Bank of Canada Responds To Weak Q2 Economy–Holding Policy Steady

General Bob Rees 8 Sep

Prime rate predicted to increase back half of 2022.  Thank you for the the below Dr Cooper.

 
Bank of Canada Responds To Weak Q2 Economy–Holding Policy Steady
As we await the quarterly economic forecast in next month’s Monetary Policy Report, the Bank of Canada acknowledged that the Q2 GDP report, released last week, caught them off-guard. In today’s policy statement, the Governing Council of the Bank said, “In Canada, GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Bank’s July Monetary Policy Report (MPR). This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector. Housing market activity pulled back from recent high levels, largely as expected. Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery (see chart below).”
Bank Says CPI Inflation Boosted By Temporary Factors–Maybe

Financial conditions remain highly accommodative around the globe. And the Bank today continued to assert that the rise in inflation above 3% is expected, “boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen but by less than the CPI.”

The Governing Council again stated the Canadian economy still has considerable excess capacity, and the recovery continues to require extraordinary monetary policy support. “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” Concerning forward guidance, the Bank said, “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022.” This seems to be a placeholder statement, allowing the Bank to reassess the outlook next month, possibly delaying the guidance if the economy continues to perform below their July projection.

Similarly, the Bank maintains its Quantitative Easing program at the current pace of purchasing $2 billion per week of Government of Canada (GoC) bonds, keeping interest rates low across the yield curve. “Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”
Bottom Line

Only time will tell if the Bank of Canada is correct in believing that inflation pressures are temporary. Financial markets will remain sensitive to incoming data, but bond markets seem willing to accept their view for now. The 5-year GoC bond yield has edged down from its recent peak of 1.0% posted on June 28th to a current level of .80%. In contrast, the Canadian dollar had weakened significantly since late June when it was over US$0.825 to US$0.787 this morning. Clearly, the Bank of Canada is committed to keeping Canadian interest rates low for the foreseeable future. 

The next Bank of Canada policy decision date is October 27. Stay tuned for the Canadian employment report this Friday.
Written by;
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Housing Dampened Economy in Q2

General Bob Rees 31 Aug

“……. and forward guidance will continue to suggest no rate hikes until the second half of next year. ”  Thank you for the analysis Dr Cooper

 
Housing Dampened Economy in Q2
This morning’s Stats Canada release showed that the economy unexpectedly contracted in the second quarter by 1.1%, down from the revised 5.5% gain in the first three months of the year. The Canadian dollar dipped on the news to $.7921 as questions of resiliency in the face of the delta variant mount. Economists in a Bloomberg survey were anticipating a 2.5% expansion. Adding to the disappointment, economic growth fell a further 0.4% in July, according to a preliminary estimate.

The weak GDP data reduces the odds of the Bank of Canada tapering their bond purchases at their policy meeting on September 8th. It also highlights the output gap–the degree to which the economy remains below full economic capacity–remains a big issue. The Bank has forecast the gap to close by the middle of 2022. While that remains uncertain, we continue to expect growth to rebound in the third quarter.

Increases in investment in business inventories, government final consumption expenditures, business investment in machinery and equipment, and investment in new home construction and renovation were not sufficient to offset the declines in exports (-4.0%) and homeownership transfer costs (-17.7%), which include all costs associated with the transfer of a residential asset from one owner to another.

Housing investment reshapes the economySince the third quarter of 2020, housing investment has emerged as the predominant contributor to economic activities and capital stock—with residential capital stock surpassing non-residential capital stock. Moreover, the average housing investment for the previous four quarters was 17% higher than the average over the last five years.

Housing Investment
Both new construction and renovations—the components of residential capital stock—have shown sustained growth since the third quarter of 2020. Because of the ability to work from home, savings from less travel and reduced participation in other activities, low mortgage rates and increases in home equity lines of credit, spending has continued to increase on new houses (+3.2%) and home renovations (+2.4%).After taking on $62.3 billion of residential mortgage debt in the last half of 2020, households added $84.2 billion more residential housing debt in the first half of 2021.

Supply chain disruptions continue to impact motor vehiclesShortages of microchips and other inputs curtailed trade in motor vehicles and domestic consumption. Household purchases of new passenger cars (-7.2%) and trucks, vans and sport utility vehicles (-1.6%) decreased, while business investment in medium and heavy trucks, buses and other motor vehicles fell 34.2%. Longer plant shutdowns because of international supply chain disruptions have constrained imports of parts and led to significant decreases in exports. Low production of motor vehicles and parts resulted in an 18.9% drop in exports of passenger cars and light trucks and an 8.7% decline in tires, motor vehicle engines and parts exports. Inventories had another quarter of significant drawdowns in response to supply needs.

Double-digit household savings rate continuesThe modest rise in household spending (+0.7%, in nominal terms) was outpaced by growth in disposable income (+2.2%), leaving households with more net savings than in the previous quarter. Household incomes were primarily bolstered by employees’ rising compensation and increasing transfers received from the government, which were partially offset by a 2.8% rise in personal income taxes.

Consequently, the savings rate reached 14.2%—the fifth consecutive quarter with a double-digit savings rate—as various pandemic-related restrictions and uncertainty continued to limit the scope of household consumption. The household savings rate is aggregated across all income brackets; in general, savings rates are greater in higher income brackets.
Bottom Line

Today’s release is, in some respects, ‘ancient history.’ It is still widely expected that the economy will rebound in the third quarter. With the surge in household savings and continued growth in personal disposable income, pent-up demand is likely to boost consumption for the remainder of this year. All eyes will be on the August employment report released Friday, September 10th. The Bank of Canada will likely continue to proceed cautiously. Another tapering of the bond-buying program will come under scrutiny, and forward guidance will continue to suggest no rate hikes until the second half of next year.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Residential Market Commentary – A nuanced but notable signal from the U.S. Fed

General Bob Rees 30 Aug

Great insight from First National, one of our preferred lending partners. 

Residential Market Commentary – A nuanced but notable signal from the U.S. Fed

 

Anyone trying to forecast the course of interest rates in Canada is advised to keep one eye on what is happening in the United States.

On Friday the Chair of the U.S. Federal Reserve, Jerome Powell, sent a noteworthy signal.  During his address to the Jackson Hole Economic Symposium Powell announced that key aspects of the U.S. economy are showing good improvement, and the central bank could start reducing economic stimulus later this year.

Since the start of the pandemic, the U.S. Fed has been working to keep money flowing through the economy by purchasing US$ 120-billion in government bonds every month.  The, so-called, “quantitative easing” is an effort to hold interest rates down and encourage borrowing and spending.

Economists have pointed to a rollback in “Q-E” as a precursor to possible interest rate increases.  The Bank of Canada has trimmed its quantitative easing twice since April, and has projected interest rates could start to rise in the second half of next year.

The U.S. Fed had been saying it did not see interest rate increases coming until later in 2023.  But the Friday’s comments from Powell did not include a timeline for “Q-E” cuts or rate hikes.

Inflation – one of the key factors in setting interest rates – has been spiking in both Canada and the U.S. as the economies recover.  But the central banks in both counties say it is just temporary as production and supply chains get back to normal.

As always, the course of the pandemic remains the wildcard in any economic planning and forecasting.

 

From,

  • First National Financial LP
  • August 30, 2021

Annual Inflation Hits 3.7% in Canada–A New Election Issue

General Bob Rees 18 Aug

Annual Inflation Hits 3.7% in Canada–A New Election Issue
This morning’s Stats Canada release showed that the July CPI surged to a 3.7% year-over-year pace, well above the 3.1% pace recorded in June. This is now the fourth consecutive month in which inflation is above the1% to 3% target band of the Bank of Canada. And given the flash election, opposition parties are already making hay. “The numbers released today make it clear that under Justin Trudeau, Canadians are experiencing a cost of living crisis,” Conservative Leader Erin O’Toole said in a statement. He went on to suggest that the Liberal government is stoking inflation with its debt-financed government spending programs.

While it is true that deficit spending has surged during the pandemic, the same is also true for nearly every country in the world. Moreover, accelerating inflation is a global phenomenon and most central banks believe it to be temporary. Certainly, Tiff Macklem is firmly of that view, as is the Fed Chair Jerome Powell.

Supply disruptions and base effects have largely caused the rise in inflation. Semiconductor production, for example, slumped during the 2020 lockdowns, and then couldn’t be ramped up fast enough when demand for cars and electronics returned, leading the prices of new and used autos to rise at a record pace. Prices for airfares and hotel stays also jumped. Companies found themselves short of workers as they reopened, leading some to offer bonuses or boost wages and subsequently raise prices for consumers.
Central bankers believe that the price pressures are transitory, representing temporary shocks associated with the reopening of the economy.  Lumber prices, for example, spiked when demand for new homes returned and have since normalized (see the chart below). To be sure, above-target inflation has heightened uncertainty. The central banks do not want to choke off the economic recovery through misplaced inflation fears. Many Canadians remain out of work, and long-term unemployment is still very high. Moreover, the recent surge of the delta variant proves that the recovery is uncertain.

Governor Tiff Macklem, whose latest forecasts show inflation creeping up to 3.9% in the third quarter before easing at the end of the year, has warned against overreacting to the  “temporary” spike.

Shelter Prices Rising Fastest

Prices rose faster year over year in six of the eight major components of Canadian inflation in July, with shelter prices contributing the most to the all-items increase. Conversely, prices for clothing and footwear and alcoholic beverages, tobacco products and recreational cannabis slowed on a year-over-year basis in July compared with June.Year over year, gasoline prices rose less in July (+30.9%) than in June (+32.0%). A base-year effect continued to impact the gasoline index, as prices in July 2020 increased 4.4% on a month-over-month basis when many businesses and services reopened.

In July 2021, gasoline prices increased 3.5% month over month, as oil production by OPEC+ (countries from the Organization of Petroleum Exporting Countries Plus) remained below pre-pandemic levels though global demand increased.

The homeowners’ replacement cost index, which is related to the price of new homes, continued to trend upward, rising 13.8% year over year in July, the largest yearly increase since October 1987.

Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, was up 13.4% year over year in July.

Year-over-year price growth for goods rose at a faster pace in July (+5.0%) than in June (+4.5%), with durable goods (+5.0%) accelerating the most. The purchase of passenger vehicles index contributed the most to the increase, rising 5.5% year over year in July. The gain was partially attributable to the global shortage of semiconductor chips.

Prices for upholstered furniture rose 13.4% year over year in July, largely due to lower supply and higher input costs.
Core MeasuresThe average of core inflation readings, a better gauge of underlying price pressures, rose to 2.47% in July, the highest since 2009.

Monthly, prices rose 0.6% versus a consensus estimate of 0.3%. Rising costs to own a home are one of the biggest contributors to the elevated inflation rate, following a surge in real-estate prices over the past year.

Bottom Line

Today’s inflation data likely did little to alter the Bank of Canada’s view that above-target inflation will be a transitory phenomenon. They are already ahead of most central banks in tapering the stimulus coming from quantitative easing. They do not expect to start increasing interest rates until the labour markets have returned to full employment, which they judge to occur in the second half of 2022. In the meantime, pent-up demand in Canada is huge as people tap into their involuntary savings during the lockdown to pay higher prices at restaurants, grocery stores and gas stations. Financial markets appear to be sanguine about the prospect for rate hikes, as bond yields have been trading in a very narrow range.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The Slowdown In Canadian Housing Continued in July

General Bob Rees 16 Aug

 
The Slowdown In Canadian Housing Continued in July
Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell 3.5% nationally from June to July 2021–the fourth consecutive monthly decline. Over the same period, the number of newly listed properties dropped 8.8%, and the MLS Home Price Index rose 0.6% and was up 22.2% year-over-year.
While sales are now down a cumulative 28% from the March peak, Canadian housing markets are still historically quite active (see Chart below). In July, the decline in sales activity was not as widespread geographically as in prior months, although sales were down in roughly two-thirds of all local markets. Edmonton and Calgary led the slowdown, but these cities didn’t experience falling sales until recently. In Montreal, in contrast, where sales began to moderate at the start of the year, activity edged up in July.

The actual (not seasonally adjusted) number of transactions in July 2021 was down 15.2% on a year-over-year basis from the record for that month set last July. July 2021 sales nonetheless still marked the second-best month of July on record.

“While the moderation of sales activity continues to capture most of the headlines these days, it’s record-low inventories that should be our focus,” said Cliff Stevenson, Chair of CREA. Most markets are in sellers’ market territory.
New ListingsThe number of newly listed homes dropped by 8.8% in July compared to June, with declines led by Canada’s largest cities – the GTA, Montreal, Vancouver and Calgary. Across the country, new supply was down in about three-quarters of all markets in July.

This was enough to noticeably tighten the sales-to-new listings ratio despite sales activity also slowing on the month. The national sales-to-new listings ratio was 74% in July 2021, up from 69.9% in June. The long-term average for the national sales-to-new listings ratio is 54.7%.

Based on a comparison of sales-to-new listings ratio with long-term averages, the tightening of market conditions in July tipped a small majority of local markets back into seller’s market territory, reversing the trend of more balanced markets seen in June.

Another piece of evidence that conditions may be starting to stabilize was the number of months of inventory. There were 2.3 months of inventory on a national basis at the end of July 2021, unchanged from June. This is extremely low – still indicative of a strong seller’s market at the national level and most local markets. The long-term average for this measure is twice where it stands today.
Home PricesThe Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.6% month-over-month in July 2021, continuing the trend of decelerating month-over-month growth that began in March. That deceleration has yet to show up in any noticeable way on the East Coast, where property is relatively more affordable.

Additionally, a more recent point worth noting (and watching) just in the last month has seen prices for certain property types in certain Ontario markets look like they might be re-accelerating. This could be in line with a re-tightening of market conditions in some areas.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 22.2% on a year-over-year basis in July. While still a substantial gain, it was, as expected, down from the record 24.4% year-over-year increase in June. The reason the year-over-year comparison has started to fall is that we are now more than a year removed from when prices really took off last year, so last year’s price levels are now catching up with this year’s, even though prices are currently still rising from month to month.

Looking across the country, year-over-year price growth averages around 20% in B.C., though it is lower in Vancouver and higher in other parts of the province. Year-over-year price gains in the 10% range were recorded in Alberta and Saskatchewan, while gains are closer to 15% in Manitoba. Ontario sees an average year-over-year rate of price growth in the 30% range. However, as with B.C., gains are notably lower in the GTA and considerably higher in most other parts of the province. The opposite is true in Quebec, where Montreal is in the 25% range, and Quebec City is in the 15% range. Price growth is running a little above 30% in New Brunswick, while Newfoundland and Labrador is in the 10% range.
Bottom Line

Sales activity will continue to gradually cool over the next year, but it will take higher interest rates to soften the housing market in a meaningful way. Local housing markets are cooling off as prospective buyers contend with a dearth of houses for sale. Though increasing vaccination rates have begun to bring a return to normal life in Canada, that’s left the country to contend with one of the developed world’s most severe housing shortages and little prospect of much new supply becoming available soon.
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Canada’s Jobs Recovery Continued in July

General Bob Rees 9 Aug

Thank you Dr. Cooper for the great analysis!

 
Canada’s labour market continued its recovery in July as health restrictions were lifted, but the gains were shy of expectations. The report signals the economic rebound is intact and shows companies are finding workers as pandemic restrictions vanish. The smaller-than-expected increase, though, could cast some doubt on the pace of hiring. The gains last month were largely in full-time private-sector employment, particularly among youth and women.

The  Labour Force Survey showed employment rose 94,000 (+0.5%) in July, adding to the 231,000 (+1.2%) increase in June. The two months reversed the 275,000 jobs lost during lockdowns in April and May. Of the three million jobs lost at the start of the crisis, 2.74 million have now been recovered. The employment rate was 60.3% in July, still 1.5 percentage points below the pre-pandemic rate.

The unemployment rate fell 0.3 percentage points to 7.5%, matching the post-February 2020 low hit earlier this year.

Employment growth in July was almost entirely in Ontario. Youth aged 15 to 24 and core-aged women aged 25 to 54 accounted for the bulk of gains in the month. Women were hardest hit by the pandemic’s loss of childcare/schooling, so the make-up of employment gains will likely be skewed towards them.

The number of employed people who worked less than half their usual hours fell by 116,000 (-10.1%) in July. Total hours worked were up 1.3% and were 2.7% below their pre-pandemic level.

Self-employment was little changed in July and was down 7.1% (-205,000) compared with February 2020. The number of self-employed workers has seen virtually no growth since the onset of the pandemic.

The number of employees in the public sector fell by 31,000 (-0.7%) in July, the first decline since April 2020. Nearly half of the monthly decrease was in Quebec (-15,000; -1.5%) and was partly due to a larger-than-usual summer decrease in the number of educational services workers. Despite this decline, public sector employment at the national level was up 150,000 (+3.8%) compared with February 2020.

In terms of provinces, Ontario accounted for the majority of July’s improvement, as employment increased by 72k in the province. Manitoba (+7k), Nova Scotia (+4k), and Prince Edward Island (+1k) also saw employment advance on the month. New Brunswick (-3k), Saskatchewan (-5k), and B.C. (-3k) lost jobs in July.

Lastly, total hours worked improved by a robust 1.3% in July, but it is still 2.7% below its pre-pandemic level.

The Canadian jobs report coincided with the release on Friday of surprisingly strong U.S. payroll numbers, where 943,000 positions were added last month.
Bottom Line According to the Bank of Canada, employment will need to surpass pre-pandemic levels before complete recovery is declared because the population has grown since the start of the crisis.

July was another solid month for the Canadian labour market as the loosening of public health restrictions across the country spurred hiring activity. That said, capacity limits and travel restrictions held back high-touch businesses from operating at full capacity, limiting job gains in July.

Indeed, employment in high-touch services is still well below pre-pandemic levels. Even with gains in July, accommodation and food services employment was nearly 20% below its February 2020 level. It’s important to note that July’s labour survey was taken during the week of July 11th, and restrictions in some provinces were loosened at the end of that week. So, we could see the recovery continue to strengthen in August.

There are growing headwinds, however. Concerns around the Delta variant are rising, and some countries, harder hit by the virus, are re-imposing restrictions. Canada has not yet been compelled to do so due to low hospitalization levels, but cases are rising. While the impressive vaccination drive should keep hospitalization rates low, health worries could dent consumer and business confidence. Indeed, the economy’s path forward will be closely linked to the evolution of the pandemic.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Residential Market Commentary – What’s ahead for interest rates

General Bob Rees 9 Aug

Thank you to one of our preferred lenders, First National, for the below insight : )

 

 

Aug 9, 2021

First National Financial LP

 

The Bank of Canada is not making its next rate announcement until September. That has market watchers looking to other indicators as they attempt to foresee what is coming for the economy and interest rates.

The latest significant news was good, but modest. Canada’s unemployment rate dipped to 7.5% with the creation of 94,000 jobs in July. Most of those are full-time and in the private sector.

Employment levels are linked to inflation, which is a key factor watched by the Bank of Canada in setting interest rate policy which, in turn, can affect mortgage rates.

As the labour market tightens up, employers tend to offer higher wages to attract workers. That increases the cost of producing goods and services, driving inflation. As well, as more people get work and earn more money demand for goods and services increases. If that demand outpaces supply, inflation can also result.

Canada finds itself in this position now. Inflation is running high chiefly because of supply constraints caused by the pandemic. At the same time, more and more people are heading back to work.

That has some analysts forecasting the Bank of Canada will be raising rates to calm inflation. The Bank, however, has been saying otherwise.

It is also useful to watch what is happening in the United States. The two economies are tightly linked and actions in the U.S. can offer useful clues about what will happen here.

In its latest assessment of the American economy the U.S. Federal Reserve continued to down play inflation – which is running high there as well – as “transitory”. The Fed continues to look to the second half of 2023 as the most likely time for any possible rate hikes. While the Bank of Canada has said it expects rates could start rising as much as a year sooner than that, it would be unusual for the BoC to move before the Fed.

 

Bank of Canada ‘On the Vanguard’ of Unwinding Stimulus

General Bob Rees 14 Jul

Bank of Canada ‘On the Vanguard’ of Unwinding Stimulus
The Bank of Canada raised its inflation forecast in the newly released July Monetary Policy Report (MPR), making it one of the most hawkish central banks in the world. The Bank announced its third action to reduce its emergency bond-buying stimulus program by one-third. The central bank was among the first from the advanced economies to shift to a less expansionary policy last April when it accelerated the timetable for a possible interest-rate increase and pared back its bond purchases. In today’s press release, the Bank announced it would adjust its quantitative easing (QE) program again to a target pace of $2 billion per week of Government of Canada bond purchases–down $1 billion from its prior target of $3 billion per week. This puts upward pressure on bond yields, all other things constant. No doubt, the federal government’s funding of the enormous Covid-related budget deficits has been abetted by the central bank’s bond-buying.The pace of purchases of Canadian government bonds was as high as $5 billion last year. The central bank acquired a net $320 billion of the securities since the start of the Covid-19 pandemic. The bank owns about 44% of outstanding Canadian government bonds.

The Bank of Canada has said it wants to stop adding to its holdings of government bonds before it turns its attention to debating rate increases. Still, officials chose not to accelerate the projected timeline for a possible hike today.

In holding the overnight rate at the effective lower bound of .25%, the Governing Council reaffirmed its “extraordinary forward guidance” that the Canadian economy still has considerable excess capacity. The recovery continues to require extraordinary monetary policy support. “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved,” the central bank said in the policy statement. In the Bank’s July projection, this happens sometime in the second half of 2022.

Swaps trading suggests investors are fully pricing in a rate hike over the next 12 months and a total of four over the next two years, which would leave Canada with one of the highest policy rates among advanced economies. This puts the Bank of Canada ahead of the Fed in raising interest rates. Chair Powell told Congress today that the US economy isn’t ready for bond tapering. “Reaching the standard of ‘substantial further progress’ is still a ways off,” he said in prepared remarks. In the U.S., investors aren’t pricing in any rate hike over the next year and only two over the next two years.July Monetary Policy Report

The Bank revised its forecast for Canadian GDP growth this year from 6.5% in the April MPR to 6.0% because of the more restrictive third-wave pandemic lockdown in the second quarter. Growth is now expected to pick up strongly in the third quarter of this year. Consumer confidence has returned to pre-pandemic levels, and a high share of the eligible population is vaccinated. As the economy reopens, consumption is expected to lead the rebound, increasing spending on services such as transportation, recreation, and food and accommodation.

Housing resales have moderated from historically high levels but remain elevated (Chart below). Other areas of housing activity—such as new construction and renovation—remain strong, supported by high disposable incomes, low borrowing rates and the pandemic-related desire for more living space.
CPI Inflation Boosted By Temporary Factors

The Bank revised up its inflation forecast for this year but asserted once again that inflation would return to 2% in 2022. This is a controversial call consistent with central-bank mantras around the world. The BoC said, “Three sets of factors are leading to this temporary strength. First, gasoline prices have risen from very low levels a year ago and are above their pre-pandemic levels, lifting inflation. Second, other prices that had fallen last year with plummeting demand are now recovering with the reopening of the economy and the release of pent-up demand. Third, supply constraints, including shipping bottlenecks and the global shortage of semiconductors, are pushing up the prices of goods such as motor vehicles.

The BoC expects CPI inflation to ease by the start of 2022 as the temporary factors related to the pandemic fade. Economic slack becomes the primary factor influencing the projection for inflation dynamics thereafter. The uncertainty around the outlook for the output gap and inflation remains high. Because of this, the estimated timing for when slack is absorbed is highly imprecise. In the projection, this occurs sometime in the second half of 2022. After declining to 2% during 2022, inflation is expected to rise modestly in 2023 as the economy moves into excess demand. The excess demand and resultant increase in inflation to above target are expected to be temporary. They are a consequence of Governing Council’s commitment to keeping the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.

Inflation is expected to return toward the target in 2024. The projection is consistent with medium- and long-term inflation expectations remaining well-anchored at the 2% target. Both businesses and consumers view price pressures as elevated in the near term. A large majority of respondents to the summer 2021 Business Outlook Survey now expect inflation to be above 2% on average over the next two years. Nonetheless, firms view higher commodity prices, supply chain bottlenecks, policy stimulus and the release of pent-up demand as largely temporary factors boosting inflation higher in the near term.
Bottom Line

Only time will tell if the Bank of Canada is correct in believing that inflation pressures are temporary. Financial markets will remain sensitive to incoming data, but for now, bond markets seem willing to accept their view. The 5-year GoC bond yield has edged down from its recent peak of 1.0% posted on June 28th to a current level of .936%. As well, the Canadian dollar has weakened a bit, to US$0.7993, since the release this morning of the BoC policy statement. The loonie, however, remains among the strongest currencies this year vis a vis the US dollar. 
Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Canada’s Jobs Recovery Resumed in June as Lockdown Began to Ease

General Bob Rees 13 Jul

Thank you Dr Cooper!

 
Canada’s Jobs Recovery Resumed in June
as Lockdown Began to Ease
This morning, Statistics Canada released the June 2021 Labour Force Survey showing employment rose 230,700 (1.2%) in June, rebounding from a cumulative decline over the previous two months of 275,000. Total hours worked were little changed. The national unemployment rate fell 0.4 percentage points to 7.8%.

Jobs continue to swing back and forth as the various COVID waves drive lockdowns and reopenings. Hopefully, we’re in the last of the reopenings. Services accounted for all of the gains. Hospitality jobs were the biggest gainer, as expected, adding 101k positions, but they remain well below pre-virus levels. Restrictions are expected to continue easing through the summer, which should mean more solid gains over the next couple of months. Other sectors seeing a boost from the reopening were retail/wholesale (+78k), education (+26k) and health care (+20.5k). Goods sectors were down across the board, with losses concentrated in construction (-23k) and manufacturing (-12k).

Beyond the headline increase, one of the bigger stories in this report is the sharp 0.6 ppt rise in the participation rate to 65.2%. That’s the largest increase in a year and leaves the rate 3-4 ticks away from pre-COVID levels. Compare that to the U.S., where the participation rate is still nearly 2 ppts lower than in early 2020. The rise in the participation rate limited the decline in the jobless rate to 0.4 ppts to 7.8%, still some wood to chop there. The rising participation rate should alleviate some concerns about widespread labour shortages.The bulk of the gains were in pandemic-exposed sectors, like retail, food and accommodation, that got hit most by the new containment measures. Employment in accommodation and food services was up 101,000. The retail sector added 75,000 jobs.

Increasing vaccination rates and falling Covid-19 case counts have allowed the country to finally re-open restaurants, bars and retail stores after months of closures. Ontario began allowing patio dining earlier this month, and several cities in Quebec have further relaxed restrictions, allowing indoor dining for the first time this year.

With the June gains, Canada has recovered 2.65 million of the 3 million jobs lost at the height of the pandemic last year. The nation created 263,900 part-time jobs, with full-time employment down 33,200.Employment growth in June was entirely in part-time work and concentrated among youth aged 15 to 24, primarily young women. Increases were greatest in accommodation and food services and retail trade, consistent with the lifting or easing public health restrictions affecting these industries in late May and early June in many jurisdictions.

The number of employed people working less than half their usual hours fell by 276,000 (-19.3%) in June. Total hours worked were little changed and were 4.0% below their pre-pandemic level.

The employment increase in June was in part-time work, which rose by 264,000 (+8.0%) following combined losses of 132,000 over the previous two months. The overall level of part-time employment was essentially the same as in February 2020, before the COVID-19 pandemic. Increases in the month were driven by accommodation and food services and retail trade—two industries where part-time workers represent an above-average proportion of employment—and were concentrated among youth.

After falling by 143,000 over the previous two months, full-time work was little changed in June and was 336,000 (-2.2%) lower than its pre-pandemic level.

Gains were driven by private-sector employees, while self-employment declines.

The number of private-sector employees rose by 251,000 (+2.1%) in June, following two monthly declines. As of June, the number of private-sector employees was 2.5% lower (-313,000) than in February 2020.

In the public sector, employment rose by 43,000 (+1.1%) in June, bringing it to 180,000 (+4.6%) above pre-pandemic levels. Employment in this sector has trended up following the initial wave of the pandemic, particularly driven by increases in health care and social assistance, public administration, and educational services.

The number of self-employed workers fell by 63,000 (-2.3%) in June and was down 7.2% (-207,000) compared with February 2020. Self-employment is a broad category that includes workers in various situations, including working owners of incorporated or unincorporated businesses and independent contractors. Compared with June 2019, declines in the number of self-employed were widespread across multiple industries and were concentrated among the self-employed with paid help.

The employment rate remains below pre-pandemic levels.

To fully understand current and emerging labour market trends, it is essential to consider employment change against the backdrop of population change, which totalled 1.1% (+334,000) between February 2020 and June 2021. To keep pace with this population growth and maintain a stable employment rate—that is, employment as a proportion of the population aged 15 and over—employment would have had to grow by 203,000. Instead, total employment was 340,000 lower in June than in February 2020, and the employment rate was 1.7 percentage points lower (60.1% compared with 61.8%).

Number of Canadians who worked from home drops by nearly 400,000 

Among Canadians who worked at least half their usual hours in June, the number who worked from home fell by nearly 400,000 to 4.7 million. For 2.6 million of these people, working from home represented an adaptation to the COVID-19 pandemic, as this was not their usual work location. At the same time, the number of people working at locations other than home rose by approximately 700,000 to 12.3 million.

Almost one-third (31.4%) of workers aged 25 to 54 and more than one-quarter (27.2%) of those aged 55 and older worked from home in June. Due to their concentration in industries where working from home is less feasible, such as accommodation and food services, a far smaller proportion of youth aged 15 to 24 (12.9%) did so.

Regionally, Ontario and Quebec led the way higher, though B.C. and Nova Scotia had solid increases as well. Interestingly, even with restrictions easing through most of the country, only five provinces reported job gains.
Bottom Line The jobs report is the last major piece of economic data before next week’s Bank of Canada policy decision, where it’s expected to continue paring back its stimulus efforts. The Bank of Canada is among the first from advanced economies to shift to a less expansionary policy, having already cut its purchases of Canadian government bonds to $3 billion weekly from a peak of $5 billion last year.

Analysts anticipate that will come down to C$2 billion per week at the July 14 meeting before eventually falling to a weekly pace of about C$1 billion by early next year. In addition to the bond tapering, the market has priced in at least one interest rate hike by this time next year.

Canada’s economy remains 340,000 jobs shy of pre-pandemic levels. The unemployment rate was below 6% before the pandemic.

With vaccination rates rising and restrictions easing, economists are predicting a strong rebound in the second half. According to a Bloomberg News survey of economists earlier this month, Canada’s expansion is seen accelerating to an annualized pace of 9.1% in the third quarter, with a 6% gain in the final three months of 2021. Consumer and business confidence regarding the outlook has recently hit record highs.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Residential Market Commentary – Mortgage debt milestone

General Bob Rees 29 Jun

Thank you to our partners at First National LP for the below

Residential Market Commentary – Mortgage debt milestone

Canada’s economy has hit a striking new milestone.  Real estate secured debt is virtually equal to the country’s GDP.

Statistics Canada says that, as of the end of April, the combination of mortgage debt and home equity lines of credit totaled $1.96 trillion.  March GDP clocked-in at $1.98 trillion.

Credit monitoring company Equifax reports that total consumer debt stood at $2.08 trillion at the end of the first quarter of this year.  The company says most of that is mortgage debt.  It reports that the number of new mortgages in Canada jumped 41% in Q1, compared to the same period a year ago.

The Bank of Canada as warned that high household indebtedness and imbalances in the housing market are key vulnerabilities in the Canadian economy.

Well known economist Benjamin Tal recently pointed out that the Canadian economy – and in particular the housing market – is now very sensitive to interest rate increases.  Tal says that even a small increase, of as little as 1.5 percentage points, would be enough to moderate home price growth, which he called “a very good thing.”

Tal also cautions that, if the Bank of Canada falls behind the curve on interest rate hikes to battle inflation it could be forced to speed up the increases, which would have a negative impact on housing.

There is also the on going concern that higher rates will see households devote more of their income to mortgage payments and cut back on other purchases which could slow the post-pandemic recovery we are hoping for.

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