Key points:
- Canada is currently in the “soft landing” phase of the economic cycle. This falls between the phases of raising rates, and recession.
- Inflation continues to move in the right direction. However, rather than inflation dramatically dropping, we are more experiencing a relative low in comparison to this point last year.
- Bond yields have been dropping and rising, but as we approach a recession they should cause fixed-rate mortgages to decline.
April 2023 inflation watch
In this video, I discuss the biggest headlines in terms of inflation in Canada this past month. In particular, I review where we are in the economic cycle, what inflation is expected to do throughout the year, and the impact on interest rates and the bond market.
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:01] Welcome, everybody, to your April 2023 Inflation Watch video where we review critical macroeconomic factors that influence Canadian interest rates and real estate. If this is your first time here, welcome. Please consider leaving us a like, share, comment. Let’s dive right in.
Canada is currently in the “soft landing” economic phase
Chris: [00:00:20] I’m excited because I found perhaps the best schematic of how the economy works. Very technical, but I think it does a really good job of illustrating. Now this little figure here is the US chair of the Federal Reserve, Jerome Powell. I’m sorry, it’s not Canadian centric content. If there are any talented graphic designers out there, maybe we should take a look at putting Tiff’s face on here. But I think it does a really good job of showing the cycle. We are this. We’re somewhere between these two guys right here, between raise interest rates and soft landing here in Canada, we’ve already pivoted and stopped raising interest rates. And in the April Bank of Canada meeting, you hear a lot of rhetoric from the Bank of Canada saying everything’s fine. It’s going exactly as we expected. We anticipate a soft landing. They also interjected with some language about, you know, that the job’s not done, that they’ll have to raise, they’re not afraid of raising interest rates further. And you’ll never hear the Bank of Canada talk about a recession until it already is clear that they’ve already reached the floor down here. So I think this this is really interesting and shows where we are. We’re in this phase of soft landing. And I also think it helps to illustrate how far we are away from that all important pivot to interest rates.
Chris: [00:01:49] As far as the Bank of Canada overnight lending rate is concerned, there was a meeting at the beginning of April. That was the second consecutive meeting that they held the interest rate unchanged at 4.5%. Over here. And you can see this is the forecast projecting forward. This is kind of the official forecast of what is expected. And it’s a predominantly a hold for the coming months. And then you can see that the first expected drop isn’t going to happen until the first quarter of 2024 to be determined. This is an area of speculation and debate between the market and the Bank of Canada. Of course, Bank of Canada is saying everything’s fine. The market on the other side is saying, no, not so fast. We think there’s some weakness and we’re seeing that reflected in lower bond yields. So it’ll be interesting to see who cracks first. Is it the market that’s right? Or is it the Bank of Canada?
Inflation trends and expectations for the future
Chris: [00:02:45] What about the all important inflation figures? Well, they continue to trend in the right direction, which will make the Bank of Canada happy. The March inflation number came in as anticipated at 4.3%. So you can see this very quick drop off. Now, it may seem when you look at this, that, hey, we’re doing a really good job at dropping inflation, but it’s actually not exactly what’s happening here, because you have to think that the way inflation is calculated is compared to the previous month. And it’s a comparison to where we were March of 2022, which was comparatively high. So it’s not so much that inflation is dropping, it’s that it’s not increasing. And so when you compare it to the base year effect, it’s called the base year effect. Statistically or mathematically, it looks like it’s it’s dropping. And so that’s why when the Bank of Canada says that by the mid-summer they expect the inflation rate to be 3%, that’s probably fair because you can see this big peak that we had when was it, April, May, June of 2022 is going to come off the chart and that’ll be the base year that gets eliminated. So yeah, we will see inflation in that 3% range quite soon, which will be nice to see, but it doesn’t mean that prices are dropping. It just means that prices aren’t accelerating anymore.
Bond yields are rising, but a recession will impact the bond market
Chris: [00:04:11] What about bond yields? So bond yields impact fixed rate mortgage pricing. And the way I like to think about bond yields is if you’re sitting in a car. Bond yields are showing you the road ahead. That’s like looking through the front windshield. When we talk about the Bank of Canada and policy rates, that’s like looking in the rear view mirror because they’re responding to things that happened in the past. Inflation and all these factors are a response to things that happened many, many months ago. Whereas the bond yields market is trying to predict where we’re going in the future. Is it recession, is it higher interest rates? Is it higher inflation? And this chart here is the Government of Canada, five year bond yields over the last month. And you can see how it’s yo yoed around this 3% level here. It dropped in early April and then rose. And there are three factors that have caused the bond yield to rise. Number one is that the in the United States, they are not done yet raising interest rates. You can see here in this chart as of this week, that there’s all but a guarantee that the bank of sorry, that the Federal Reserve will increase the prime rate in the US. So that’s going to elevate rates in the US and that has an impact on Canadian exchange rates. The second factor is something that happened in mid-April, which was the oil powerhouse, which is OPEC Plus, announced that they were going to cut oil production by 2 million barrels a day. And in doing so, that drives up the price of oil, which drives up inflation risk. So that’s a big risk that still exists in the markets and is currently being evaluated as to what impact that’s going to have on inflation.
Chris: [00:06:05] So where does all this leave us with Canadian mortgage interest rates? Well, at the moment, interest rates have come down. Five year fixed rate mortgages can be found for as low as 4.4%, all the way up to 5%. And that range really depends on the type of product, the insurability of it. I won’t get into the details now, but there’s a range between 4.4 and 5%. Short term, I don’t think we’re going to see any quick drops to fixed rate mortgages. I think they’re going to kind of stay here for the next few months because bond yields have kind of trended back up and the downward pressure has eased. The macro picture, though, is that fixed rate mortgages should drop as we head into the latter part of this year and recession warning signals become clearer. That will impact the bond market, which will have an impact on fixed rate mortgages. If you have to choose a mortgage today, I think the best way to go would be with a short term fixed, anywhere between 12 months and 36 months. You don’t necessarily want to commit to a five year term because we do anticipate that rates will be lower as we head into recession later, well, into next year.
Need more help or information?
Chris: [00:07:24] My name is Chris Molder. I am a Toronto mortgage broker. I hope you found some value in today’s video. If you did, please consider liking. Please consider sharing. Until next time. Bye for now.
If you’d like to discuss your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.
