Here at home this week, the major policy headline was the Bank of Canada’s decision to hold their overnight lending rate steady at 5%.  The decision was not a surprise, with the Bank highlighting the most recent contraction in GDP growth in Q3 while also acknowledging inflation globally is cooling but still above target.  Of note, they credited the slowdown in the economy in reducing inflationary pressure here at home and that prices have indeed eased broadly across the spectrum of goods and services Canadians consume daily.  You can read the full media statement here: Bank of Canada Rate Decision - Dec 6, 2023 The rate decision had immediate results in the Canadian bond market, with yields on 2 and 10 year government of Canada bonds falling. This lends further support to the downward trend we’ve seen since yields peaked in mid-October after fears subsided that inflation was again on the rise.   

 

With cuts expected from the Bank of Canada in late Q1 2024, there should be some relief in sight for borrowers.  Especially as our RBC Economics group reported this week that the Canadian Housing market continues to see activity decline, notably in Toronto where inventory YoY has increased by 40.7%.  Home prices in Toronto were also flat month-over-month in November, with home prices on average correcting down 4.8% since August.  (RBC Economics) For home buyers, there may be an opportunity in the GTA in the months ahead however that opportunity is offset by the higher cost of borrowing given our current rate environment.  Case in point, RBC Royal Bank is currently offering a 5 Year Fixed Rate of 6.14%.  On a $1,000,000 mortgage amortized over 25 years, that rate results in a monthly payment of $6,481.52.  With rates expected to come down in 2024, there should be relief in sight for mortgage borrowers, however, this could also result in upward pressure on prices as affordability improves – truly a double-edged sword for those looking to buy their first home or upsize.

 

The labour story in the U.S. has been mixed.  ADP Private Payrolls data on Wednesday indicated activity in the private sector was slowing down.  Private payrolls increased by 103,000 in November, well below the consensus expected of 120,000 and down by 8.8% from October. (CNBC)  JOLTs job openings on Tuesday also reflected a significant decline in activity as openings fell from 9.35 million in September to 8.73 million in October – a decline of 6.5% and well below the consensus estimate of 9.3 million.  Conversely, on Friday non-farm payrolls data from November indicated an increase in jobs of 199,000, up from October’s 150,000 and beating estimates by 26,500 jobs. (Reuters) Moreover, the unemployment rate in the U.S. for the month of November fell to 3.7% from October’s 3.9%, which also came in under market consensus for a 3.9% read.  Fortunately, Hourly Earnings YoY came in at 4.0% in November, in line with expectations and keeping pace with the current rate of inflation in the U.S.  The news on Friday resulted in yields lifting in credit markets as the expectation for a higher for longer scenario is supported by inflation remaining above target and the outsized performance in the job market. 

 

There has been meaningful improvement in Europe when it comes to the inflation story, as Eurozone inflation came in at 2.4% in November.  With regards to the timing of rate cuts by the ECB in reaction to recessionary pressure and this improvement in inflation,  a recent survey by Bloomberg of economists indicated that the market is likely pricing in cuts too early as the consensus is for cuts to begin in June. (BNN Bloomberg)  At present, credit markets are pricing in cuts as early as March in the Eurozone which has resulted in equity markets gaining some momentum in Europe.  Across the English Channel in the UK, like the story here in Canada and in the U.S., the labour market has cooled down substantially under the pressure of restrictive credit markets and stubborn inflation that remains well above the BoE’s target at 4.6%.   

 

In China this week, new yuan loan issues increased after the PBOC improved its accommodative monetary policy to encourage banks to increase their lending to businesses and consumers, alike.  In November alone, Chinese banks issued 1.3 trillion yuan ($181.72 U.S. billion) in new yuan loans. (Reuters)  This has injected a substantial amount of capital into an economy that continues to mitigate the risk of a fledgling real estate market while trying to move away from a dependency on infrastructure and property activity to support economic growth.  Economic activity is also slowing in Japan, as Q3 GDP growth contracted by -2.9% on a YoY basis. (Nikkei) Inflationary pressure in the country continues to impact consumers who have decreased their spending on goods but have begun to shift their spending to the services sector which has been a similar story in developed economies.  However, unlike the U.S. and Canada, Japan’s labour market continues to experience a decline in real wages which is exacerbated by an inflation rate of 3.3%.