Warren’s Mortgage Monthly – Vol 100 – September 2023 Edition
School’s in, marking the arrival of a new season soon to be upon us. Hard to believe that fall is around the corner especially given the 2nd summer Labour Day weekend that we all just enjoyed. Where was this weather all summer long? Seemingly, everything is ‘mixed signals’ this year. My burning bush however, never leads me astray and the hint of red on its leaves certainly can be relied upon as a forecast of what is ahead. Hope everyone enjoyed this last long weekend.
On the economic front Tiff MacKlem and his team are back from their summer hiatus just in time for the prime announcement date tomorrow. This announcement marks 18 months since the first 0.25% rate hike began – now fully reflecting itself in the economic data.
While all the data is not yet in, certainly there are enough touch points for Tiff to make a call. The key data points:
2nd Quarter GDP contracted 0.2% putting annualized economic growth at 1.1 vs the 1.5% predicted by the Bank of Canada suggesting, a marked slowdown and potentially signalling the arrival of a recession – (2 consecutive quarterly contractions being the definition of an economy in recession). Preliminary Stas. Can. data for the 3rd quarter – still tbd –is signalling flatline growth for the 3rd quarter as well. It should be noted that the original 1st quarter GDP data pegged at 3.1% and largely the impetus for the further rate hikes seen in March, April and June has been revised down to 2.6% begging the question as to why we continue to hike?
July’s CPI reading clocked in at an unwelcome 3.3% inflation vs the 2.8% in June – the data largely driven by an increase in oil prices and over 30% of this number being impacted by higher mortgage costs – none of which are in the control of the consumer and not driven by excess demand. Stripping out mortgage inflation alone would peg true inflation at 2.4% near the 2% Bank of Canada objective. It is this reading (CPI)that has the market watchers at odds with one another – some speculating that this alone is enough for the BoC to raise prime tomorrow another 0.25% and others citing the GDP contraction, among other touch points, as the reason there will be no change, rather a pause tomorrow to allow August data to steer the course for the next announcement date in October.
July’s unemployment data ticked up to 5.5% suggesting softening in the labour market which is another indicator near and dear to Tiff’s heart. Interesting, that despite being told by the Bank of Canada that inflation could not come down without a significant change to the unemployment data that we sit today at 3.3% (from the8.1% high) without any great change to the unemployment data - hmmmmmm
Retail sales – flatlined in the 2nd quarter while sales volumes dropped by 0.8% suggesting a consumer that is pinched and pulling back on spending – a desired outcome for Tiff.
Wholesale trade – exports continue their downward trend, the fifth month in a row as Canada posted its largest trade deficit inJuly since late 2020.
Housing activity continued to contract at an 8.2% annualized rate marking the 5th quarter of decline and the lowest level since the pandemic began in early 2020.
With 5 of the 6 main indicators (cited above) clearly depicting a downward trend – save the headline inflation number which we knew would be volatile on a month to month basis, and the downward revision to first quarter GDP from what was thought to be 3.1 but was actually 2.6% - it is evidently clear to this author that the time for a long pause should be the call for tomorrow. Given the slew of negative data of recent months and in the categories deemed most important to the Bank of Canada and certainly when compared to growth pre-pandemic, Canada’s economy is not experiencing blockbuster growth, typically the catalyst for the need of higher interest rates to cool it.
Clearly June’s last hike was completely unnecessary and anything further at this point would be playing with fire. A call that several Premiers and politicians are now echoing with a plea to the Bank ofCanada head that there be no more hikes ahead. The only positive outcome of another increase being that “if” taken tomorrow, the pace and size of rate cuts will be imminent and large. It boggles the mind that economists, including the former Bank of Canada head David Dodge are predicting that rates will not begin their descent until 2025…..really? How are we forecasting out 2 years when we cannot get 1 month right? Just 18 short months ago the overnight rate (Bank of Canada Prime) was 0.25% with “no increase in sight” for a “very long time”.
Assuming an overall stall in economic activity over the 2nd half of 2023 (barring a contraction which is this author’s call), economists are now projecting that the first rate cut will be in April 2024 if the stall comes to pass. It is interesting too that tightening monetary policy (rate increases) does not necessarily solve inflation caused by supply shocks. Japan refrained from any rate increases to date and low and behold their inflation continues to drop.
Overwhelmingly and pre-effects of the other 9 interest hikes taken over the course of the last 18 month, the most recent data are suggesting that Canada’s economy is barely alive and this before the rest of the rate hikes work their way through the economy, never mind the influence of 30%+ of mortgage renewals set to mature in the coming months weighing further on Canadian’s pocketbooks and thus spending ability. Further mind-bending is that anyone is even contemplating another rate hike. As the saying goes….analysis paralysis – depending on what you wish numbers to say you can point them in any direction you want.
I believe that enough data and dire warnings will spurn Tiff to stand aside tomorrow and give us some time to let the data evolve. Thursday, Stats. Can. will release labour market figures (unemployment), which is the only missing piece of data to make tomorrow’s call. Again, this data point, depending on how you wish to read the tea leaves does not reflect the true labour market and housing stats given the huge surge in immigration and the near 1 million people more that have evaded statistical analysis given they were non-permanent residents presumed to have left the country. Integrating these stats would point to far more dire impacts to what is already flashing red.
While not a burning bush, Tiff should heed the warning of red flags and an overall “fall”to economic data as to what lies ahead….. a cold and dormant winter. Tomorrow remains a coin toss as to what Tiff will do, but the writing is clearly on the wall that we may have done too much already. Another 4.75% on interest rate hikes are still to present themselves, mortgage renewals at much higher rates not yet reflected in the data are still to come, China’s economy is stalling which will have a negative effect on global markets and geopolitically we are at tension levels that should not be ignored.
As we know, the world can change in the blink of an eye. Cautioning you only to headline predictions which are mostly poorly placed. If anyone finds themselves in a dire financial predicament, a call to your lender could help ease the short-term pain with an extension in amortization. Counterintuitively, anyone facing a renewal at this juncture may wish to pursue a variable rate to allow the next few months to evolve. Variable allows you to convert at any time and seemingly we are near the end of the rate-tightening cycle. Locking in at peak rates today even if only for a 1 yr term could be a misplaced move if seeking payment relief in the near future.
If anyone would like to talk through their current financial situation in the hopes of finding relief for the months ahead I would welcome a call.
Stay well, hope the kids in your lives had a great first day back to school and hope Tiff is relaxed enough to take his foot off the pedal.
Best always,
Warren