Light it up?

Houthis to the left of us. Trumpers to the right. Stuck in the middle with Tiff.

Our CB boss is in a tough spot these days, between the rock of inflation and the hard place of rate cut hopes. On Wednesday morning the Bank of Canada will tell you the price of money is staying put, but in a press conference moments later Tiff Macklem will outline the reasons those promising a big and quick rate pivot need to keep it in their pants.

There are a few.

Rebels are shooting ships in the Red Sea, causing a massive disruption in global trade. The big boats now face a 4,000 km, 10-day, crazy-expensive detour around a hulking thing called Africa. As shipping costs escalate, inflation has snuck back into Canada and the States, now sitting at 3.4%. No disaster, but not moving in the right direction. The economy is doing fine, wage growth is steamy, unions are winning big, productivity is down and shelter costs have been escalating.

Worse, there’s Trump. Against all political norms, logic, common sense and morality, the guy could be prez again. Even if not, the most powerful country in the world is being duelled over by two wrinklies who need to nap every afternoon. But if 45 wins, Mr. Market expects tax cuts, deregulation, diddling with the Fed, increased deficits and, yeah, probably more inflation.

As you know, DeSantis imploded. Nikki is all that stands in the way of a Trump nomination, as he now slurs her name and heritage. Soon the only minor obstacles will be four criminal trials and 91 felony charges, which Trump uses as campaign events. What a world.

Well, what does all this mean for those who forecast lower interest rates in 2024?

Maybe something. Maybe nothing. It all depends on the data (employment, retail sales, GDP, CPI) between now and March.

Economist Derek Holt – usually a prescient guy – says don’t be so sure cheaper money is coming. “Not with that combination of developments,” he states, while warning what a mortgage chop would do to real estate prices. “Cutting… would strongly risk reigniting the same imbalances all over again.”

And what will Tiff say in his presser Wednesday morning? “I think he’ll sound more cautious if anything and continue to intimate that markets are overly aggressive in pricing near-term rate cuts as he did in his pre-holiday speech when he said that they will want to see clear evidence through volatile readings that they are durably on track to 2% before easing.”

Others keep the cut hopes alive. They have not wavered even in a world of two hot wars, spreading conflict in the Middle East, rising prices and political nuttiness. For example, here’s BMO’s Robert Kavcic, an economist whose been impressive in his assessment of the Cana dian housing market:

“We believe the Bank will be in position to cut rates around mid-year, with 100 bps of easing through 2024. As such, given the recent rally in the bond market, we’ve likely already seen peak Canadian mortgage rates for this cycle.”

Others agree. In fact, most others. CIBC, RBC, TD, National – all are gearing up for cuts in the late spring/early summer. Mortgage rates have been drifting down in advance, and you can be certain the bankers’ desire for more loan originations after the 2023 drought will lead to aggressive pricing once the daffodils arrive. And, by the way, Kavcic has bad news for those who have been sitting on the sidelines waiting for real estate prices to croak. He says it’s over. “Canadian home prices have now largely adjusted back to their long-term growth trend, suggesting that most froth has been cleaned out of many markets.”

As for market buzz, here’s the forecast from TD’s housing whiz Rishi Sondhi: “We’re forecasting sales to increase every quarter this year [with] a particularly large increase in the second quarter of this year, which, of course, overlaps with the spring selling season period. And that’s across Canada; we’re expecting pretty strong sales growth.”

No froth remaining. Sales levels swelling. New home construction falling behind. Rates fading – sooner or later in 2024. Add it up.

Market stats for December suggest places like Toronto/GTA and Vancouver/LM were shaking off the 2023 torpor. Sales and prices were up year/year. The average detached in 416 was almost 10% more expensive at Christmas than in January. So, is this a harbinger? Will enough Canadians lose their minds and rally to buy homes when they have hardly ever been more costly?

RBC econs Robert Hogue and Rachel Battaglia are suggesting just that.

“Our view is the Bank of Canada will pivot around mid-year and slash its policy rate by 100 basis points over the second half of this year followed by further 100 basis points in 2025. We see prices firming up after activity has turned and demand-supply conditions have tightened sufficiently—possibly sometime in the third quarter. That said, any price recovery will be restrained by lingering affordability issues.”

Royal LePage says prices will go up 6% more this year. The guys at CREA say sales will increase 10% nationally.

Meanwhile the average family cannot afford the average house. Politicians are panicking. Folks are growing irrational. The pandemic threw gasoline on real estate. The most aggressive rate hiking cycle in memory did not quell it. And now, we could be on the precipice of… gulp…

Does anyone recall what ‘normal’ means?

About the picture: “Here are our two beloved family dogs out for their walk,” writes Josh. “The big guy is Ollie (aka Trash Panda) and is still a puppy at less than a year.  His “big brother” is Loki (aka Death From Below).  You must watch your plate when Ollie is around and watch your ankles with Loki.”

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