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Low US inflation could mean an end to rate hikes

Your mortgage news update for the week of August 11, 2023

Memo 1: Low US inflation could mean an end to rate hikes

If there’s one measure today’s interest-fatigued borrowers are watching like a hawk, it’s inflation – both north and south of the border. With both the Canadian and American central banks labouring to contain the pace of the Consumer Price Index back down to a 2% target, each new reading provides fresh insight on whether more rate hikes– or a hold – will be in the cards.

That’s why softer-than-expected US inflation numbers out this week could help spell relief for borrowers in the near future; the headline CPI number for July came in at 3.2% year over year – slightly higher than the 3% recorded in June, but still below economist expectations.

According to an analysis from Bank of Montreal Senior Economist and Director of Economics Sal Guatieri, prices are up just 0.2% on a monthly basis, for the second month in a row. Taking into account the past three months, CPI has risen 1.9% – its slowest pace since June 2020.

A key point of interest is dropping grocery prices, which rose just 0.2% month over month, but down -3.6% annually, marking a total of 4.7% growth – their lowest level since August 2021. Energy prices have fallen -12.5% year over year, along with vehicle prices (-5.6%). As has been the case in Canada, though, shelter prices continue to increase, up 0.4% monthly, though rent growth has started to cool.

However, with elements like food and energy prices stripped out, US core inflation remains at 4.7% – well above the US Federal Reserve’s 2% target. Nonetheless, the latest stats should give the Fed some breathing room to lay off another hike in next month’s interest rate announcement.

“While two months of subdued core (and supercore) inflation numbers might not define a trend, they do indicate progress in the Fed's fight to restore price stability,” writes Guatieri. “Barring a hot August CPI and labour market report, the progress should encourage the FOMC to skip a rate hike on September 20 and, in our view, for the remainder of this exceptional tightening cycle. That can only increase the prospect for a soft landing.”

Meanwhile, economists are keeping a keen eye out for the Canadian inflation numbers, which are due on August 15. Following last month’s promising print of 2.8%, another soft reading would further strengthen the case for the Bank of Canada to resume its rate hold, offering borrowers some badly-needed stability.

Also read: What borrowers should know about the latest GDP numbers

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Memo 2: A slowdown for Canadian trade

The impact of a recent port strike in Vancouver, as well as severe flooding in Nova Scotia are making their mark on the Canadian economy, in turn softening the prospects for overall GDP. 

As reported by Statistics Canada, the nation’s merchandise exports dropped 2.2% in June – with export prices declining for the 11th time over the past 12 months – while imports dipped by 0.5%. Combined, that’s widened Canada's merchandise trade deficit with the world from $2.7 billion in May to $3.7 billion in June, well outstripping analyst forecasts of $2.8 billion for the month.

According to StatCan, nine out of 11 export categories experienced decreases, including motor vehicles, metals, industrial products, and food products. Of particular note was a deep crash in canola exports by -42%.

Overall, dropping activity will further drag down economic growth; analysts are now forecasting GDP growth to moderate to 1.2% in Q2 of this year, down from the 3.1% recorded in the first quarter – a development the Bank of Canada will be monitoring. The central bank has stated that an economic slowdown will be necessary before it can take its foot off the monetary policy gas pedal, and stabilize or reduce interest rates and the cost of borrowing for Canadians.

Memo 3: A “bumpy road” ahead for real estate

The Bank of Canada surprised borrowers this past June when, after just five short months, it ended its rate hold with a fresh quarter-point hike, followed by yet another increase in July. Those hikes – the ninth and tenth in the Bank’s hiking cycle, respectively – brought the benchmark cost of borrowing up to an even 5%, pushing the Prime rate in Canada up to a whopping 7.2%.

That’s effectively poured cold water on the housing market, according to new analysis from RBC, with sales plummeting in major markets such as Toronto, Ottawa, Hamilton, and BC’s Fraser Valley between June and July. That’s a sharp turnaround from the robust activity seen in the spring.

“Signs of cooling activity in some of Canada’s largest markets are consistent with our view that the spring rebound was premature, and will taper off further amid high interest rates, ongoing affordability issues and a looming recession,” reads the analysis, which was written by economists Robert Hogue and Rachel Battaglia. 

“We think the path ahead is more likely to be slow and bumpy, with the recovery gaining momentum when interest rates come down—a 2024 story.”

It appears only Alberta and Saskatchewan have remained largely unscathed, with Calgary, Edmonton, Regina, and Saskatoon all recording an uptick in monthly sales, and featuring strong sellers’ market conditions.

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