The growth scare

Did the bankers blow it?

A lot of investors weren’t hanging around for an answer Friday morning. They were too busy dumping stuff in the wake of a weak jobs report from the US. Stock markets fell. Bond yields plunged. Tech companies were whacked. It was a traditional risk-off retreat as investors locked in profits after 2024’s giant equity rally.

The employment news was bad news. People took it as increasing the odds of a hard landing instead of a soft one. Maybe even a recession. The US economy suddenly looks to be cooling down faster than the cowboys expected. Maybe the Fed didn’t see it coming? So is this one more thing to worry about, atop Trump/Harris, Ukraine, Gaza, China’s real estate meltdown, Putin, plus Netanyahu poking the beast?

Whazzit mean?

• The odds of a US interest rate cut next month now sit at 100%. It’s clear central banks kept rates too high for too long. They need to worry more about the economy than inflation.
• The chances of that cut being a giant 50 basis points (half a per cent) just shot higher.
• Economists are factoring in up to three American rate cuts by the end of the year. In Canada we could end up with four by Christmas (two more to come).
• Bond priceshave pushed higher and yields tumbled lower as investors seek a safer haven.
• The Government of Canada five-year bond yield just cashed through the 3% mark. It sat at 4.5% a year ago.
• Canadian five-year mortgage rates will be coming down next week as a result.

Canadian bond drop suggests a mortgage plop

The sentiment is that central banks are behind the curve. As the American jobless rate climbs (now 4.3%), the pressure for rate cuts is immense. Suddenly the Bank of Canada looks wise, not capricious or hasty, in having chopped its policy twice already this summer – the first major CB to do so. The Canadian dollar rose in value. Bitcoin shed more than $500 a unit. Wall Street and Bay Street ran red. And Trump looked like an idiot for focussing his campaign on Kamala Harris’s DNA.

A big selloff among the high-flying tech companies is propelling the Nasdaq into correction territory. US Treasury prices have rallied for the last seven sessions. After 2024 delivered outsized returns for equity investors, the growth scare now is augmenting losses. The pendulum swings big – especially amid an historic and crazy American presidential election polarizing a world currently stressed by heat, wildfires and two hot wars.

What next?

Canadian interest rates will decline at least twice more this year, economists say, as America lurches into a period of looser monetary policy. “This clearly gives the Fed the green light to start cutting rates in September,” says BMO’s Scott Anderson, “and the market’s attention will now shift focus toward how many and how deep the coming cuts will be.”

By this time next week, a five-year mortgage could be available for close to 4.5% at a major bank. By Christmas – or certainly for the coming spring market – a rate of 3.9% or less is possible. Variable-rate mortgages will be on a steady trajectory down for many months to come, especially if economic growth deteriorates faster than the Bank of Canada can stem it.

After a year of lousy sales and pent-up demand, will money in the 3% range ignite a wave of buying and a new FOMO epidemic? Or are families – already financially stressed by debt and inflation – likely to pull in their horns as unemployment rises and the GDP fades?

In other words, house prices to new highs? Or the opposite?

Let’s take bets.

About the picture: “Daily reader, rarely comment, but I wanted to share my new family member with the pathetic steerage…” writes Tom. “My best friend Maggie Mae adorned the cover of your awesome free dog rag in the past, (is that a MSU?), and now my dear Maggie has a partner in crime here at the Doomsday Ranch. Rescued near James Bay in Northern Quebec, meet River! His DNA test says he is part Siberian Husky, Lab, Border Collie, American Staffy and…. Wait for it…. 19% Neufoundland! Check out those mitts! He and Maggie Mae are becoming closer everyday, despite frequent MMA tussles, and now they can even share a moose skull. Thanks again for the FREE blog.”

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