Down, down

Down, down. The prime at the Big Banks is 4.95%, effective this morning. Not so long ago it stood at 7.2%.

Inflation used to be 8.1%. Now it’s 1.9%. Five-year mortgages that were 6.5% are now popping up for 3.8%. And look at stocks. The S&P 500 has shed 8% in a month. The Dow is off 3% in a week.

The Bank of Canada has chopped rates for the 7th time. In a row. That’s a reduction of 2.25% in nine months, which has seen the big policy rate plopped from 5% to 2.75%. And, as we know, the Canadian loonie has faded into the 69-cent range while a US greenback may soon be worth 1.5 birds.

There are more rate cuts to come, the econs say. “We continue to expect three more 25 bp cuts at the next three meetings, taking the overnight rate down to 2%,” states BMO Economics. “We’re sticking with our existing forecast for a further 25 basis point cut at each of the next two rate decisions. The resulting 2.25% overnight rate could end up being the trough for this cycle if, by summer, Canada and the US are able to hammer out a deal that largely removes tariffs on both sides,” adds RBC’s Avery Shenfeld. Scotia’s Derek Holt says he thinks the BoC is sounding “hawkish” as it leans into the latest threat. Tariff Man.

Any way you look at it, air is leaking out of stuff.

The economy is deflating. Money costs are losing altitude. Consumer confidence is fizzing away. Business investment is positively flaccid. The real estate market sprung a leak. Stocks have been selling off. Everywhere, and in everything, is the expectation that worse lies ahead.

“Canadians are worried,” said central baker Tiff yesterday. And this…

“Our surveys suggest that threats of new tariffs and uncertainty about the Canada-US trade relationship are already having a big impact on business and consumer intentions. Canadians are more worried about their job security and financial health as a result of the trade tensions, and they intend to spend more cautiously. Businesses have lowered their sales outlooks, notably in manufacturing. Credit has become more difficult to access for some businesses.”

So we are all unsure where tariffs stand at the moment. Some Canadians stuff is being hit while some is expected to be taxed soon. Steel and aluminum came under the hammer last night. The big day is April 2nd, now. Trump is pissed at Doug Ford, who is in Washington at the moment. The US president has threatened to break our car industry and tax us so bad it will “go down in the history books.” He gets mad when people retaliate, his commerce secretary told Bloomberg.

This has made equities “untradable” in the words of one investment house. Markets can cope with any event, tragedy, shock or announcement. But they cannot deal with uncertainty. So, it’s risk-off. Sellers take over.

As for real estate, the spring market is rapidly evaporating for the same reason. People mildly worried about losing their jobs don’t buy houses – especially ones which have only gone sideways (not down) in price. The dramatic decline in interest rates (did I mention we’ve had seven cuts?) has done nothing to pry buyers off the sidelines. Ditto for the big mortgage changes, bringing in 30-year loans, higher price caps and plunged downpayments. It was the perfect storm, now becalmed.

Trump is now driving Canadian monetary policy, says CIBC. “It’s eminently clear from the central bank’s statement today that the hit to confidence from developments on the trade front was the only reason we saw a rate cut today… the very fact that it opted to cut suggests that its worry over growth was greater than its concerns over upside risks to inflation.”

The expectation on Bay Street is that three more quarter-point chops this year could turn into something deeper unless Canada and the US cut some kind of deal in the next few months. “We strongly suspect that the weak growth impact will dominate and, while the Bank’s caution means it will proceed very slowly,” says BMO, “the ultimate destination for rates is lower than the market now expects. That’s even moreso the case if the trade war deepens further than the current planned U.S. tariffs.”

Could the Bank of Canada rate go sub-2% by the summer?

You betcha. Those people now flocking to variable-rate mortgages are making just such a wager. More than a million renewers who took out cheap home loans five years ago – during the pandemic – may well be doing exactly that. Turns out that crises are their friend.

A core belief has emerged this week following Tiff’s actions, statement and media conference. Our guys think we’ll be battling serious tariffs for a long time – at least a year. That will tip the Canadian economy into recession. And in recessions, layoffs become a fact of life. If Trump goes nuclear on Canada (proving he’s insane as a well as evil) and kills the auto sector, things get worse. Meanwhile the growing Canada-US interest rate spread will ensure the dollar stays low. Inflation will probably rise, but fears of economic decline, “will keep the Bank in easing mode”.

House sellers will crack. Prices will drop. There will be bargains.

Those with cash and confidence will take advantage, and make out. As always.

About the picture: “I just had to respond to the call for more dog photos,” writes Joel. “Here is a photo of our always photogenic beagles Pistache and Spudd who love to snuggle in a patch of sun in our studio on a cold winter day. Pistache makes for a great pillow, I can attest for that, but I’m pretty sure he prefers Spudd resting on him than me. It’s hard to resist joining them for a cuddle break when they do things like this. I hope all is well with you”

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

Source: https://www.greaterfool.ca/2025/03/13/down-down/