Ice, baby

Could rates actually plop in three weeks?

Suddenly, it’s a thing. Flowers are emerging. Robins are horny. Spring has erupted, and the latest inflation news has economists frolicking naked in the fountain. Well, at least they’re looking less dour. Because the end (of higher interest rates) is nigh.

People thought January’s CPI of 2.9% was a fluke and February would mimic what’s happening in the US, where consumer prices have been inching higher. Typical was this forecast yesterday from Royce Mendes at Desjardins: “We’re looking for inflation to re-accelerate as a result of higher energy prices during the month. It looks like for the next few months inflation will probably be bouncing around the three per cent range.”

Instead, and despite vastly higher costs for mortgages and rents, inflation has iced again – now down to 2.8%. Food price hikes have slowed. Internet and cell costs have dropped. Energy is under control. And if it were not for those shelter expenses, our inflation rate would be lower than a certain PM’s poll numbers.

So here’s the latest: two back-to-back inflation reports within the Bank of Canada’s target range of 1-3%. That’s a big win after we experienced more than 8% post-pandemic. And this is despite a 26.3% jump in mortgage interest costs and rents swelling by 8.2%.

Core inflation is w-a-y below expectations, as BMO economists point out. Technically: “Most major metrics stepping down by at least a couple ticks on a yearly basis. The BoC’s two main measures slipped 0.2 ppts, with median easing to 3.1%, or the lowest since 2021 and down almost 2 full ppts in a year. At 3.2%, the trim reading has seen almost as much improvement. With most core measures rising just 0.1% m/m in s.a. terms, the short-term trends receded further. The median is now up at just a 2.1% a.r. on a 3-month pace, and 2.5% for six months—the BoC will be encouraged.”

Translation: the guts look good. Four provinces are below 2%. Only two (the French one and the cowboys) are over 3%. The Bank of Canada itself had expected the rate to be 3.2%, so this is bomb. But is it sustained enough for rate cuts?

April still seems too early to be pulling the trigger on rate cuts, though it can’t be entirely ruled out if the Business Outlook Survey shows even more progress. The softness of the domestic economy and increasing slack driven by higher rates is helping put downward pressure on inflation, just as the BoC intended. At a minimum for April, look for the Bank to open the door to rate cuts. BMO continues to call for a June start to rate cuts, and this report certainly reinforces our conviction.

The econs at CIBC are also giddy. They’re calling Tuesday’s report, “unambiguously good news,” with “virtually every core measure looking more encouraging.” The price of services (outside of those pesky shelter costs) has crashed to just 1.6%, “showing that the sluggishness in consumer demand is working to tame inflation in that area, which also suggests a further slowdown in wage inflation ahead, something that the Bank is looking for in order to trim interest rates.”

This is the last inflation report to be tabled before the CB’s critical rate decision on April 10th. Blog addicts will recall we recklessly suggested last autumn the first rate cut could materialize on that date. That’s still a maybe, but more certain now is a chop at the next rate review meeting in June. Even if no cut comes in three weeks, Tiff and the gang are expected to sound a lot more dovish.

Meanwhile, look at Mr. Market. Here’s what happened to the yield on a Canada five-year bond immediately following the inflation print. Nice and frosty.

This takes mounting pressure off five-year mortgages (now just over 5%). It raises the possibility of a cut in April and the certainty of one in June. A softening, weakening economy – compared to the American juggernaut – should bring cheaper money to the land of maple sooner than the US, now in the throes of a weird, sad presidential contest. And while business insolvencies, bankruptcies and mortgage default rates are higher in Canada, you can probably count on the coming Bank of Canada actions to do nothing but grease real estate.

In fact, as stated, if mortgage interest costs can drop in a meaningful way, the inflation rate (and the banks’ policy rate) will continue to decline. Mortgage rates will pace them. And two million families renewing their home loans later this year and into 2025 will be spared some pain.

Says crusty mortgage broker and influence Ron Butler: “As each month goes by the Governor knows this great truth: by waiting to cut he guarantees a longer & more severe economic downturn in Canada even after he starts cuts.”

This is bitter news to those morose and piteous doomers who come here to cry ‘higher for longer’, who want the country to burn in the name of regime change and are just pissy because those who flipped, specked and leveraged pushed home costs to the sky.

But it is what it is. The central bank, 1. Nihilists, 0. And the housing insanity continues.

About the picture: “Lots of cat photos lately,” writes Randall, “so sending along a Roxy & Friends photo with a beautiful southern Ontario early spring day in the background.  Our dog sitter continues to impress with the group photos.  Cats are cool too, Roxy’s sister is a cat .”

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