Today, mainstream economic forecasts fall within a fairly narrow band.
The narrative, in simple form, acknowledges that we’re in for a tough winter but predicts that we’ll be on our way back to normal not long after the snow melts, thanks to widespread vaccinations. After that, most forecasters expect our economy to rebound robustly and inflation to surge, as consumers unleash the cash they saved up during the lockdown.
In recent posts I have challenged several of the assumptions on which this view is built. Here is a summary of my key counter-arguments:
In last week’s post I offered my interest-rate forecast for the year ahead.
I contrasted our hope that vaccines will bring an end to the pandemic and breathe life into our economy with our fear that record-high infection rates and the reintroduction of lockdowns will inflict further economic damage in the interim.
Our latest jobs data, released last Friday, provided a snapshot of how COVID-19’s second wave has impacted employment. The picture wasn’t pretty.
We begin 2021 with our glasses half full – and that’s not just because our New Year’s celebrations were cancelled.
On the one hand, recently approved vaccines give us hope that we will beat the pandemic back and return to normal activities sometime this year. But on the other hand, spiking infection rates have necessitated the reintroduction of lockdown restrictions that will severely test our resolve over the near term.
Against that backdrop, and in keeping with my annual tradition, here is my interest-rate forecast for the year ahead.
I would like to wish my readers a healthy and happy holiday season.
I’ll be off until the new year. In the meantime, here are links to my recent blog posts that address five key mortgage questions:
- Is Another Bank of Canada Rate Cut on the Way?
- Have Canadian Mortgage Rates Bottomed?
- What Will Happen to Mortgage Rates When the Pandemic Ends?
- Should You Choose a Fixed- or Variable-Rate Mortgage? (Right Now It’s No Contest)
- When Will Canadian Mortgage Rates Rise?
When the Bank of Canada (BoC) slashed its policy rate from 1.75% to 0.25% in March, it said that it had reached its lower bound, which in central-bank parlance means the bottom of its range.
The Bank has confirmed many times since then that it has no plans to drop its policy rate into negative territory and that it would only consider doing so as a last resort.
But what about that last 0.25%? Have circumstances evolved to the point where the BoC might adjust its lower bound and drop its policy rate again?
The Bank’s commentary last week confirmed that this is a possibility.
This week’s post will offer my thoughts on five topics from last week that relate to Canadian mortgages and rates going forward.
- The Latest Employment Data
Last Friday Statistics Canada estimated that our economy added 62,000 new jobs in November, much higher than the consensus estimate of 20,000.
The market’s reaction to this upside surprise was muted, however, because the data only tracked results up to November 14, which means that most of the impact from recently introduced lockdown measures hasn’t yet been reflected in the numbers.
To wit, Manitoba introduced tighter restrictions on November 12 and despite a narrow overlap of only three days with Stats Can’s November data, that province showed a loss of nearly 18,000 jobs last month. This is being interpreted as an ominous sign for Ontario, which introduced tighter restrictions in the Toronto area on November 20.
Our latest employment results were welcome news, but previously stated concerns that spiking COVID infection rates will curtail our employment momentum still appear well founded.
There is a growing consensus that the pandemic will end sometime in mid- to late-2021 and that fixed mortgage rates will move higher relatively soon in anticipation of that outcome.
I respectfully disagree with both assumptions.
While I hope I’m wrong, I think the pandemic could continue for longer, and I don’t think fixed mortgage rates will bottom for some time yet.
To explain why, let’s start with an update on potential vaccines, and more importantly, projected vaccination rates.
Last week Prime Minister Trudeau told us to expect that an effective vaccine will become available in early 2021 and that “more than half of Canadians” will be vaccinated by next September.
Bluntly put, this sounds like wishful thinking.
Inflation spiked last month.
Statistics Canada confirmed that our Consumer Price Index (CPI) rose by 0.7% on a year-over-year basis in October. The increase was led by food prices and costs associated with housing construction, which rose at their fastest pace in fourteen years.
While last month’s result came in far above the consensus forecast of 0.4%, our overall CPI remains well below the Bank of Canada’s (BoC) target of 2%.
Two of the Bank’s three key sub-measures of core inflation also increased by 0.1% in October, with CPI-common rising to 1.6% and CPI-trim rising to 1.8%. CPI-median held steady at 1.9%.
In its latest Monetary Policy Report (MPR), the BoC had forecast inflation of only 0.2% for the third quarter of 2020, and as such, our latest inflation data have fueled speculation that the BoC may be forced to either raise its policy rate and/or curtail its quantitative easing programs sooner than expected.
Here are five reasons why I disagree with that view:
The five-year Government of Canada (GoC) bond yield recently surged higher, triggering warnings that our five-year fixed mortgage rates, which are priced on it, will soon rise.
A small run-up in five-year fixed rates may materialize, although it hasn’t yet, and anyone who is in the market for a fixed-rate mortgage would do well to lock in immediately to guard against that risk (which is pretty standard advice).
Short-term volatility aside, the more important question is: Have our mortgage rates now bottomed?
Last Friday Statistics Canada released its latest employment report and estimated that our economy added another 84,000 jobs in October.
This result came in a little higher than the consensus forecast of 75,000 but well below the robust increases we saw in September (+378,000) and August (+246,000).
The more jobs we recover, the slower the pace of additional gains will be and the more evident the permanent damage caused by COVID will become.
In its latest policy statement, press-conference commentary, and Monetary Policy Report (MPR), the Bank offered unusually clear guidance on the future path of interest rates, which will be extraordinarily useful to anyone in the market for a mortgage.
In today’s post I’ll highlight the key points from the Bank’s communications and then explain why I think its latest guidance should put an end to the fixed vs. variable debate until face masks are a distant memory.
Last Wednesday Statistics Canada confirmed that our rate of inflation ticked a little higher in September.
Our Consumer Price Index (CPI) increased by 0.5% on a year-over-year basis last month, up from 0.1% in August and higher than the consensus forecast of 0.4%. A sharp drop in gasoline prices (-10.7%) pulled down the overall number, and without it, our CPI would have risen by a full 1%.
Last week the Bank of Canada (BoC) announced that it would end its Canada Mortgage Bond (CMB) purchase program, effective October 26.
This news didn’t garner much media attention, probably because it isn’t likely to have a significant impact on mortgage rates over the short term. But the BoC’s withdrawal of support is still noteworthy because it serves as a litmus test for current financial-market conditions.
The BoC’s latest action reminds me of the family board game Jenga. In that game, players start by building a solid tower of blocks, and then each player takes a turn removing a block until the tower collapses and the game ends.
The Bank’s gradual removal of emergency COVID-support mechanisms will follow a similar pattern, although hopefully with a very different result!
Last Friday Statistics Canada confirmed that our economy added another 378,000 jobs last month, well above the consensus forecast of 150,000.
Our employment data are notoriously volatile, to the point where Stats Can’s monthly Labour Force Survey is sometimes jokingly referred to as “the random number generator.”
That said, if the recent data are anywhere near accurate, there is no denying that our jobs recovery is evolving at a much more robust pace than previously expected.
Will it continue?
Last week Statistics Canada confirmed that our GDP increased by 3% in July on a month-over-month basis, following an increase of 6.5% in June.
In regular times, those would be jaw-dropping results. Today, not so much.
The collapse in our GDP earlier this year has been followed by positive surges in momentum since our economy re-opened. Against that backdrop, comparisons to pre-COVID statistics and trends aren’t helpful, but the latest data do provide useful insights into the current state of our economy.
Here are five highlights: