to tighten monetary policy aggressively.

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

Canadian Home Sales Slow As Mortgage Rates Rise.

General Dakota Matias 22 May

Canadian Housing Market Feels The Pinch of Higher Rates

Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. In April, national home sales dropped by 12.6% on a month-over-month (m/m) basis. The decline placed the monthly activity at its lowest level since the summer of 2020 (see chart below).

While the national decline was led by the Greater Toronto Area (GTA) simply because of its size, sales were down in 80% of local markets, with most other large markets posting double-digit month-over-month declines in April. The exceptions were Victoria, Montreal and Halifax-Dartmouth, where sales edged up slightly.

The actual (not seasonally adjusted) number of transactions in April 2022 came in 25.7% below the record for that month set last year. As has been the case since last summer, it was still the third-highest April sales figure ever behind 2021 and 2016.

Jill Oudil, Chair of CREA, said, “Following a record-breaking couple of years, housing markets in many parts of Canada have cooled off pretty sharply over the last two months, in line with a jump in interest rates and buyer fatigue. For buyers, this slowdown could mean more time to consider options in the market. For sellers, it could necessitate a return to more traditional marketing strategies.”

“After 12 years of ‘higher interest rates are just around the corner,’ here they are,” said Shaun Cathcart, CREA’s Senior Economist. “But it’s less about what the Bank of Canada has done so far. It’s about a pretty steep pace of continued tightening that markets expect to play out over the balance of the year because that is already being factored into fixed mortgage rates. Of course, those have, for that very reason, been on the rise since the beginning of 2021, so why the big market reaction only now? It’s likely because typical discounted 5-year fixed rates have, in the space of a month, gone from the low 3% range to the low 4% range. The stress test is the higher of 5.25% or the contract rate plus 2%. For fixed borrowers, the stress test has just moved from 5.25% to the low 6% range – close to a 1% increase in a month! It won’t take much more movement by the Bank of Canada for this to start to affect the variable space as well.”

 

New Listings

The number of newly listed homes edged back by 2.2% on a month-over-month basis in April. The slight monthly decline resulted from a relatively even split between markets where listings rose and those where they fell. Notable declines were seen in the Lower Mainland and Calgary, while listings increased in Victoria and Edmonton.

With sales falling by more than new listings in April, the sales-to-new listings ratio eased back to 66.5% – its lowest level since June 2020. This reading is right on the border between what would constitute a seller’s and a balanced market. The long-term average for the national sales-to-new listings ratio is 55.2%.

More than half of local markets were balanced based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in April 2022. A little less than half were in seller’s market territory.

There were 2.2 months of inventory on a national basis at the end of April 2022, still historically very low but up from slightly lower readings in the previous eight months. The long-term average for this measure is a little over five months.

 

Home Prices

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 23.8% on a year-over-year basis in April, although this was a marked slowdown from the near-30% record increase logged just two months earlier.

 

Bottom Line

The fever broke in the Canadian housing market last month. Nevertheless, despite the sizeable two-month slide in sales, activity is still almost 10% above pre-COVID levels and the raw April sales tally was still one of the highest on record.

Markets in Ontario are weakening most, significantly further outside the core of Toronto. Sales in the province slid 21% in April and are now in line with pre-pandemic activity levels. The market balance has gone from drum tight with “not enough supply” to one that resembles the 2017-19 correction period. Elsewhere, Vancouver and Montreal look better with relatively balanced markets, while others like Alberta and parts of Atlantic Canada remain pretty strong.

The Bank of Canada will likely hike interest rates by another 50 bps on June 1.

 

 

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

Canadian Inflation Rose Again in January to 5.1% y/y, Pressuring The Bank of Canada to Hike Rates in March.

General Dakota Matias 19 Feb

Inflation Ticked Up Again in January

StatsCanada today reported that consumer price inflation rose to 5.1% from year-ago levels in January, compared to 4.8% in December. This was higher than expected but still well below US inflation posted at 7.5% for the same period. Undoubtedly, this puts additional pressure on the Bank of Canada to hike the overnight policy rate target in early March when it meets again, despite the disappointing jobs data last month. Even excluding gasoline, the CPI rose 4.3% y/y last month.

Shelter costs rose 6.2% year over year in January 2022, the fastest pace since February 1990. Higher prices for new homes contribute to higher costs associated with the upkeep of a property or the homeowners’ replacement cost. Higher home prices also tend to raise other owned accommodation expenses. In contrast, lower interest rates bring borrowing costs down—measured in the CPI through the mortgage interest cost index, which includes new and resale home prices.

The owned accommodation index, which measures the ongoing costs of homeownership, increased 6.1% year over year in January. Homeowners’ replacement cost (+13.5%) and other owned accommodation expenses (+14.0%), which includes commissions on the sale of real estate, put upward pressure on shelter prices amid rapid price growth in the housing market throughout the pandemic.

Conversely, mortgage interest costs fell 6.8% year over year in January, putting downward pressure on the shelter index.

Renters also saw a rise in prices, as the rented accommodation index increased 3.2% year over year, contributing to the higher shelter prices Canadians faced in January.

Another highly visible component of rising inflation was the surge in food prices. Shoppers paid more for groceries, as food prices from stores rose faster in January 2022 (+6.5%) than in December 2021 (+5.7%).

Prices for fresh or frozen beef (+13.0%), fresh or frozen chicken (+9.0%), and fresh or frozen fish (+7.9%) rose more in January 2022 compared with December 2021. Margarine (+16.5%) and condiments, spices, and kinds of vinegar (+12.1%) were also up compared with January 2021. Higher input prices and shipping costs because of ongoing supply chain disruptions have contributed to increased food prices. In addition to supply chain disruptions, unfavourable growing conditions have led to higher prices for fresh fruit (+8.2%) and bakery products (+7.4%).

 

Consumers paid more for alcohol in January 2022, as alcoholic beverages purchased from stores rose 2.9%, following a 1.6% gain in December 2021. Much of this increase stemmed from higher prices for both beer and wine, amid material shortages and increased shipping costs.

 

Bottom Line

Inflation has now exceeded the Bank of Canada’s 1% to 3% target band for 10 consecutive months. Other central banks have already begun to hike overnight rates from their effective lower bound of 25 basis points introduced in March 2020.

The U.S. Federal Reserve is preparing to raise interest rates in March, and last Friday’s jobs report fueled speculation it may need to move aggressively. The Bank of England just delivered back-to-back hikes, and some of its officials wanted to act even more forcefully. The Bank of Canada is set for liftoff next month. Even the European Central Bank may get in on the action later this year.

The recent trucker protests and border blockades have further disrupted the fragile auto supply chain. Wages in Canada rose 2.4% y/y, so Canadian households, on average, are seeing their purchasing power diminish.

Markets are pricing in as many as seven increases in borrowing costs over the next 12 months. While the Bank runs the risk of tightening too aggressively, there is little doubt that the emergency monetary easing has run its course.

 

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

Canadian Economic and Fiscal Update.

General Dakota Matias 16 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.

 

 

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

Strong Q3 Growth in Canada.

General Dakota Matias 5 Dec

Canadian Economy Bounced Back Sharply In Q3

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”.

 

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

Canadian Inflation Hits 18-Year High.

General Dakota Matias 28 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.

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

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/

12