Economic Update

June 06, 2022 | Matt Barasch


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This week we saw a few data releases which are going to paint the picture for the second half of 2022 into 2023.

Chart of the Week (COW)

Gasoline prices in Canada are now above $2/litre for the first time. When compared to U.S. prices, Canada has seen a much bigger surge over the past year:

Average U.S. prices are up ~$2/gallon over the past year, while prices per gallon in Canada are up ~$3/gallon over the same period.

Economic Update

We saw a few data releases this week, which are going to help paint the picture for the second half of 2022 into 2023.

First off, as expected, the Bank of Canada raised its overnight lending rate by 0.5% to 1.5%. At the start of 2022, the rate was 0.25%, so there has now been a cumulative 1.25% of rate hikes. Further, there is a very strong likelihood that the BoC will raise rates by another 0.5% at its next meeting in August, while RBC Economics sees the Bank getting to 2.5% by the end of the summer; although, RBC believes that the BoC will pause there.

The overnight rate has not been above 1.75% since before the Global Financial Crisis, which is demonstrative of the impact that high inflation is having on the Bank’s outlook and actions. The rate hike brings the Prime Rate in Canada to 3.7%, up from 2.45% at the beginning of the year. As a result, we have begun to see home prices moderate after 2+ years of strong gains:

The way we would think about housing is this – the surge in home prices we saw in early 2022 was likely the result of those who had locked in lower mortgage rates - banks will usually allow you to hold a rate for 120 days - and felt an urgency to purchase (and close on a place) before they lost the lower rate. With that 120-day window now closed for most who locked in lower rates, it is not surprising to see pricing come off the boil as we have not only seen some buyers pulled forward, but we have also likely see some buyers exit the market as the new higher rates make it more difficult to afford a new house.

Meanwhile, the U.S. reported non-farm payrolls for May, which showed an increase of 390,000 jobs, which was ~60k more than expected. There has been much talk in recent weeks about the rising risks of a recession in the U.S. as high prices and a slowdown in hiring weigh on the economy. While those risks still remain, the simplest way to think about a recession is an economy that is not creating jobs and the U.S. economy still shows no signs of checking this box:

As you can see from the chart above, the grey areas, which indicate U.S. recessions, are proceeded by declines in payrolls (usually by about 6-months). While the pace of job creation has begun to slow this cycle, the 390k gain still ranks in the top 10% of all monthly readings over the past 80-years. Thus, while we continue to have concerns about the U.S. economy in the second half of 2022, the jobs data continues to paint a contrary picture.