Hawkish Bank of Canada Decision.

Bank of Canada Responds To Mounting Inflation: Ends QE and Hastens Timing of Rate Hike

The Bank of Canada surprised markets today with a more hawkish stance on inflation and the economy. The Bank released its widely anticipated October Monetary Policy Report (MPR) in which its key messages were:

• The Canadian economy has accelerated robustly in the second half.
• Labour markets have improved, especially in the hard-to-distance sectors. Despite continuing slack, many businesses can’t find appropriate workers quickly enough to meet demand.
• Disruptions to global supply chains have worsened, limiting production and leading to both higher costs and higher prices.
• The output gap is narrower than projected in July. The Bank now expects slack to be absorbed in Q2 or Q3 of next year, one quarter sooner than earlier projected.
• Given persistent supply constraints and the increase in energy prices, the Bank expects inflation to stay above the control range for longer than previously anticipated before easing back to close to the 2 percent target by late 2022.
• The Bank views the risks around this inflation outlook as roughly balanced.

In response to the Bank’s revised view, it announced that it is ending quantitative easing, shifting to the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds. The Bank now owns about 45% of all outstanding GoC bonds.

The Bank today held its target for the overnight rate at the effective lower bound of 1/4 percent. While this was widely expected, the Bank adjusted its forward guidance. It moved up its guidance for the first hike in the overnight rate target by three months, from the second half of 2022 to the middle quarters–sometime between April and September.

Canadian bond traders had already bet a rate hike would occur in Q1 or Q2. Nevertheless, bond yields spiked at 10 AM today when the Bank released its policy decision (see chart below).

Bottom Line

Since the Bank last met in early September, the Government of Canada five-year bond yield has spiked from .80% by a whopping 60 basis points to a 1.40%. That is an incredible 75% rise. A year ago, the five-year bond yield was only .37%.

The Bank believes the surge in inflation is transitory, but that does not mean it will be brief. CPI inflation was 4.4% y/y in September and is expected to rise and average around 4.75% over the remainder of this year. Macklem now believes inflation will remain above the Bank’s 1%-to-3% target band until late next year.

There is also a good deal of uncertainty about the size of the slack in the economy. This is always hard to measure, especially now when unemployment remains elevated at 6.9%, while sectors such as restaurants and retail are fraught with labour shortages. Structural changes in the labour force are afoot. Many former restaurant employees have moved on or are reluctant to return to jobs where virus contagion risks and poor working conditions. There was also a surge in early retirements during the pandemic and a dearth of new immigrants.

Concerning housing, the MPR says the following: “Housing market activity is anticipated to remain elevated over 2022 and 2023 after having moderated from recent record-high levels. Increased immigration, solid income levels and favourable financing conditions will support ongoing strength. New construction will add to the supply of houses and should help soften house price growth”.

Published by Dr. Sherry Cooper

Rate Hike Expectations still Growing.

With inflation well above the Bank of Canada’s target level and ongoing supply chain issues, expectations of earlier-than-expected interest rate hikes in 2022 are growing.

For much of the past year, the Bank of Canada had assured markets that interest rate hikes were off the table for at least the next year or longer. In January, the BoC had said, “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 January projection, this does not happen until into 2023.”

Fast-forward to today, and rate hike expectations are growing by the week, with some seeing the first rate increases by mid-2022.

Scotiabank made headlines last week with its aggressive forecast for four quarter-point rate hikes in 2022, followed by four quarter-point hikes in 2023. That would mean a Bank of Canada target rate of 2.25% by the end of 2023—well above its current level of 0.25%, and higher than any other bank forecast.

No rate hikes are expected when the Bank meets this Wednesday, but all eyes will be on its statement and accompanying Monetary Policy Report for clues of a shifting outlook given the inflation and supply issues mentioned above.

Here’s a look at what some economists expect from the BoC at its Wednesday meeting:

On further winding down of Quantitative Easing (QE):

• TD: “This winding down of emergency stimulus isn’t a shock for Canadians. The Bank of Canada has been leading the pack, cutting its government bond purchases over the last year and completely ending programs that were no longer needed (mortgage bond purchases, for example). We expect the Bank to make another reduction in its bond purchases in October and cease all net-new purchases at the beginning of 2022.” (Source)

On rate hike expectations:

• BMO: “The interest rate landscape is shifting rapidly amid the sustained strength in a wide variety of inflation measures. Short-term bond yields have bolted higher as inflation has surged to the fastest pace in decades in many economies. Markets are now pricing in almost four rate hikes by the Bank of Canada by the end of 2022, compared with almost nothing just two short months ago.” (Source)
• Desjardins: “Without the BoC even blinking, the 5‑year yield, one of the most influential rates in Canada’s financial ecosystem, is up nearly 47 basis points since early September. We expect it to rise by about 30 more basis points by the time the BoC finally hikes rates, meaning tightening is already underway. Which begs the question of why many appear to feel that the BoC should be in a rush.” (Source)

On inflation:

• BMO: “Canadian inflation has broadened out from an initial rebound in beaten-down prices (gasoline) and reopening pressures (airfares, hotels), to supply-constrained items (autos, appliances), to homes, and now to food. We now expect headline inflation to average 3.3% both this year and next—in perspective, inflation has not averaged 3% for a single year since 1991, let alone two years in a row.” (Source)
• RBC: “Central banks are acknowledging inflation will be more persistent than previously expected, but there’s little they can do to resolve supply chain bottlenecks and rising energy prices. Most continue to focus on supporting a complete economic recovery.”  (Source)
• NBC: While other central banks (most notably, the BOE) have begun sounding the alarm on inflation, [Bank of Canada Governor] Tiff Macklem appears committed to the Bank’s transitory inflation narrative, reiterating this view in recent weeks. As such, we’re not looking for a significant change in tone, though we will likely get an acknowledgement of stronger-than-expected price hikes to date and potential upside risks ahead.” (Source)
• Desjardins: “…our estimates show that the annual inflation rate reached a cyclical peak in September and could start to decline slowly in the coming months. Despite this encouraging prognosis, the risks of inflation continuing to rise in the coming months or remaining at its peak for longer are quite high.” (Source)

On GDP forecasts:

• RBC: “We expect the central bank will revise its near–term GDP projections lower in October. It was previously looking for 6% growth in 2021, whereas our latest call is 5.1%. Our forecast remains consistent with the bank’s guidance that economic slack will be absorbed in the second half of next year, though there’s some risk that time-frame will be pushed back depending on how much of the recent growth shortfall is seen being made up in 2022.” (Source)
• NBC: “With growth stumbling recently, a markdown to the GDP outlook seems all but certain.” (Source)

Big 6 Bank Interest Rate Forecasts

Article feature image: David Kawai/Bloomberg via Getty Images

Inflation Rises are no longer just talk, they are here.

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”.

Published by Dr. Sherry Cooper & DLC Marketing Team

Expectations for the first Bank of Canada interest rate hike have moved up to as early as April as inflation concerns grow and supply disruptions persist.

Nearly half of Canadian businesses (45%) expect inflation to run hot at more than 3% over the next year, according to the Bank of Canada’s third-quarter Business Outlook Survey released Monday. Another 42% of businesses expect inflation of 2-3%, while just 10% foresee inflation of between 1% and 2%.

The inflation concerns were largely driven by worsening supply disruptions that will limit sales, along with labour shortages and the need for higher wages, both of which will drive prices higher. The silver lining is that most businesses see higher inflation as being temporary.

Still, the median prediction for inflation from the business survey was 3.72%, the highest reading since the survey started in 2014.

Because inflation expectations are a major driver of inflation, markets have taken notice and now see the Bank of Canada being forced to raise interest rates sooner than the second half of 2022, which has been the guidance provided by the BoC for much of the past year.

Overnight Index Swap (OIS) markets are now almost fully pricing in the first quarter-point rate hike by April, according to Bloomberg.

Other market watchers agree that rate hikes are likely to come sooner than expected. David Wolf, a portfolio manager for Fidelity Investments, says the Bank of Canada is overestimating the amount of slack in the economy and will therefore need to raise rates well before the second half of the year.

“The bank thinks that there’s a lot of capacity, which I don’t think there really is, and the facts on the ground of rising prices show that,” Wolf said at the Bloomberg Canadian Fixed Income Conference, according to the Financial Post. He added that expectations for the first rate hike in the second half of 2022 are off base.

“It’s going to come a lot sooner than that,” Wolf added.

In comparison, here’s a look at Canada’s big bank forecasts for the first rate hikes in 2022 (keep in mind that some of these estimates are lagging by several weeks):

• BMO: +25 basis points (bps) in Q4; an overnight rate of 0.50% by end of 2022
• CIBC: +25 bps in Q4; 0.50% by end of 2022
• NBC: +50 bps in Q3; 1.00% by end of 2022
• RBC: +25 bps in Q3; 0.75% by end of 2022
• Scotia: +25 bps in Q3; 0.75% by end of 2022
• TD: +25 bps in Q4; 0.50% by end of 2022.

Better to Act Early: Tal

Signs that the Bank of Canada may move earlier than expected is actually a positive development, according to CIBC’s Benjamin Tal. In the early days of the pandemic, rate hikes weren’t forecast until 2023 or even 2024.

Tal, who meets regularly to advise the BoC, said he has encouraged the Bank to “buy some insurance” by making its first rate move by early or mid-2022.

“I’m very encouraged by the fact that they are willing to move early rather than later,” Tal said during a talk at Mortgage Professionals Canada’s Virtual Mortgage Symposium last week.

He noted that waiting later than that would risk having the Bank chase a lagging indicator, which could lead to more serious economic problems.

“If you are chasing a lagging indicator, clearly you are late. And what do you do when you’re late? You panic,” Tal said. “And when you panic, you start raising interest rates way too quickly. It happened before [in] every other recession.”

Tal went on to say that he has no problem with the Bank raising rates by 75 basis points between June and December 2022. “In my opinion, that will prevent variable rates and the 5-year rate from rising dramatically in 2023,” he said.

“The best news, as far as the real estate market in Canada is concerned, is the fact that now the Bank of Canada is [considering] the idea of moving by mid-2022 and I think that’s a very good thing…it will be better for the market to see interest rates starting to rise a bit earlier because that will limit future huge increases.”

Central Banks Heading for Exits on Quantitative Easing

In addition to raising interest rates, central banks around the world are growing increasingly eager to withdraw economic stimulus in the form of Quantitative Easing (QE).

For the Bank of Canada, that means further diminishing its ongoing purchases of $2 billion worth of bonds per week.

At the height of the program, the Bank was purchasing up to $5 billion worth of bonds per week, but that amount has gradually been reduced. In total, the Bank has acquired nearly $312 billion of Government of Canada debt since last March in an effort to add liquidity to the market.

It’s widely expected that the BoC will continue to wind down its QE program at its next rate decision meeting on October 27.

Published by Steve Huebl

September sees high prices with minimal supply.

The national average home price re-accelerated in September, returning to a level last seen in May, while housing supply continued to trend down.

The average selling price in September was $686,650, up 13.9% year-over-year and 3.5% from July’s reading of $663,500.

Removing the high-priced markets of the Greater Toronto and Vancouver areas, the average price stands at $540,650.

There were 48,949 home sales in September, down 17.5% from a year earlier, but up 0.9% on a monthly basis, marking the first month-over-month increase since March, CREA noted.

Meanwhile, the tight supply conditions being seen across the country drove down the months of inventory measure to 2.1, well below the long-term average of roughly five months. New listings were also down 1.6% from July and 19.6% year-over-year.

Smaller changes in the monthly metrics suggest the market has now passed the period of extreme volatility seen since last spring, which was caused by the pandemic and related lockdowns, noted Shaun Cathcart, CREA’s senior economist.

“Having said that, given we are still stuck at around two months of inventory nationally, the thing to keep a close eye on going forward will be the behaviour of prices,” he said. “While the acceleration in home prices we saw in September was more than most would have expected, the fact that prices are now moving back in that direction is not surprising.”

Average National Home Price and Inventory

Cross-Country Roundup of Home Prices

Here’s a look at some more regional and local housing market results for August:

Ontario: $887,290 (+19.7%)
Quebec: $458,955 (+15.4%)
B.C.: $912,047 (+13.8%)
Alberta: $415,821 (+3.5%)
Barrie & District: $756,800 (+34.3%)
Halifax-Dartmouth: $471,746 (+22.9%)
Victoria: $861,900 (+21%)
Greater Montreal Area: $499,700 (+20.8%)
Greater Toronto Area: $1,082,400 (+19.1%)
Ottawa: $639,900 (+16.3%)
Greater Vancouver Area: $1,186,100 (+13.8%)
Winnipeg: $318,400 (+11.5%)
St. John’s: $291,100 (+9.6%)
Calgary: $443,700 (+9.2%)
Edmonton: $341,000 (+5.1%)

Looking Forward

All signs are pointing to more normalized readings in the months ahead, following what has been a turbulent and volatile 18 months for the housing market. This goes for both home sales and prices.

“The correction in sales from the unsustainable levels achieved earlier in the year is likely over, and September should mark the beginning of a modest positive trend in sales activity,” noted Rishi Sondhi, economist at TD Economics. “The key word here is modest, as interest rates are likely to grind higher moving forward, playing off against improving job markets, a rising population, and the decision by some households to plow excess savings into down payments.”

Sondhi added that federal housing policies could also provide some lift, but only to a small degree.

And where are home prices likely to go from here? Most signs are pointing up, say economists.

“The market has remained tight in seven of the 10 provinces (all favourable to sellers) and more balanced in Alberta and Saskatchewan,” wrote economists at National Bank of Canada. “These market conditions should continue to support price increases in the coming months.”

Interest rates are also expected to play a greater role in regulating demand as we head closer to the start of the next rate-hike cycle.

“One can’t help but feel as though the Canadian housing market is walking on tinder again, with demand holding at historically high levels, listings getting quickly absorbed, and price growth running steady near a 20% pace,” wrote Robert Kavcic, senior economist at BMO Economics.

“That said, 5-year fixed mortgage rates likely face meaningful upside in the months ahead, which could act as a dampener,” he added. “If not, or if there is a heavy rotation to variable [rates] and the market starts to accelerate again from here, talk of earlier Bank of Canada moves will only grow louder.”

Published by Steve Huebl

Following a summer slowdown in home sales, activity started to pick up again in the country’s largest cities as the typically busier fall homebuying season kicked off in September.

“Every year, we generally see an uptick in sales, average selling price and listings after Labour Day, and September 2021 was no different,” the Toronto Regional Real Estate Board (TRREB) said in its September report.

“Compared to last year, market conditions tightened noticeably, with sales representing a substantially higher share of listings, and a significantly lower number of new listings across the board,” it added. “Resurgence in the condo market was a factor in the higher share of listings sold.”

Historically low housing supply continues to be a key factor in all markets that continues to apply upward pressure to prices.

Here’s a look at September readings from some of the country’s key real estate boards:

Greater Toronto Area

Sales: 9,046

• -18% Year-over-year (YoY)
• +5.2% Month-over-month (MoM)

Average Price: $1,136,280

• +18.3% (YoY)
• +6% (MoM)

New Listings: 13,483

• -34% (YoY)
• +27% (MoM)

“Demand has remained incredibly robust throughout September with many qualified buyers who would buy a home tomorrow provided they could find a suitable property,” said TRREB President Kevin Crigger. “With new listings in September down by one third compared to last year, purchasing a home for many is easier said than done. The lack of housing supply and choice has reached a critical juncture.”

Source: Toronto Regional Real Estate Board (TRREB)

Greater Vancouver Area

Sales: 3,149

• -13.6% YoY
• -0.1% MoM

Despite the decline from last year’s record figures, sales were still 20.8% above the 10-year average for September.

MLS Home Price Index for all property types: $1,186,100

• +13.8% YoY
• +0.8% MoM

New Listings: 5,171

• -19.2% YoY
• +28.2% MoM
• New listings were 1.2% below the 10-year average for September.

“The summer trend of above-average home sales and historically typical new listings activity continued in Metro Vancouver last month,” said Keith Stewart, REBGV economist. “Although this is keeping the overall supply of homes for sale low, we’re not seeing the same upward intensity on home prices today as we did in the spring.”

Source: Real Estate Board of Greater Vancouver (REBGV)

Montreal Census Metropolitan Area

Sales: 3,671

• -28% YoY
• +8.9% MoM

Average Price (single-family detached): $504,500

• +17% YoY
• +0.9% MoM

Average Price (condo): $365,000

• +15% YoY
• -2.7% MoM

New Listings: 5,818

• -20% YoY
• +30% MoM

“The slowdown in residential sales to a pre-pandemic level continued in September,”said Charles Brant, director of the QPAREB’s Market Analysis Department. “A return to more normal economic activity resulting from the easing of health restrictions is not the only factor that explains this situation: in addition to high prices, the lack of properties for sale is still the main cause.”

Source: Quebec Professional Association of Real Estate Brokers (QPAREB)

Ottawa

Sales: 1,607

• -31% YoY
• +2.2% MoM

Average Price (single-family detached): $702,155

• +13% YoY
• +4% MoM

New Listings: 2,252

• -22% YoY
• +10.6% MoM

“While inventory has improved slightly from the pre-pandemic years (2017-2019), it is still the principal cause for concern with just over one month’s supply in the housing stock at this time,” said OREB President Debra Wright. “With the election behind us, we hope the government will now concentrate on addressing supply issues and developing first-time homebuyer assistance touted in their reelection platform.”

Source: Ottawa Real Estate Board (OREB)

Calgary

Sales: 2,159

• +26.5% YoY

Average Price: $476,190

• +1.8% YoY

New Listings: 2,907

• +6.3% YoY

“The market continues to favour the seller, but conditions are not as tight as they were earlier this year,” said CREB chief economist Ann-Marie Lurie.

Source: Calgary Real Estate Board (CREB)

Published by Steve Huebl