Back to school and back to a continued decline in inflationary pressures! While we don't know how many more cuts there will be exactly: it is for sure going to reduce the cost of borrowing in the next few years. We have been working with a lot of clients who are renewing, or in the midst of renewal of their mortgages, and there are many considerations. So reach out for any mortgage and interest bearing loans that you have coming due for our advice.
This week the Bank of Canada (BoC) decided to make its third consecutive interest rate cut this week. It’s widely expected that the U.S. Federal Reserve will initiate its first rate cut at its next meeting later this month.
Canada's inflation rate has steadily declined this year, with the Consumer Price Index (CPI) falling to 2.5% year-over-year in July, marking its lowest level since March 2021. The economy grew at an annualized rate of 2.3% in the second quarter, surpassing expectations. However, the details underlying the headline number were less encouraging. A sizable portion of the growth—roughly 80%—was driven by increased government spending. For the fifth consecutive quarter, per-capita growth declined, unable to keep pace with Canada’s population growth.
Canadian households continue to face a formidable challenge: a wave of mortgage re-financings. As mentioned above many of our clients and a lot of home-owners generally secured ultra-low mortgage rates during the pandemic and are now seeing their fixed-rate terms expire, with a considerable number of renewals still on the horizon. RBC Economics has estimated that approximately 25% of all existing mortgages will reset in 2025, and a third will follow in 2026. While a decline in interest rates can help, some analysts predict mortgage payments could rise between 20% to 40% depending on the extent of rate cuts, creating a drag on consumer spending as households grapple with higher borrowing costs.
The Canadian stock market’s strength this year can be partially attributed to the anticipation of rate cuts by the BoC, which should eventually provide relief to both Canadian consumers and businesses. This has helped the performance of rate-sensitive sectors like Financials, Consumer, Utilities, and Real Estate. The market has also been buoyed by strong performance across other sectors like Materials and Energy. Materials have been driven higher by record high gold prices, which are partly the result of central banks’ efforts to diversify their reserves.
When I look at our clients’ holdings, I consider Canada’s stock market to be fairly valued, meaning it is neither expensive nor cheap. The performance of the stock market to date is encouraging as it has come in the face of economic challenges that may persist for some time to come. Nevertheless, the rate cuts that are well under way should eventually serve as an offset to the hikes implemented just a few years ago and potentially lead to a more durable period of growth at some point in the future.
Should you have any questions, please feel free to reach out…
As for this week’s sports commentary, I’m not the biggest NFL fan, but I do play this thing with a bunch of friends called Fantasy Football. For those who don’t know, each “owner” of a Fantasy Football team plays weekly against other owners. A silly diversion to be sure. Each year in our league, we pay $200 per team to be an owner. Being an actual owner of a NFL team however, well that’s something entirely different. Today, the average NFL team is worth $6.5 billion USD. And the most valuable team, the Dallas Cowboys, is worth $11 billion. The owner of that team, Jerry Jones, paid $140MM for “America’s Team” in 1989. What an investment return. In fact, so great have the returns been, the NFL has allowed private equity firms to purchase up to 10% of a team, for investment purposes. Who knows maybe at some time in the future, we as investors can buy shares in these teams as well?