No new post this week (I was away on vacation this past weekend).
I’ll be back next Monday with an update on Canadian mortgage rates. In the meantime, here are a few links to some of my most popular recent posts:
This post explains why I think the bond market’s new bets on Bank of Canada (BoC) rate hikes later this year are likely too aggressive.
This post explained why I thought the bond market’s bets on rate cuts starting as early as this fall were too optimistic. (Those bets ended up being unwound shortly after this post was written.)
This post explains how the US Federal Reserve’s indication that it will likely pause from making additional rate hikes over the near term will impact our mortgage rates.
In this post I offer my take on whether Canadians should be considering variable-rate mortgage options now that our economic momentum is slowing and inflation has fallen steadily from its peak.
The Bottom Line: Government of Canada bond yields continued to rise last week, and borrowers should expect lenders to continue raising their fixed rates over the near term.
Anyone who is considering fixed-rate options over the near term is well advised to lock in a pre-approved rate as soon as possible.
Variable-rate discounts were unchanged last week.
I expect the BoC to start cutting its policy rate when it next moves off the sidelines, but I continue to believe that won’t be until some time in 2024.
Canadian Inflation Re-accelerates and Mortgage Rates Rise
Monday Morning Interest Rate Update for May 23, 2023
The Canadian Consumer Price Index (CPI) increased by 4.4% on a year-over-year basis in April, up from 4.3% in March.
That result surprised bond-market investors.
Nine straight months of steadily falling inflation had emboldened them to bet on Bank of Canada (BoC) rate cuts starting this fall, even as the Bank itself pushed back against that notion.
Those bets unwound after Statistics Canada released its latest inflation report on Tuesday.
Why I’m Still Not Buying the Bond Market’s Rate Cut Bets
Monday Morning Interest Rate Update for May 15, 2023
The US Consumer Price Index (CPI) increased by 4.9% on a year-over-year (YoY) basis in April, and by 0.4% on a month-over-month (MoM) basis. Those results were basically in line with the consensus forecast.
US CPI has dropped steadily from its peak of 9.1% in June 2022, but its rate of deceleration is slowing, and additional declines will be harder to come by.
US Core CPI, which strips out volatile food and energy prices, clocked in at 5.5% in April YoY and at 0.4% MoM in April.
US Core CPI has now increased by 0.4% MoM for five months in a row, and on a YoY basis it is now higher than overall CPI (5.5% vs. 4.9%). That means food and energy prices, which are the most volatile inputs to overall CPI, are now pulling US inflation down instead of up. Going forward, other slower moving prices must do their part if inflation is going to continue to cool.
The shifting composition of today’s US inflation pressures is also important to note.
What the US Fed’s Pause Will Mean for Canadian Mortgage Rates
Monday Morning Interest Rate Update for May 8, 2023
Last week the US Federal Reserve joined the Bank of Canada (BoC) when it shifted to the talk-tough-and-do-nothing phase of its monetary-policy cycle.
The Fed raised its policy rate by another 0.25%, as was widely expected, but its latest policy statement contained a subtle shift in wording, which signaled that it will likely pause additional hikes for the time being.
Instead of repeating its previous assessment that “some additional policy firming may be appropriate”, the Fed said that it will monitor the incoming data and will be “prepared to adjust the stance of monetary policy as appropriate if risks emerge”.
In addition to cooling still-hot inflation, the Fed must account for the US banking crisis, which is reducing liquidity in the US financial system and creating impacts like those caused by additional rate hikes and the current game of chicken being played by the Republicans and Democrats in the US Congress over raising the US Federal government’s debt ceiling. (The US federal government will eventually default on its debt obligations if no agreement is reached.)
Should Canadians Reconsider a Variable-Rate Mortgage?
Monday Morning Interest Rate Update for May 1, 2023
Last week Statistics Canada confirmed that our GDP increased by 0.1% in February on a month-over-month basis (MoM).
The result was a little better than the flat reading expected by the consensus, but it was still well below the 0.6% MoM increase we saw in January. Stats Can now also expects that our GDP will have decreased by 0.1% MoM in March.
Our slowing economic momentum doesn’t come as a surprise.
The Bank of Canada raised its policy rate from 0.25% in March 2022 to 4.5% by January 2023, and BoC Governor Tiff Macklem has warned that those hikes will cause economic pain for Canadians as they work their way through our economy. (He is always quick to add that the pain of higher rates is preferable to the pain that will accrue if inflation is left unchecked.)
In fact, the surprise has been that it has taken this long for our momentum to shows signs of slowing.
Is the Bank of Canada Painting Itself into a Corner?
Monday Morning Interest Rate Update for April 24, 2023
Last week Statistics Canada confirmed that our Consumer Price Index (CPI) dropped to 4.3% in March on a year-over-year basis, down from 5.2% in February and well below the peak of 8.1% we saw last June.
That rapid inflation drop has mostly been caused by base effects. Here is a quick review of Stats Can’s definition of this phenomenon:
A base-year effect refers to the impact that price movements from 12 months earlier have on the current month’s headline consumer inflation. When a large 1-month upward price change in the base month stops influencing or falls out of the 12-month price movement, this has a downward effect on headline CPI in the current month.
Put more simply, inflation is dropping because prices that spiked a year ago are aging out of the CPI basket.
The Bank of Canada Pushes Back on Bond-Market Expectations
Monday Morning Interest Rate Update for April 17, 2023
The Bank of Canada (BoC) held its policy rate steady last week, and that was welcome news for variable-rate borrowers who have watched their rates increase by 4.25% over the past thirteen months.
It was also clear from the Bank’s accompanying policy statement, press conference and latest Monetary Policy Report (MPR) that it remains far more concerned about whether it has done enough to cool inflation than whether it has done too much.
In a rare move, BoC Governor Macklem pushed back directly against bond-market futures pricing when he said, “the implied expectation in the market that we are going to be cutting our policy rate later in the year … that doesn’t look today like the most likely scenario to us”.
Three Recent Posts to Get You Ready for the next Bank of Canada Meeting
Monday Morning Interest Rate Update for April 10, 2023
I hope that you enjoyed the break. I took the long weekend off, so there won’t be a new post this week.
All eyes will be on the Bank of Canada (BoC) when it meets this Wednesday. On that note, and for context, here are three recent posts that I have written in the lead up to this meeting:
- This post summarized the Canadian and US economic news that continued to surprise to the upside before the collapse of Silicon Valley Bank caused bond yields to plunge.
- This post explains how the US and European banking scare has impacted the Canadian economy and our mortgage rates. (It also offers my take on an underappreciated factor that is underpinning our economic momentum.)
- This post explains why good news for our economy is bad news for our mortgage rates. It also offers my recommendation on the mortgage option that stands above the rest as the safe middle-of-the-road pick in these turbulent times.
I’ll be back next week with highlights from the BoC’s latest Monetary Policy Report, and to offer my take on what it said. (Spoiler alert: I’m betting that the Bank will hold its rate steady and maintain a hawkish overall tone.)
The Bottom Line: Government of Canada bond yields dipped again last week. That is keeping downward pressure on our fixed mortgage rates for the time being.
With variable-rate discounts holding steady last week, I think variable-rate borrowers shouldn’t be too worried about a BoC rate hike this Wednesday.
Will Strong GDP Growth Bring Higher Mortgage Rates?
Monday Morning Interest Rate Update for April 3, 2023
In today’s upside-down world, good news for our economy is bad news for our mortgage rates because it increases the likelihood that the Bank of Canada (BoC) will either hike its policy rate or wait longer before cutting it.
Canadian mortgage borrowers got more “bad news” last week.
Statistics Canada confirmed that our GDP increased by 0.5% month-over-month (MoM) in January, and it estimated that our GDP will rise by another 0.3% MoM in February.
A detailed look at the results shows strength across the board. Both our goods-producing (+0.4%) and services-producing (+0.6%) industries grew last month, and 17 out of our economy’s 20 different sectors experienced gains.
The latest GDP data confirm that our economic momentum is still stronger than the Bank of Canada (BoC) expected.
More Near-Term Rate Hikes Are off the Table (But So Are Rate Cuts)
Monday Morning Interest Rate Update for March 27, 2023
When central bankers cranked up their policy rates to combat runaway inflation, they knew that it would create economic pain. You can’t slow an economy that has been gorging on ultra-low interest rates for more than a decade without breaking things.
At some point, an economy must take its medicine. If tighter monetary policy doesn’t wring out the excesses that built up during the free-money era, financial markets will eventually sort out the imbalances. Odds are, that would be a much less orderly process.
The failure of weak, poorly managed banks is simply the manifestation of the pain that our central bankers warned us about. Our policy makers will do their best to limit financial contagion and other collateral damage, but only if it doesn’t interfere with slaying the inflation dragon.
The inflation debate has suddenly taken a backseat to concerns about systemic financial risk in both the US and Europe.
Within a short period of time the failure of Silicon Valley Bank (SVB) was followed by the collapse of Signature Bank, the provision of emergency lifelines to First Republic Bank, and then the fire sale of Credit Suisse to UBS.
Events like these shouldn’t be entirely surprising. They are examples of the concomitant ‘pain’ that our central bankers warned would be a necessary by-product of their rapid series of rate hikes. As Warren Buffet might put it, after more than a decade of practically free money, the tide is now going out and we’re finding out who has been swimming naked.
Last week was a busy one for anyone keeping an eye on Canadian mortgage rates.
We heard hawkish statements from the Bank of Canada (BoC) and the US Federal Reserve. They re-emphasized their commitments to do whatever is necessary to bring inflation to heel.
We also received the latest Canadian and US employment reports, for February. Both came in better than expected and confirmed that the demand for labour remains strong on both sides of our shared border.
That’s when things got interesting. The bond market’s response was the opposite of what we would have intuitively expected on first pass.
Finally Some Good News for Canadian Variable-Rate Mortgage Borrowers
Monday Morning Interest Rate Update for March 6, 2023
Let’s start with this week’s most welcome news.
There is a zero percent chance that the Bank of Canada (BoC) will raise its policy rate when it meets this Wednesday. That means that variable-rate borrowers won’t be seeing their ninth increase in twelve months.
At its last meeting, the Bank said that it would pause from making additional rate increases over the near term, and a hike this Wednesday would renege on that commitment.
The Bank said that it will now also require “an accumulation of evidence” before abandoning its pause, and thus far it has seen only five weeks of additional data.
Inflation Falls, But Bond Yields Rise Anyway
Monday Morning Interest Rate Update for February 27, 2023
Last week Statistics Canada confirmed that our Consumer Price Index (CPI) fell from 6.3% in December to 5.9% in January on a year-over-year (YoY) basis.
That result was lower than the consensus forecast of 6.1%, but the downside surprise didn’t prevent the Government of Canada (GoC) bond yields, on which our fixed mortgage rates are priced, from finishing the week higher.
To help understand why the bond market zigged when we would have intuitively expected it to zag, let’s start with a closer look at our inflation data.
Top Five Recent Posts About Mortgage Rates and Inflation
Monday Morning Interest Rate Update for February 21, 2023
I hope that you enjoyed the Family Day long weekend.
I used the holiday yesterday for its stated purpose, so there won’t be a new post this week. I’ll be back next Monday as usual.
In the meantime, here are links to five of my recent posts about Canadian mortgage rates and inflation:
- Canadian Hiring Surge Undermines Rate-Cut Bets
- Was the US Federal Reserve’s Most Recent Hike Really That Dovish?
- Why We Shouldn’t Over-React to the Bank of Canada’s Rate-Hike Pause
- Why Softer US Inflation Doesn’t Change My View on Mortgage Rates
- Mortgage-Rate Forecast and Predictions for 2023
