I thought bringing you several key economic indicators, that help anticipate the road ahead for Canadian interest rates, would be valuable for you.
1. Inflation.
Items in Canada cost more money over time. This is the phenomenon called “inflation”.
All else being equal, the value of my dollar becomes less. As items become more expensive, my purchasing power goes down.
The Bank of Canada’s mandate is to keep inflation between 1-3%, while the economy operates at capacity.
Canada’s central Bankers control inflation by moving the “key lending rate” or “bank rate” up and down.
In general, if inflation is increasing, Canada’s central bankers increase interest rates. This dampens the economy. If inflation is low, and the economy could use a boost, the central interest rate is lowered.
This “boost” can also be thought of as injecting liquidity into the “system”. Lowering interest rates is a classical economic move to stimulate borrowing.
Here is Canada’s inflation report card for September 2019:
Consumer Price Index (CPI) (inflation): 1.9%
Previous CPI (August 2019): 1.9%
Target CPI: 2%
Ok, not too bad! Flat month over month, and within the comfort zone of 1-3%.
There are other measures of inflation in Canada to help policy makers understand inflation from various angles.
CPI Trim: Essentially taking the most volatile items out of the comparable basket of goods.
Current: 2.1%
Previous: 2.0%
CPI Median: Taking the 50th percentile of data and comparing it.
Current: 2.2%
Previous: 2.1%
CPI Common: Tracking common price change variations that filter price movements that might be caused by specific factors.
Current: 1.9%
Previous: 1.8%
All three measures of core inflation are up 0.1%. The inflation forecast is flat for the foreseeable future.
2. Canadian Bond Market.
Bond movements influence Mortgage interest rates up and down. Anticipating what moves the bond market up and down can help garner some insight into near term changes of interest rates.
Let’s all remember, over a long enough period, interest rates move up and down.
I think the bond market moves up and down based on fear or greed.
I think this is a good time to qualify my thoughts here …I’m not an investment banker. I’m a Mortgage Broker.
When there is positive economic happenings, money tends to flow into the stock market. The money supply is hedged there for growth.
When there is negative economic happenings, money tends to flow into the bond market. The money supply is looking for safety.
I understand that positive and negative Canadian economic data will influence Canada’s bond market. Positive Canadian GDP data, positive Canadian wage growth, positive employment numbers etc has some effect on Canadian bonds.
I’m also reminded we are very closely tied to America’s economy. The population of Canada is about equal to that of California with the U.S economy being 10X larger than ours.
Looking for positive economic data from the U.S and or looking at growth stimulating financial maneuvers from the U.S Federal Reserve, or following Donald Trump’s twitter feed related to the trade war, bears some attention.
The U.S Federal Reserve has announced their interest rate outlook to be stimulative (lower rates). They are again purchasing Government Bonds which is referred to as Quantitative Easing. This is a different angle of injecting liquidity into the system (economic stimulus).
I’m also hearing the China-U.S trade war has made reasonably positive steps toward an agreement (at the moment).
Again, this is positive news for the overall economy. I think draws money from the safety of bonds as it flows into the stock market. Bonds then increase which in turn influence Mortgage interest rates higher.
I continue to watch for these kinds of movements of money based on fear or greed.
3. Alberta Data.
I thought bringing some Alberta economic statistics would be valuable for you.
Alberta inflation has also been steady month-over-month at 1.3%.
Edmonton’s inflation came in at 1.4%.
Calgary’s inflation came in at 1.1%.
Gasoline prices are down 21.1% in Alberta year over year compared to an average drop of 10% across the Country.
In Alberta, food prices are up 3.9% and shelter costs are higher by 1.8%.
Alberta new vehicle sales are lower by 5.8% year over year. This is the 13th month of consecutive decline.
A similar story is unfolding Nationally with new vehicles sales lower by 4.4% for the 12th consecutive month.
Alberta’s unemployment rate for September 2019 is down 0.2% to 6.6%.
The unemployment rate in Alberta lowered, which is a positive signal, right?
Understand this …the unemployment rate can move because of genuine improvement of employment. The unemployment rate can also move because of people who are actively looking for work either increase or decrease. This is referred to as the “participation rate”.
Alberta’s unemployment rate fell because there are less people actively looking for work. It’s possible, these people are discouraged with job prospects?
Edmonton’s unemployment rate is down 0.1% to 7.3%.
Calgary’s unemployment rate is down 0.2% to 7.1%.
Conclusion:
Canada’s National economy remains relatively buoyant with positive inflation, jobs growth, lower unemployment and positive national economic output.
Really, I understand this to be a fairly enviable economic position compared to other countries who are lowering their central interest rates to almost 0% again.
I think more economic stimulative measures from the Federal Reserve are helping U.S bond yields rise, that bring Canada’s along for the ride.
As this continues to unfold, there is upward pressure on fixed Mortgage interest rates in our country.
Circling back to the beginning of this email …the bond market is about half the price it was last year. Rates rise and fall.
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Talk soon,
Chad Moore
P.S
Some of you might remember my videos from 2016? We’ll, they’re back!
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P.P.S
As you know, I’m a volunteer with the Calgary Colts Junior Football Association.
We have been asked to fill A LOT of volunteers for this years Grey Cup festivities.
If you would like to volunteer for 4 hours, diving into the spirit of the 107th Grey Cup, do so here (you’ll be inside :-)):
