(originally published Nov 15th 2022)
Hey Guys!
I’ve written to you before about how influential the U.S. is to Canada’s economy. The old adage is, “when the U.S. sneezes, Canada catches a cold“.
Well, U.S. inflation data was published last week, and it’s down. The market popped champaign! As a result, stocks are soared, bond yields lowered and therefore Mortgage rates are forecast lower.
BUT …policy makers might not flinch just yet.
The previous inflationary surge in the late ’70’s and ’80’s saw a double-topping of numbers. Let’s look at what happened …
Policy makers were raising interest rates to bring down inflation—and it was working!
We can see (top image) inflation soaring in the early 1970’s, with interest rates rising in response—from about 4.50% to 15.5% (second image).
Inflation seemed to have peaked in about 1975. In the second image interest rates dropped 15.5% down to about 9.5% in 1981. As a result, there is a second—even higher peak of inflation—in about 1982.
The second peak of inflation created the requirement of central bank interest rates to again rise from about 9.5% in 1982 to 21% in 1985. Ouch.
Looking back, it’s reasonable to summate policy makers lowered rates too soon allowing inflation to rear back up.
What does a “pivot” mean?
You may have heard this term before and wondered, “what the heck”? Let me explain ….
Some monetary policies, that begin as far back as 2008, and more recently cranked up in COVID era of spending, are helpful to assets (stocks, Real Estate, crypto).
With inflation running so high, the reversal of various monetary policies (bond purchasing programs, and ultra low interest rates) is the current path central banks around the globe are on (ex., Canada, U.K., AUS, U.S. etc).
The creation of these policies have helped asset values grow (stocks, crypto, Real Estate). The removal of these policies assist in lowering these same asset values.
And this is what all the excitement was about last week when U.S. inflationary data came back lower, and lower than expected.
The “market” is forward looking 6-12 months. The general consensus was the requirement of such high interest rates would no longer be needed which is helpful for asset growth (the market popped champaign).
So the “pivot” essentially means pivoting away from the tightening of monetary policy. I’ve noted above an example of how a policy pivot, too soon, can result in inflation rearing back up.
For now, U.S. inflation data can be said to have peaked behind us. The current interest rate hike cycle is having the desired effect.
Forward looking markets responded very positively to the idea that the steep angle of interest rate hikes might change, or even pivot.
I think the example of how the battle of inflation can rear back up if policy makers “pivot” too early is relevant to our current economic environment.
Will central banks have the mind set, “buy once, cry once“. Meaning, beat inflation down, without it rearing back up which only prolongs the entire process.
Canada’s fixed Mortgage rates are slowly trickling in lower with the recent plunge in bond yields.
I hope you found this helpful!
If you have any Mortgage or Real Estate plans, reply to this email and let me know what they are.
Talk soon,
Chad Moore
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