Peak Pain Point Passed

November 25, 2022 | Matt Barasch


We will admit this week to leaning into a literary device – in this case an alliteration – to make our point. “Peak Pain”, which is ½ of our alliteration is the Point (3 of 4) at which economic indicators, while not necessarily ready to turn to the positive are no longer deteriorating.

This is especially important in the current environment as the Bank of Canada has been engaging in its most aggressive rate hiking cycle in four decades. What is likely needed for this tightening cycle to come to an end is some evidence that the Peak Pain Point has Passed (4 of 4).

With that in mind, let’s begin with a chart and then discuss:

We have discussed inflation at length, so we will try not to reinvent the wheel, but as you can see from the chart above (courtesy of RBC Economics), the peak of inflation appears to be some months in the rearview mirror with the current 3-month average (depicted in the chart) about half the level of the spring. The Bank of Canada focuses on something called CPI Trim, which removes components of the CPI basket that are increasing or decreasing at a disproportionate rate and thus could skew the data one way or another.

RBC Economics forecasts that the Bank of Canada will raise rates by just 25 basis points in December (to 4%), which would mark the first time since March that the Bank opted for the smallest rate hike possible, as CPI Trim was up “just” 5.3% year-over-year in October with a smaller share of components (58%) rising more than 3%.

Now, 58% of components are still rising more than 3%, which is likely to keep overall inflation too high for the Bank’s liking. But, as we have noted in the past, there is a lagged effect to interest rate hikes, so the BoC is unlikely to wait for the percentage of components rising by 3% to hit zero before reassessing the need for further hikes.

As a result, RBC Economics now believes that the December rate hike will mark the last hike by the BoC in the current cycle; although, it does acknowledge that there are some risks to this forecast.

Okay, let’s pivot just a tiny bit to housing and stick with the theme of PPPP:

House prices in Canada have now fallen for seven consecutive months, pushing the market into “balanced” territory for the first time since 2019. To the positive, home sales actually ticked higher in October (+1.3%; although, we acknowledge you have to squint to see it in the chart below) following steep declines over the late spring and summer months (sales were down ~36% over the prior 7-months):

To the negative, home prices continue to fall; although, again, there are some green shoots in the data as the 1.2% decline in October (m/m) was the smallest such decline in 8-months. That said: for the first time this cycle, prices nationwide are now down year-over-year:

RBC Economics believes that home prices are almost certain to continue to fall into the middle of 2023; although, again from a PPPP perspective (note that we could have done a five “P” alliteration, but spared you) the worst of the declines may be in the rearview mirror, especially if the BoC pauses after the December rate hike.

Market Implications

Markets worldwide have seen a nice recovery since mid-October. It is important to note that this rally is not occurring because the worst is necessarily behind us, but rather because the second order effects – the pace of increases/decreases in key data – appears to have peaked.

Our view, which we will expand upon in a 2023 Year Look-Ahead Video Extravaganza (more information to come, but figure mid-December for the 2023 YLAVE, which will provide our views on stocks, bonds, the dollar, housing, interest rates and the Toronto Maple Leafs), is that while 2023 is likely to have its challenges (much like when you throw a stone into a lake, the reverberations of rising interest rates can cause many “echoes”), the overall set-up for the year appears better, and, perhaps, significantly so, than 2022.