Throwing in the towel

Why must interest rates fall?

Simple. We can’t afford this. Debt is everywhere. The cost of money is too painful. The economy’s chilling fast. Central bankers have to pump the brakes before the mortgage renewal tsunami hits, or we’ll be in recession. So, down she goes.

This is why. As the nerds at Wowa.ca have discovered, we’re pooched. “The avg household debt interest payment surged 75% in just two years! Avg household now pays over $10,000 annually in interest, up from less than $6,000 in 2022.”

Here’s how that looks. And it’s ugly.

Household interest payments jump 75% in two years

Source: Wowa.ca

As you may have heard, stock markets surged Tuesday on the conviction the Bank of Canada and the Fed are about to throw in the towel. In the States, CB boss Jerome Powell said Monday inflation is being crushed and all the elements are in place for a rate cut. Mr. Market today gives 100% odds on that happening in September.

In Canada the annual inflation rate dropped to 2.7% – down a couple of clicks from last month and now long enough within the central bank’s target range (1-3%). “The details of the report are consistent with the backdrop of consumers becoming increasingly cautious with discretionary spending,” says BMO Economics. Adds the economists at CIBC: “This shows that the prior month’s upside surprise in inflation was just a blip in a broader trend of disinflation as demand in the economy remains under pressure.”

The tame inflation report also came with a Bank of Canada survey of business sentiment which, ahem, sucked. Companies are expecting softer sales, lower inflationary pressures and for wage increases to plunge – from more than 5% recently down to 3.2%. The jobs shortage is over now that consumers have scaled back and households devote more cash flow to paying loan interest. “The data should help reinforce that interest rates no longer need to be as high as they are to get inflation sustainably under control,” says RBC.

So, what next?

Looks like Bay Street is ganging behind a quarter-point rate drop next Wednesday. That would mark back-to-back monthly reductions for the first time in more than half a decade. It comes as unemployment is going up, business confidence is weakening, disinflation is taking hold and the economy is losing steam.

In short, we can’t afford rates at this level. Not with over $200 billion in mortgage renewals coming next year – people who borrowed in the 2% range and will have a hard time keeping their stuff together if home loans sit at 5% when they refinance.

“The economy is clearly in need of interest rate relief to ensure a soft landing with future headwinds such as large mortgage renewals and population growth that could cater.,” argues CIBC’s economists. “With headline inflation back within the target zone and the [Bank of Caada] survey showing firm’s inflation expectations are edging down, any worries of upside risks to inflation or inflation being stuck above target is missing the mark.”

In fact, lower rates mean reduced mortgage interest pressures which beget less inflation – since the burden of home loan costs has been a major component of our CPI. Cheaper mortgages will also lead to more rent declines, say economists, especially as population growth slows. “Recent data have supported a cut, with the job market loosening and wage gains decelerating from elevated levels,” says TD. “From our view, the story hasn’t changed. The BoC is in a cutting cycle. Whether or not it follows through with a slightly quicker pace of cuts next week, Canadians should expect rates to be steadily reduced over the rest of this year and next.”

Yes, and then there is Trump.

As the big cult lovefest continues in Milwaukee this week, markets extend the odds of a Republican win this November to above 70%. As dangerous as many of the orange guy’s policies may end up being for the global economy and geopolitical stability, they’re being viewed now as supportive of the stuff Wall Street loves. Interest rates pushed lower. Tax breaks extended. Environmental regs tossed. Costly DEI rules shelved. Energy supported and domestic factories protected.

For us, not so hot. There are major risks to a Trump presidency. But in a polarized, black-&-white world such as this, outcomes are fuzzy and vision clouded by emotion. What this blog will be reporting to you in two years could be shocking.

But for now, cheaper loans are at hand. Try to resist. You will learn why.

About the picture: “This is Sheena, chasing barn swallows at age 13 years and 11 months,” writes Jane. ” The dogs stir up insects in the field so the barn swallows arrive; the swallows know that if they get the dogs to chase them even more insects result.  I’ve been reading the blog since shortly after you started it, thanks to you & your colleagues for the financial wisdom.”

To be in touch or send a picture of your beast, email tok ‘garth@garth’ca’.