Soooo, how was your weekend?
Me? Well, was into my third rye-and-gingerale on Saturday night, while watching fifteen minutes of six different 1990’s action films that I have seen thirty times each, when I received a phone call to learn that my offer to purchase an investment condo had been accepted.
The phone call wasn’t sobering. Literally or metaphorically.
And to think, I was just about to open a storage bin and see if I could get my vintage Gameboy working to play Tetris and report back to Marina about my high score, but we were out of double-A batteries. If only the technology existed that would allow a person to play a 1990’s video game on a television in 2024…
In any event, my purchase is conditional, since, well why not? So if and when the deal firms up, I’ll be sure to come on here and tell you all about it.
I really thought I would take more flak for last Thursday’s bullish post on the downtown condo market, but maybe it’s just not a sexy topic?
Do you know what is a sexy topic?
An update on the TRB Interest Rate Prediction Game!
When we last updated this contest in June, it looked like we were headed toward a massive tie!
Let’s regroup.
Here’s an update of the standings after the first two predictions have been made:
With the first rate cut in June, JF007 and Jimbo were eliminated.
The following people got June 5th correct as the date of the first rate cut:
-David Fleming-Peter-Marina-House Keys-Alex
But a lot of people got the 25-basis point cut correct. Everybody except JF007, Peter, Jimbo, and Anwar.
So what happens now?
I see two possible scenarios playing out:
1) Another 25 basis points are cut.
If this happens, then it’s a mess.
David Fleming, House Keys, Marina, and Alex all have two points, but their respective predictions for the yearly total are 125, 175, 100, and 150 basis points respectively, so they would all stay at two points.
But Addison and Adrian, who predicted 25 basis points for the first cut, has also predicted a total of 75 basis points, and thus would earn their second points.
This would create a six-way tie for the win.
2) Another 50 basis points are cut.
In this case, House Keys, who predicted 100 basis points and who also predicted June 5th and 25 basis points for the first cut, would end up with three points and take home the victory.
I don’t see a scenario where we see another 75 basis points for the year, so we can rule out a total of 125 basis points.
Personally, I would like to see House Keys win, but more so because I want a further rate cut as my mortgage renews in November.
Now, can we recall what the reaction was like on June 5th when the Bank of Canada introduced the first interest rate cut after eleven straight hikes?
It was madness!
For about two days, that is.
After all the shock, awe, amazement, and discussion, the conversation completely died out. Maybe it just wasn’t that big of a story to begin with, or maybe the fact that the real estate market cooled off in June and July made the story moot.
So what’s happening this time around? What are the proverbial water cooler conversations?
There has been no shortage of media coverage on the topic over the last few days and the insights and opinions are tying interest rates to all kinds of different topics.
I’ve read about interest rates and inflation.
I’ve read about interest rates and economic growth.
I’ve read about interest rates and politics.
I’ve read about interest rates and immigration.
And although I would think this could get boring after a while, I’ve thoroughly enjoyed the coverage.
I want to share with you a few thoughts from other people; columnists, economists, and market movers.
Let’s start here:
“Bank Of Canada Interest Rates Could Come Down Faster Than We Thought”Financial PostJuly 25th, 2024
From the article:
“There’s a strong sense that policymakers feel an urgency to continue to the rate cutting cycle in September,” said Bartlett, one of the economists to change his forecast.
CIBC Capital Markets chief economist Avery Shenfeld is now calling for cuts in September and October, rather than in October and December.
“The statement highlighted a pickup in economic growth ahead, but note that lower interest rates are cited as a driver of that growth, so there is clearly an intention to continue to trim rates this year and in 2025,” he said in a note.
Most did not change their forecast of two more cuts this year; they just moved them up. But a few went further than that.
Capital Economics thinks the bank will cut 25 basis points at each meeting until the policy rate reaches 2.5 per cent by mid-2025.
Ooh-la-la!
We’re talking two rate cuts this fall?
House Keys: get your Starbucks order ready!
Predictions are merely thoughts and there’s no guarantee that these rosy outlooks are realized, but I was surprised to see Capital Economics predict that we’ll see 25 basis points cut at each meeting until the rate is down to 2.50%.
If that happened, we could see the popular five-year fixed-rate mortgage back around 3.49%, which was unthinkable at this time last year.
Again, tell me to stop cheerleading, but just think of what that would do to the real estate market.
We’ll just leave it there for now…
More from the article, this time including thoughts from ‘the’ David Rosenberg:
David Rosenberg, of Rosenberg Research, says the Bank of Canada has some catching up to do and “a steady diet of more rate relief is in our future.”
The central bank’s own projection for the economy of 2.1 per cent growth in 2025 and 2.4 per cent in 2026 implies the rate will have to come down much further, he said.
“The Bank of Canada is hardly done — this is the early stage of what will prove to be more than just a partial unwind of the most severe tightening cycle since the John Crow era of the late 1980s.”
Real estate bears must be hating this talk, so let me caution: there’s more.
I mentioned above that there’s more discussion now about interest rates and economic growth, whereas the conversation for the last year has been about the interest rates and inflation.
Here’s an important read:
“Bank of Canada Pivots To Boosting Economic Growth, Raising Rate Cut Bets”ReutersJuly 25th, 2024
From the article:
The Bank of Canada is shifting its focus to boosting the economy rather than suppressing inflation, which raises prospects of further interest rate cuts in the coming months, analysts say.
The Canadian central bank lowered its benchmark rate for a second straight month on Wednesday, cutting by 25 basis points to 4.50%. It said downside risks to inflation are taking on increased weight in its deliberations.
Investors see a roughly 60% chance the BoC will ease again at its next policy meeting in September. Investors are pricing in 44 basis points of easing in total by the end of the year, which implies a policy rate 6 basis points below previous expectations.
A faster pace of rate cuts would provide relief for heavily indebted Canadian households. It could also increase pressure on the Canadian dollar, which weakened on Thursday to a three-month low of 1.3848 per U.S. dollar, or 72.21 U.S. cents.
“There is a pivot that has taken place with the BoC shifting its focus away from the inflation fight, which has been won, to economic support, which is much more necessary,” said Philip Petursson, chief investment strategist at IG Wealth Management.
Up to this point, all the talk has been about getting inflation under control and then looking at interest rates.
The definition of “under control” is variable, but the narrative has become quite interesting. The above article quotes an investment strategist as saying the inflation fight “has been won.”
Has it? Have we officially called it?
Either way, with June inflation coming in at 2.7%, the lowest it’s been since March of 2021, it seems that the Bank of Canada has finally turned its attention to something just as important: the economy.
As I mentioned last week, Canadian unemployment was at 6.4% in June. Every percentage point increase represents another quarter-million Canadians out of work.
The above article also notes the weak Canadian Dollar, which has been down-trending since the spring of 2021.
It seems as though there are many reasons for the interest rate cuts, and they don’t all have to do with inflation.
Here’s a quote from the Bank of Canada governor himself, Tiff Macklem:
“We are determined to get inflation back to 2%, but we also don’t want to weaken the economy too much and have inflation go below our 2% target.”
This seems to be an admission of sorts that the quantitative tightening introduced in 2022 and 2023 has “weakened the economy.”
Mr. Macklem adds “too much,” as though weakening the economy was okay on a smaller scale, but that now we’ve crossed some sort of line in the sand.
The relationship between inflation and interest rates will remain, however, even if the conversation has shifted.
“Bank of Canada Cuts Interest Rate, Signals More To Come If Inflation Keeps Dropping”CTV News – BusinessJuly 24th, 2024
Here are selected quotes from Tiff Macklem from the article:
“We are increasingly confident that the ingredients to bring inflation back to target are in place.”
“Looking ahead, we expect inflation to moderate further, though progress over the next year will likely be uneven.”
“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces place out.”
The CTV News article provided us with a true “picture that paints a thousand words,” at least from my view:
Inflation rose very quickly in 2021 and 2022.
Interest rates moved accordingly, but the lag was about one year.
Now look at the decline in inflation. Note that the decrease in interest rates is also lagging.
Of course, this is what central banks do. I’m merely pointing out that there is no reason to delay further interest rate cuts at this point, and combined with the newfound focus on growing the economy, plus the unfortunate unemployment numbers, and the sagging Canadian dollar, I’m starting to believe the pundits who believe there’s not one but rather two interest rate cuts ahead.
There’s one more article that I’m going to share today and this one provides a very intriguing thesis:
“Trust The Liberals To Fix Immigration? The Bank Of Canada Doesn’t”National PostJuly 24th, 2024
Here are some selections from the article:
It is apparent that in announcing its rate cut, the Bank of Canada feels like it has to step in to clean up the federal government’s mess.
Tiff Macklem is a man so cautious that he looks before and after he leaps.
The Bank of Canada governor is allergic to politics and has refused to bite when asked whether the Liberal government’s expansive fiscal policy has aggravated inflation.
All of which makes it more surprising that as part of its announcement to lower the policy rate from 4.75 per cent to 4.5 per cent Wednesday, the Bank of Canada openly questioned the ability of the federal government to deliver on its pledge to reduce over the next three years the number of non-permanent residents (NPRs) in Canada to five per cent of the population, from the 6.8 per cent that resided here in March.
Derek Holt, head of capital markets economics at Scotiabank, called the combination of housing affordability and a deteriorating job market for young people a “political powder keg” in a recent research note.
“Canada is still taking in far too many people in this (NPR) category… If the federal government and provinces do not reach an agreement on curtailing (it) … then unemployment is likely to keep rising,” he wrote.
Mike Moffatt, an economist and senior director at the Smart Prosperity Institute, said the bank is clearly questioning the credibility of the federal commitment to the five-per-cent target.
“I think it’s fair. They’re basically saying the government isn’t going to do what they claim they’ll do. I don’t remember the last time I saw that from them,” he said.
It is a sign of how undisciplined immigration policy has become that the central bank feels it has to step out of its lane to admonish the government.
It’s an opinion piece by John Ivison, so disagree with the idea that the BOC is “cleaning up the government’s mess,” if you so choose.
But the implications and ramifications of the cycles of quantitative tightening and quantitative easing are starting to make their way to the forefront.
It’s not just about inflation. It’s not just about home prices. It’s about so, so much more.
As much as I would love to ask for yet another prediction – this one about whether we see one cut through the end of 2024, or two, I think we’ll simply stick to the original TRB Interest Rate Prediction Game as outlined in January and cheer on House Keys for the win.