Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
RBC Capital Markets’ Canadian Housing and Mortgage virtual conference brought depressing conclusions according to analyst Geoffrey Kwan,
“with our most diverse group of speakers to-date, the key takeaways could be summed up as: (1) fixing housing affordability, particularly in Toronto and Vancouver, is likely past the point of no return; (2) housing activity remains weak, but is showing early signs of improvement as Y/Y comps should improve through 2023. However, the recent back-up in bond yields and yesterday’s Bank of Canada (BoC) +25bps rate hike is likely to see mortgage rates materially increase, which some speakers believe could see housing activity weaken again; and (3) a combination of a low unemployment rate, savings built up through the pandemic, increased incomes (partly driven by inflation) and cutting back expenses likely explains why we haven’t seen material financial distress … Numerous speakers seemed to suggest the lack of a credible and coordinated strategy to fix housing affordability, citing the Canadian Government’s plan to bring in an all-time high 500,000 new immigrants/year for the next few years, but also elevated international student activity and a steady stream of temporary foreign workers with educational institutions and employers, respectively, not being required to ensure adequate housing is available for those they bring into Canada, yet financially benefit from high tuition fees and lower cost labour, respectively”
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Scotiabank strategist Hugo Ste-Marie thinks the Bank of Canada will raise rates again in 2023,
“the BoC pointed out that “with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.” … core CPI (ex-food and energy) has decelerated in the past year, but more recently, progress has stalled. Conclusion: With the BOC facing a very resilient economy, where the inflation risk is tilted to the upside, it’s hard to think that only one hike will be enough to change the broad picture... more hikes are likely needed. Next two meetings are scheduled in July (most likely) and September (too long to wait). [derivatives markets] now pegged the benchmark rate at 5%+ in Q4, implying at least one more to go.’
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BMO economist Benjamin Reitzes is also in the ‘more hikes’ camp as he highlighted the bond market reaction to Wednesday’s Bank of Canada meeting,
“Government of Canada bond yields surged on Wednesday following the Bank of Canada’s latest 25 bp rate hike, lifting policy rates to 4.75%. The overnight rate is now at the highest level since 2001, when the BoC was cutting rates as the tech bubble burst. The market was pricing only 50% odds of a hike ahead of the latest decision, contributing to the sharp bond market move. Another 25 bp hike in July appears likely in our view given the BoC’s hawkish tone and limited data points until that meeting. The market agrees with our view and is pricing another 35-40 bps in tightening by year-end. As of late Wednesday afternoon, Canada 2-year yields surged over 20 bps to around 4.60%, the highest level in 16 years. With 5-year yields also popping about 20 bps higher, mortgage rates could soon climb as well. That would dampen building momentum in housing, something the BoC probably won’t mind seeing.”
“BMO: “Bond Market Says Yikes!”” – (research excerpt) Twitter
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Diversion: “Why Everyone Is Suddenly Talking About Aliens” - The Atlantic
Scott Barlow