Incoming

Just as we face incoming fire from Washington, our own pitched battle rages across the frozen maple landscape.

Trump was bad enough over the last few days. Now this. First the news (in case you missed it), then the Three Big Things that this will mean (and, yeah, they’re big).

The latest jobless and population numbers are sad.

• Canada created 50,000 new jobs in November, but 45,000 of those government hires. You’re right – not good.
• Wage gains have slowed (now at 4%) while average hours worked have dipped.
• Despite a jump in jobs, the unemployment rate spurted higher – to 6.8%. That’s the highest in eight years (save for the Covid episode)
• The reason was a surge in the workforce – a stunning 138,000 more folks last month.
• Manufacturing jobs are vaporizing (another 28,000 gone) while retail positions jumped (39,000). So the high-paying industrial and unionized work is being replaced by the low-pay barista and clerk class.

Let’s jump to what this means.

It’s news that will freak out Tiff and the CBers. Already the dollar is weak, the economy is barely growing and the Orange Guy has seriously messed up next year. The odds have flipped quickly on the coming Bank of Canada rate cut, set for next week.

So, the first Big Thing: we’ll get a heaping half-point chop in the CB rate in a few days. This will be the fifth one, dropping the policy rate down to 3.25%.That means the chartered bank prime will sink to the 5.4% level, with VRMs, lines of credit and HELOCs going along for the ride.

Says BMO chief economist Doug Porter: “This is what we believe the Bank will do, not necessarily what we believe that they should do. There is certainly still a solid counter-argument for a more moderate 25 bp cut—domestic demand is clearly reviving, core inflation picked up last report, the Fed is proceeding more cautiously, and the currency is pushing 20-year lows. But the Bank seems biased to ease quickly, and the high jobless rate provides them with a ready invitation.”

So the second big thing is another elevator rise down for the Canadian dollar. The currency is weak because the US greenback is strong (thanks to you-know-who), and also due to the wide gap now between American and Canuck interest rates. The Fed has resisted easing because the economy there is growing at three times the rate of ours, with inflation running hotter.

Down goes the loonie as rates poised to drop

Now with another big rate hack in Ottawa, that spread widens further. Since capital flows where it can get the best rate of return, more will course south. Thus our dollar crashed a little today, down to 70.69 US pennies (as I type this driving down the 401), a decline of almost 1%. Yikes.

Recall that Scotiabank economists are warning the loonie could be at the 55-cent level if Trump actually brings in a 25% tariff on Canadian goods, and especially if we retaliate – driving consumer costs higher for families here. No good outcome.

And here comes the third big thing: higher real estate values. “Housing is poised to reignite,” says Porter. And yesterday – even before the odds of a big rate hike materialized – Royal LePage was forecasting a 6% jump in real estate values in 2025.

Why would this happen even as the economy weakens and the jobless rate rises?

Cheaper credit, of course. Mortgage rates are going down again. Also pent-up demand is high, since we have now had two dead Spring markets with sales running below long-term averages. People still get married, shack up, get house lust, have babies – and now that the future’s a little uncertain, real estate seems more solid than, say, stock in TD bank. Besides, Chrystia just gave the country 30-year mortgages, 60% lower downpayments, the FHSA and other incentives to jump into a house.

“Lousy employment news,” says crusty mortgage dude Ron Butler, “ is good mortgage rate news. “But the future of Canada’s private sector economy looks awful. The unemployment rate in Canada rose to 6.8% sending 5-yr Canada bonds down (over 40 BPS drop in 10 days). Will the Bank of Canada cut 50 BPS next Wednesday?”

Yes it will.

My, oh my. What a year about to unfold.

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Source: https://www.greaterfool.ca/2024/12/06/incoming-3/