The no brainer

Lower. Faster.

“With inflation soon to be vanquished, and real interest rates still at restrictive levels,” says the chief economist of the Penguin Bank, “there’s no logical reason for central bankers to move too cautiously to provide relief. Both countries are now looking at a softening jobs market that they don’t really want or need. So cutting rates materially is really a no brainer.”

That’s Avery Shenfeld, the latest Bay Street economist to predict interest rates are going to crumble a lot quicker than most people expect – and far more rapidly than was imagineable a few months ago.

CIBC now says there’ll be half-point drops by the Bank of Tiff later this year and early in 2025, with the CB rate settling at 2.25% in less than a twelve months (June of 2025). That will constitute a dramatic collapse from the 5% rate we lived with for a year, and send mortgage costs catapulting lower.

“It really is time to declare victory in the battle against inflation,” he adds, “and get the economy moving again. There’s no reason not to speed up the process of getting interest rates down materially.”

He’s not alone. Economist Veronica Clark of Citibank, is calling for a hefty half-point plop at the next rate setting in October. National Bank is also on the same page, saying the current 4.25% Bank of Canada rate will be 3.5% by Christmas.

BMO is forecasting a drop in rates for the central bank of almost 2% by the time the cutting ends. But things could travel south from there, it warns. “The risk is toward an even faster pace of easing if the economy continues to underperform.”

Yes, you recall the words published here the other day about deflation, right? It’s a thing now. The current worry – that prices will actually start to reverse as the economy cools excessively, the jobless rate bumps and we get downward pressure on wages. Nobody wants that. Including the CB boss. “With inflation getting closer to the target,” says Tiff Macklem, “we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.”

This rate-hacking is expected to infect the US Fed as well, which will drop its policy market for the first time in four years next Wednesday morning. The central bank is expeced to cut by a quarter then, followed by two halfers before the end of ’24. This is to address a growing slack in the labour market and guard against recession – especially if Trump wins the White House.

“A Trump victory backed by full Republican control of Congress would usher in lower corporate taxes and an even larger budget deficit,” warns BMO, “giving the economy an extra near-term lift. But it could also lead to higher interest rates and a possible trade war that undermines growth in the medium term.”

So lower rates now, the thinking goes, would give the American economy time to grow and stabilize prior to any Trumpian madness taking place. But if the election goes the other way, the future will look like the immediate past and American rates will stay in the neutral 2% range.

What should we expect?

Unemployment here will tick a little higher. Expect maybe 7% before it crests, with the biggest hit being taken by the kids and the newcomers. However, remember this will be just half the jobless spike that came with Covid – and it’s anticipated to be brief.

Variable-rate mortgages are looking a lot sexier now. There’s a premium for taking one at the moment, but if these economists are right, things will drift quickly in the favour of VRM borrowers. (Unless Trump wins.)

The bond portion of your balanced/diversified/GF-approved portfolio stands to do very well (and your preferreds, of course) as rates tumble. Recall that as yields fall, the value of bonds rises, throwing off a tasty capital gain. We always knew the rate-tightening cycle would end and then unwind – but not this quickly.

Will real estate benefit? Well, a big bunch of renewers are sure going to be relieved in late 2025 and 2026 when their home loans come up for refinancing. That renewal cliff everyone fretted over has gone pffft. The indebted masses who make up bank mortgage portfolios have an average existing rate of 2.89% – and will be renewing in the 3% range. The effect on housing markets: zero.

As for real estate itself, the outlook is total murk. Condos are in serious trouble. New home construction has collapsed. Listings in the resale market have started to explode higher. Prices never really dropped to reflect seriously higher borrowing costs. Affordability is at near-record disgusting levels. Buyers have been on strike, waiting for this rate collapse to take place. And nobody really knows if FOMO will return along with 3% (or lower) loans, or if the middle class is simply out of money.

As we told you days ago, Scotiabank’s Derek Holt says exactly the opposite. Our savings rate and net worth is boffo, he claims. Quit bitching.

In conclusion, well, there is none.

About the picture: “Hope you are well Garth,” writes Andrewski. ” Bala & Gibson are chilling after our daily 10k. Life is grand.”

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

Source: https://www.greaterfool.ca/2024/09/13/the-no-brainer-3/