WHAT’S DRIVING INFLATION?
Inflation is down considerably, that is for sure, from its high of 8.1% last year. Even so, it went up slightly to 4.4% last month. As I said in the April edition of Jason’s Journal, I think inflation could be with us for longer than the Bank of Canada anticipates (they are forecasting that inflation will decrease to 3% by mid-year, and finally return to the Bank’s target rate, 2%, next year).
Why is inflation going up? A key driver is gas prices, which made their biggest jump since last October, when OPEC decided to cut production. I maintain my view that high interest rates have not yet fully affected consumers, and therefore that spending will remain robust, keeping prices up. There is plenty of evidence of strong spending, including in the housing and travel markets, which I discuss below.
The bottom line is that even though the Bank of Canada signalled in March that they would stay in a holding pattern for some time and not raise interest rates, they may change course and increase rates some time this year.
HOMES
Strong home sales mean that our country’s housing market has turned a corner. Sales ramped up following a lacklustre March and prices went higher, with Toronto, Vancouver and Calgary leading the way. In Toronto, resales jumped 27% and prices rose 2.4% from March. In Montreal and Vancouver, resales shot up 12% and 30% respectively, while Calgary saw a 28% rebound. The pause in our central bank’s interest rate hike campaign seems to have given buyers enough confidence to jump back into the market.
THIS SUMMER WON’T BE SO BAD
Great news! We won’t have to fly Air Canada unless we really want to.
That’s right – a WestJet pilots’ strike has been averted.
I am kidding, a bit, as I know that Calgarians specifically and Westerners in general look more fondly upon WestJet than the national carrier.
WestJet still unleashed quite a bit of inconvenience upon travellers this month, with hundreds of flights cancelled just before the Victoria Day long weekend. After all, WestJet carries 28% of Canada’s domestic market, which is a good chunk, even though Air Canada leads this country’s small pack of competition with 47%.
The bigger story is that demand for air travel is fully recovered from the dark days of the pandemic. Heading into the busy summer travel season, demand is strong, and here is an interesting twist: Air Canada reports that demand in business class and premium economy has recovered faster than for economy seats. This demonstrates that people are willing to keep spending (see my above thoughts on the persistence of inflation and interest rates), which is expected to keep ticket prices high. For its part, WestJet has announced increased seats and flights for this summer, including a 27% increase in flights to and from Calgary.
Let’s hope Canada’s airports can handle the higher traffic after the debacle at Pearson in particular last summer – when on-time performance at that airport was an incredibly bad 35%. As you can see from this CBC story, Canadian airports and airlines are promising that “this summer won’t be so bad.”
AND YET…
Clearly there is risk associated with all of the spending going on. In fact, Canadian consumer insolvencies are at their highest level since 2019. Insolvencies include personal bankruptcy filings and also consumer proposals, which are offers made by consumers to pay creditors less than what they are owed; if the offer is accepted, the consumer avoids bankruptcy.
What really jumps out at me is that consumer proposals are at their highest level since 2011. This means that a lot more people – nationally there were more than 9,000 consumer proposals in March – are struggling with debt than indicated by the bankruptcy number alone. Here is an interesting analysis from the Alberta Central Credit Union:
“Alberta is a particularly interesting province to observe at the moment, because despite strong oil prices causing the usual boom in the local economy, there are troubling signs of consumer stress.
“Albertan households have some of the highest debt-to-income ratios, making them vulnerable to rising interest rates, and have seen a bigger decline in their purchasing power than other provinces…the rate of consumer proposals in the province is higher than it’s ever been, and a full 35 per cent higher than…before the pandemic.”
My main message to you: this could be a good time to review your budget. We have budgeting tools to share with you. If you’d like us to send them your way, just let us know.
RAISING THE ROOF?
Speaking of inability to pay…the US debt ceiling is a big story: the possibility that Congress will not lift the legal limit on how much debt the US government can incur, which is $31.4 trillion. If the ceiling is not lifted, the US government might start missing payments on its vast obligations as early as June 1st.
We believe it is very likely that Democrats and Republicans will make a deal to avoid that possibility, because the repercussions of missing payments – which fund one-quarter of the US economy – would be so dire. As one example, the US federal government owes American doctors, hospitals and insurance companies $47 billion of Medicare payments on June 1st, but if the ceiling is not lifted, the government might be unable to pay. Failure to lift the ceiling would also create high volatility in the markets, falling real estate prices, rising interest rates, mass layoffs and likely a recession, all of which could affect Canada to varying degrees.
Again, we believe it is very likely that the debt ceiling will be increased, partly because the political costs, for politicians of either stripe, of inducing turmoil on the markets and economy would be high. That said, we are monitoring the situation closely, note that the ceiling has been raised 86 times since 1960 (50 under Republicans and 36 under Democrats), and also that while markets fell during debt ceiling debates in 2011 and 2013, the S&P 500 rebounded more than 20% in the following years.
MORE VALUE FOR YOU
I will soon have some news for you about my ability to deliver even more value to our clients. I look forward to making an announcement in the coming months.
THE FAMILY FILES
Cara had a very successful campaign selling Girl Guide cookies, as many of my family and friends are personally aware, having received a figurative or literal knock on the door. She is also really enjoying ballet and gymnastics.
Golf is another sport that both Cara and Jake are enjoying…well, at LaunchPad at least, which I mentioned in last month’s edition of Jason’s Journal. Tara enjoys it too, so we went as a family to celebrate Mother’s Day. We also went out for dinner. And of course, being a good son, my two brothers and I sent flowers to our mother. There is a picture of her below.
On behalf of my entire family, I wish a very Happy Mother’s Day to all the moms this year and every year.
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The greatest compliment we can receive is a referral to someone you care about who would appreciate the same value we take pride in giving you. If you have someone in mind, feel free to contact me at any time. Thank you very sincerely.
Jason de Weerd, CFP, CIM
Investment Advisor & Financial Planner
RBC Wealth Management
RBC Dominion Securities Inc.
1-403-213-6731
jason.deweerd@rbc.com
www.jasondeweerd.ca