Good morning,

More pain this morning as the Bank of Canada surprises markets for the 2^nd meeting in a row & raises 0.5% vs the market’s expectation of 0.25%.  Last meeting consensus was expecting more & we got less.  This week, the opposite.  As of this morning market expectations are still for another 0.25% but as we’ve seen throughout this year, this can all change for better or worse.  The Bank ended their release ambiguously stating they will be considering whether the policy interest rate needs to rise further.  This is a change from their typical, “more action is needed,” line but as we saw today & throughout this year, be cautious with optimism with these guys, although it does appear we are very near the end here.

Inflation continues to come down but CPI inflation is still at 6.9% with core inflation around 5%.  Canada’s 10s/2s yield curve, which gives an indication of future economic activity, is the most inverted since the early 1990s.  In a health economy the curve slopes upwards, which points to economic growth into the future.  When short term yields are higher than long term, the curve slopes downwards, which corresponds to periods of economic recession.  The growth outlook is not good.  Winter is coming.

A lot has been made over the last month of Central Bank action.  The head of Australia’s central bank actually came out with an apology to people who took out mortgages last year under the guidance of rates being low until 2024.  In Canada, for the first time ever our central bank ran a loss.  Keep in mind that loss falls on the backs of tax payers & is looking to be something to the tune of a $10b loss – instead of collecting something around $3b annually from the Bank of Canada, we’ll be forking out approximately $7b overt the next 3 years.  First time ever.  Ever is a long time..

They also admitted they should have raised rates sooner but defended paying out $18.4m in bonuses to staff last year so more signs of how broken our world has become.

Prior to this morning, around 13% of all mortgages in Canada had passed their trigger rate, meaning their payments were not covering all the interest owed for that month.  After today that number will be higher.  ​If you’re in that boat, raise your payments, even if you have already.  You want to delay the trigger situation as much as you can.  Around 75% of mortgages in Canada this year were in variable rates, which, in a lot of situations had to do with broken policy pushing clients to going variable in order to have the lower stress test rate & qualify for their purchase.  Also, in fairness, given the history of this central bank it was hard envision the hawkishness we ended up seeing.

Looking at my own business, what I got wrong was, we knew inflation was going to be an issue & that’s something I was talking about since 2020.  We knew there was a ton of debt in the country & raising rates would be problematic, which it is & will continue to be, but what I underestimated was the level of damage that could occur between when they started raising & finished.  I completely underestimated the level of pain & damage they would be willing to reign down & that is something I take very seriously.  Myself & really everyone completely missed the boat on that.  The conflict in Ukraine certainly didn’t help & looking back that seemed to be the point where the switch really flipped & that was used as the excuse to really move to significant increases, but whether that happened or not, inflation still would have been high & that’s not THE reason for this year. 

Even though variable had been the better bet close to 90% of the time in Canada’s history, the take away for me is to really outline what could happen in that 1 time in 10 where it isn’t.    

This is the last meeting for 2022.  One that will surely be remembered for a long time.  Next year the story will be when will rates start to drop but I would suspect mid to late 2023 before any relief comes on that front.

That’s it for me.  Thanks for watching & please get in touch if you’d like to discuss.

Good morning,

The Bank of Canada raised another whopping 0.75% at this morning’s rate announcement, making a total of 3% in the last 6 months & leaving the door open for more rate increases.  This has been a massive move in a short period of time & based on their announcement we may not be out of the woods yet. 

GDP is weaker than projected with the last 2 month’s readings being 0% & -0.1%.  Growth has clearly turned.  Housing continues to pull back across the country however inflation is still high at 7.6%.  The target is 2%.  We’re a clearly a ways off from that so the question is, are we going to see the Bank of Canada continue to march up rates until inflation starts with a 2?  They could have raised rates by 3% this morning & next month’s reading still wouldn’t be close to 2%.  Is the plan to talk aggressively to decrease how much further action they’re going to take?

2 weeks ago Tiff Macklem who heads our Central Bank published a special in the National Post, which is not normal & points to how much anxiety is out there. 

In that piece Tiff highlighted that inflation appears to have peaked but that it also remains far too high & will likely remain too high for some time.  He continued that they need to tame inflation back to 2% by raising borrowing costs in the “short term.”  They don’t want to choke off demand, but slow it’s growth for what they call a “soft landing.”

How much confidence do you have in the same people who are largely responsible for the high inflation we’re experiencing today, who were clueless as it ramped up, refrained from doing anything while inflation was accelerating all last year, to be able to artfully land this ship without triggering a recession?  Inflation hasn’t been at 2% in over 1.5 years & they did nothing for the bulk of that. 

I thought I’d go back over the recent history of Central Bank messaging & highlight some of the statements to give an idea of the type of accuracy we can expect here:

When Covid hit, Tiff Macklem said (a number of times) that they didn’t plan on raising rates until well into 2023, to be assured that we will have low borrowing costs “for a long time” & suggested to anyone “considering making a major purchase (… or) investment, you can be confident rates will remain low for a long time”.

It’s not 2023.  Rates are not low. 

In the 2^nd half of last year, while inflation was ramping up, their statements highlighted that inflation was going to be temporary & that even though it was above their 2% target, that was “as expected.”

As recently as December of 2021, while inflation continued to ramp up, they stated that inflation would be back to 2% by late 2022.

One month later at their January 2022 meeting that changed to inflation will decline “reasonable quickly to about 3% by the end of this year.”

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Two months following that statement inflation was all of a sudden not a temporary phenomena & actually a problem & so began the rate hikes.

Those comments haven’t aged well & all but the 1^st aren’t even a year old!

So what to do with your variable rate mortgages?  CIBC came out last week stating they think this will be the final rate increase we see but if you take Tiff at his word, we have more rate hikes to come.  The Bank of Canada has highlighted recently that they are “front loading” the rate hikes & in the post called attention to the hikes being short term but what are you to believe? 

If you’re in a variable, you can always lock in but the question is if it’s worth locking into a fixed rate of 4.5% – 5% to avoid having your variable cross that threshold for, say, 6 months?  For 12?  Are you OK giving up the option of benefitting when rates do eventually drop? 

Variable rates have only really been going up for 6 months & only recently have crossed the threshold of being more expensive per month than if you had gone with a fixed rate for most variable rate mortgages.

Would you have felt the same pain or anxiety you feel now if you had taken a fixed rate right from the get go & had been paying considerably more being in a fixed for the past many years while the variable has been lower? 

Feeling safer comes with a premium.  Feelings should never drive financial decisions.

I’m going to highlight some action points below if you are a in a variable but please do reach out to me today if you would like to discuss any of this. 

OPTIONS:

Lock into a fixed rate around 5% depending on the term with no cost to do so:
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PROS:    

-piece of mind

CONS:   

-not being able to benefit from potentially lower rates in the future  (when rates drop fixed rate penalties get expensive)

-taking on significantly higher penalty risk

If you’re in a fluctuating payment variable rate, switch into a fixed payment variable rate & extend the amortization back up to the max
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PROS:    

-with fixed payments your cash flow will not be impacted by the rate changes as your payments are fixed (but the amount that goes towards principal/interest will fluctuate as rates change)

-when rates do eventually drop you will pay your mortgage off quicker as more of your payment will then go towards principal vs interest

CONS:   

-will incur a small 3 months interest penalty

-will not be able to benefit with lowering payments from dropping rates

Move into a 1 year fixed rate term

PROS:    

-payment/rate security to ride out the current rate volatility

-not locking into a long term at a time where rates are just below the peak & hopefully renewing that mortgage in a year’s time where rates should be lower than today.

CONS:   

-will incur a 3 months interest penalty

-cannot benefit from lower cash flow with lower payments until renewal

Wow, the last month has been one of the craziest I’ve seen in my 12 years doing this job. The Bank of Canada raised rates by 0.5% at this morning’s interest rate announcement.  Big move. 

The last month saw the biggest jump in fixed rates in over 30 years with most lenders in Canada now above 4% for a 5 year fixed.  All the worst expectations for inflation & rate hikes seem to be priced in but it’s important to remember where we are in the business cycle & how that can impact some of these wild rate hike expectations.

Before we get into it, remember, if you’re in a fixed rate.  Today’s move doesn’t directly impact your mortgage.  You’re locked in.  What I would suggest, though, is starting to think about your payments at renewal & what you can do to prepare for that.  Get in touch with me to discuss strategies to brace for that.

If you’re in a variable rate, it’s important to keep in mind you’re still saving a significant amount vs locking in here.  Even with a 0.5% jump today, locking in would mean a rate likely around 1.5% more than you’re in currently.  We’re going to get more rate increases, but remember that the variable only costs more if rates rise by not only that much, but more & stay there..

Let’s talk about inflation.  Inflation tells us what happened, not what’s going to happen.  Prices have been accelerating upwards for over a year.  While our central bankers were telling us it’s not an issue, transitory was the word often used, & would ease by the end of this year, it was ripping.  They explicitly wanted it to run hot & now, after keeping rates at record lows & lower than they should have been all the way up until last month, it’s hot.  The question is, will it continue to stay hot? 

Inflation is a rate of change measure.  It was March of last year when inflation started picking up so due to higher base effects, it will be a steep hurdle for CPI to continue these high prints moving forward & not start to come down.  We would need something like oil alone to avg around $150 / barrel for the entire month.  It’s already dropped approx. 20% from last month’s high. 

The other piece to weigh into this is demand destruction.  With fixed mortgage rates over 4%, will house prices continue to rip to the upside?  The real estate market in Canada appears to have peaked last month as higher rates started to be felt.  With gas & energy prices eating into disposable income, will consumers have the same firepower to put cash into renovating homes, buying cars, taking vacations, etc. ?  No.  In a lot of ways, the bond market & higher costs are doing the Bank of Canada’s work for them in slowing growth & cooling things down.

So inflation tells us about the past, what do the forward looking indicators suggest we can expect?  All signs suggest to central banks tightening & raising rates late in the cycle & into an already forming slowdown.  A recipe for a recession.

In the US, a famously reliable indicator of a recession within the next 2 years is the spread on the 10 year & 2 year bond yields.  The spread inverted which means the long bond has a lower yield than the short term bond.  That means rates are going to go up & then come down.  Central banks rising rates is going to break things.  Personally I would be shocked if they get anywhere near the rate hike expectations this year without triggering a recession by the end of the year. 

Consumer cyclical stocks are down approx. 20%.  The transport new orders index has seen an extraordinary reduction in new orders.  China’s PMI went from 50 to 42 which is a massive move.  These aren’t things that suggest anything but a big slow down ahead.

It never feels good as rates go up if you’re in a variable.  It feels even worse reading all the sky is falling articles in the news about inflation & 2% rate hikes this year, but don’t react based on feelings.  Remember, even if we get another 1.5% in rate hikes this year, depending on your variable rate, you’re still saving money.  You’ve saved a significant amount riding it out this far.  The more rate go up, the less potential they have to continue going up.  Locking in immediately takes on a higher penalty risk, higher payments, higher cost.  Do you want to be doing that at a time when inflation & growth is already slowing on rate of change terms? 

CLICK HERE to schedule a call with me.

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