Climbing down

When’s the rate cut?

Here’s the latest. Consumption levels in America are rising. That’s because people are earning and spending more. Since the US economy is two-thirds driven by household cash flow, things are hot. The GDP is swelling at a robust rate. Inflation’s hotter than expected. US manufacturing has done a U-turn and is now rebounding after 16 months of misery. The S&P500 hit over 20 new highs in the last three months.

As a result, markets are betting the Fed rate cut in 2024 will be 65 beeps, not the 75 considered a week ago. Bond yields have advanced as investors look for an inflation premium. The odds of a June rate cut have fallen to 50%. Mr. Market is actually expecting rates to be higher in the coming months than the CB itself does.

Complications? Yeah, politics. Gaza. Putin. Trump.

Eight months out from the November presidential vote – which will be epic, historic and global, no matter the outcome – Fed boss Jerome Powell is aware that a series of rate cuts eating into the final weeks of the campaign will be viewed by the Trumpers as purely political. Trump has already indicated he wants Jay’s head on a stick, so anything that happens in terms of monetary policy will be consequential.

The next shoe to drop?

That’s the jobs report this Friday. For over two years now the American unemployment rate has been below 4%. That’s a remarkable thing, after 11 interest rate hikes, post-pandemic inflation, supply-chain messes and the advent of two disruptive wars. If the non-farm payroll report is a corker at the end of this week, the first rate cut will come in July, not June.

But one things is for sure. The tightening cycle is over. No rate hikes. And in Canada, things are drastically different.

Recently this pathetic blog gave you some of the reasons rates may decline sooner here than there. Our economy is barely growing, enterprise failures and loan defaults are mounting, the big banks are setting aside billions for bad loans, hundreds of thousands of businesses could not repay their Covid loans, over $200 billion in mortgage renewals are coming and governments continue to pile on debt, as corporate revenues fall and politicians fail at budgeting. We’re the most indebted country in the western world on a household basis. Average families cannot afford average homes. The unemployment rate is rising and the public mood souring, leading to lower spending. To cap it all off, yesterday we learned Taylor Swift has cancelled her Canadian dates. (Sadly, it was an April Fool’s prank.)

As for housing, the March numbers will be interesting when released tomorrow. To date the pattern has been one of slightly higher sales, far higher inventory and sticky prices. Mortgage rates have declined about 1% since their apex, and governments everywhere have been obsessed with real estate. Rents have increased. Vacancy rates have declined. And Ottawa has just jumped into the fray with a ‘bill of rights’ aimed at tenants.

In short, America has huge problems and is doing peachy. We have problems and not much is getting better. So the odds of the Bank of Canada moving in advance of the Fed have taken a big leap forward.

Chances of a June chop by our guys is 64%. A half point drop by September is being put at 68%. For a CB rate three-quarters of a point lower in December the betting is 76%. And for a bank rate a full 1% less by this time next year = 66%.

Will these reductions be enough to revive housing and shoot prices skyward again, making everything worse and causing the steerage section to herniate?

It looks unlikely. We’ll know soon. If March stats are dishwater it’ll be an indication that one towering leg of the maple economy is teetering.

Will we get lower property prices and an earlier rate cut amid cooling inflation stats?

That scenario is closer. It’s the one afterwards you might worry about.

About the picture: “This is a picture of Captain, sweetest dog ever,” writes Donna. “He eats bunny’s food and drinks bunny’s water just to show who’s boss. Keep up the good work Garth trying to educate us Beavers, we need you.  Financial Management should be taught in school!”

To be in touch or send a picture of your beast, email to ‘[email protected]’.