The upward trend in inflation seen in the U.S. in the first quarter of 2024 has begun to reverse, with April inflation data reflecting a decline from March to 3.4% YoY versus 3.5%.   Energy costs continued to spike during the month, however, headline CPI readings across many of the prices tracked remained in line with market expectations.  Food price inflation also remains relatively low, at 2.2% in April.  The tick downward in April has brought some relief to markets but given core price measures in the U.S. remain broadly elevated we expect that the Federal Reserve will hold off on rate cuts until December.  Jerome Powell and other Fed board members have continued to indicate that they believe rates are restrictive enough.  Fortunately for you the investor this means that U.S. fixed income continues to offer attractive passive income return, while still providing for potential growth in these positions when rates do begin to fall in late 2024/early 2025. (RBC Economics)

 

Here at home, the focus last week was on our housing sector and the lift in inventory in April with an increase of 2.8% in new listings which contributed to a 6.5% rise in the overall number of properties on the market.  Conversely, sales declined in April by 1.7%, falling below the 10-year average and indicating that buyers are now waiting for a decline in lending rate.  From the Bank of Canada’s perspective, this recent uptick in inventory will help to ease the increase in prices that is to come when affordability improves as interest rates decline into 2025.  Unfortunately, new home construction still lags demand as new housing starts in April declined to 240,200 from March’s 242,300.  Finally, Canadian CPI for April came in at 2.7% - down from 2.9% in March and increasing the probability of a rate cut in June from the Bank of Canada. (BNN Bloomberg)

 

Speaking of interest rates, if you have a mortgage coming due for renewal this year, I recommend you consider renewing into a variable rate term if your financial plan allows.  This will allow you to benefit from the decline in Canadian interest rates this year and into 2025.  More importantly, when you do renew ensure that your payment is adjusted so you stay on track with your plan to pay down your mortgage.  Though this will impact your cash flow today, not doing so can harm your long-term financial plan.  Let’s say your current mortgage is $500,000 and you are paying 3% and let’s assume the variable rate you renew into is Bank Prime – 0.31% (6.89%).

 

 

Although your monthly expenses increase by just under $1,000/month, not adjusting your payment to remain in line with your existing amortization will (1) lengthen the time it takes you to pay off your mortgage by over 10 years and (2) add over $200,000 in additional interest costs over the lifetime of your mortgage.  When reviewing your mortgage renewal options this year (or any year) make sure you review your objectives for your mortgage in line with your financial plan and speak with a lending professional that understands your objectives and lets you review all your options.

 

Overseas in China, the government’s latest plan yet to fix the country’s real estate sector includes lower down payment requirements and government-backed firms buying excess inventory. Since the crises began, Chinese property developers have collectively defaulted on US$124 billion of dollar debt, and have halted hundreds of projects, putting at risk the jobs of 5 million people and triggering social angst. Despite this latest attempt to bolster their real estate market, market analysts say more financial power will be needed – a notion that is confounded by China already managing other challenges including lower growth and U.S. tariffs. (BNN Bloomberg)

 

Finally, since the beginning of the year, there have continued to be upside surprises out of Europe.  Not only has inflation declined faster towards the ECB’s target, but the Eurozone economy managed to yield positive GDP growth of 0.3% in the first quarter of 2024 – ending a shallow recession from late last year. The European Commission’s outlook for growth in the region is 0.8% GDP growth in 2024 and 1.4% in 2025.  With European equity market performance performing in line with the U.S. (11.32% YTD for the EURO STOXX 50 and 11.29% YTD for the S&P 500) investor optimism in the region has taken hold and is supported by improving economic conditions.  (BNN Bloomberg)