Get over it

Let’s talk about what comes next.

Tomorrow the Ottawa nerds will deliver the latest inflation number. It could be 2.5%. Maybe a titch less. In any case, a meaningful decline over the 2.7% of the previous read in June.

In other words, we’re snuggled inside the Bank of Canada’s target range (1-3%) and have been for a few months. If you’re worried about inflation, you’re not paying attention. It’s done. That was 2023. Get over it. Disinflation is the new thing, and you’ll like it better.

The focus now is on a weakening economy and, above all, jobs. We lost some last month. The unemployment rate has pushed up to 6.4%, a big 1.6% higher than two years ago. Now we’re regaled with stories of 300 people competing for crap jobs at Timmie’s as the employment vacancy rate tumbles.

Without a doubt, central banks – and ours in particular – are turning their focus away from rising consumer prices and instead towards rising consumer joblessness. This means the rationale for higher rates, or keeping the cost of money elevated, is utterly gone. The new job is to get credit moving again so businesses will expand and hire leading to more spending and growth.

Inflation – now it’s yesterday’s issue

We’re seeing clear, “signals of more policy weight now being put on labour market (and broader economic) conditions,” says BMO economist Michael Gregary. “The policy weight shifts reflect the meaningful progress already made in pulling inflation down from its 2022 peaks and the increasing confidence both central banks have that their 2% targets, in sight at the end of a still bumpy road, can be reached. And they, critically, reflect the deterioration in labour market conditions that seem to have reached a ‘tipping point’ from a risk management perspective.”

That tipping point means this: an interest rate reduction at every Bank of Canada setting for the rest of the year. Those events will happen September 4th, October 23rd and December 11th. This will bring the policy rate to 3.75% from its high of five per cent.

But the bank is not expected to stop there. CIBC economists are forecasting a further retreat to 2.5% by the end of 2025. If these things come to pass, the prime at the chartered banks will be 5.95% by Christmas of this year and 4.7% by Noel of ’25.

In the States, says Gregory, where inflation also has a 2-handle, “from a risk management perspective, deteriorating labour market numbers are now getting equal billing with improving inflation figures.” The Fed is seen as starting its rate descent in three weeks, and also cutting at every instance this year.

In Canada, CB boss Tiff Macklen looks a dove after saying this: “We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2% target.” A little inflation is good, he’s arguing, and we may at the right place already. Or close enough.

BMO says to expect, “a steady stream of cuts into early next year before a slower cadence unfolds.” But we’re also being told both the Bank of Canada and the Fed may surprise Mr. Market by cutting the cost of money “even more aggressively”.

Hmmm. Seems those people who are opting for variable-rate mortgages these days aren’t so thick after all. Their payments will steadily decline. Or the portion of the monthly going to principal reduction will steadily rise. Either way, they win.

And meanwhile that mortgage renewal tsunami which doomers said would capsize the big banks, has turned into an ankle-deep ripple. The average rate among all the borrowers coming up for home loan renewals in 2025 is 2.89%. The odds of them snaring a rate that starts with a ‘3’ are rising. It’s hardly a disaster. That doubling in monthly payments once held out as a destabilizing risk to Canadas financial system turns out to be a nothingburger.

The implications are profound.

This is great news for the battered Libs and our non-financial Finance Minister, if she still has the job next summer. Cheaper rates will lower federal debt payments (now north of $50 billion a year). They will remove a major threat to the banking sector and increase profitability and share values. Lower financing costs help corps and lead to more employment. They augment credit and help grease higher consumer spending. And, of course, mortgage costs tumble.

On the flip side, the age of the 5% GIC is gone. In a year you might see 3%, so once again savers will barely keep their snouts above the inflation waterline. What lower mortgages do to real estate sales and affordability is unknown – but probably predictable. After two years of soggy sales and pent-up demand, with legions of buyers waiting for cheaper home loans, the FOMO dam may burst.

Even with the rate drop most average people cannot afford to buy the average urban house, but there are enough move-up folks with equity and jobs to push valuations to new heights. This will happen because governments have been utterly unable to tame housing, and as today’s excess inventory levels crash.

Now you know what comes next.

About the picture: “Here’s some puppy pics for your blog.  Ivy (white pup) and Sadie (dark pup).  My aunt put me onto your blog after all her failed financial advice,” writes Kevan. “Sadie and Ivy are both rescues from Northern Manitoba.  They were rescued 2 months apart.  Sadie was found at about a week old along the highway with her mother and 6 brothers and sisters.  Ivy’s mother was dumped out along the same highway pregnant, was rescued, and then had 10 pups shortly after in foster care.  Both girls are now bonded, and live the lap of luxury.”

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

Source: https://www.greaterfool.ca/2024/08/19/get-over-it-4/