Gravitas: Shelter Inlfation

October 13, 2023 | Michael Newton


The Newton Group Insights

Much of the focus on the recent strong-than-expected CPI report in Canada centered around rising energy prices, but persistently elevated shelter costs are likely to be a more concerning dynamic for the Bank of Canada moving forward. The all-in measure of shelter cost is currently running at 10% month over month. There are multiple drivers of this pressure, including mortgage interest (excluded from core inflation measures), rent and energy prices. Most importantly, the persistent imbalance between supply and demand in the housing market could continue to an underlying driver of elevated shelter inflation. Given strong population growth, the normalization in shelter inflation in Canada can reasonably be expected to progress at a slower pace than hoped for. The most striking trend that emerged in recent months has been the return of sellers to the housing market. September was a case in point where new listings increased sequentially in all major markets. The factors driving this trend are many but soaring interest costs no doubt are prompting a growing number of owners to move. High interest rates at the same time dampen demand. RBC economics thinks buyers will stay on the defensive in many parts of Canada despite more choice becoming available to them. High interest rates, ongoing affordability issues and a looming recession are poised to pose major obstacles. Any material acceleration in the market recovery will have to wait until interest rates come down in 2024. 

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Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(new) Evolve Enhanced Yield Bond Fund (BOND-T) provides investors with a low-cost fixed income solution that will seek to deliver attractive monthly income and long-term capital appreciation. To enhance yield, as well as mitigate risk and reduce volatility, BOND will initially employ an active covered call option writing program on 50% of the portfolio. Initially the underlying portfolio will consist weightings in the iShares 20+ Year Treasury Bond ETF and the Vanguard Long-Term Treasury Index Fund ETF. There are no underlying management fees in the ETF until April of 2024. The vehicle will be targeting a 10% yield. New position in Cash Flow Portfolio.

(+) JPMorgan Chase (JPM-US) The country’s largest bank saw shares rise after it reported third-quarter financial results, boosting its profit 35% from a year earlier to $4.33 per share, a figure not immediately comparable to LSEG estimates. Revenue came in at $40.69 billion for the quarter. Owned in US Portfolio.

(+) UnitedHealth Group (UNH-US) Shares of the health insurance giant gained on better-than-expected earnings. The company posted adjusted earnings of $6.56 per share on revenue of $92.4 billion. UnitedHealth has the highest share price of any Dow stock, giving it the most influence over the benchmark’s performance. Owned in US Portfolio.

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