A Bumpy Road To The Inflation Target

Canada’s headline inflation number for December ’23 moved up three bps to 3.4%, as expected, as gasoline prices didn’t fall as fast as a year ago. These so-called base effects were also evident in the earlier US inflation data for the same month.

Additional acceleration came from airfares, fuel oil, passenger vehicles and rent. Prices for food purchased from stores rose 4.7% yearly in December, matching the increase in November (+4.7%). Moderating the acceleration in the all-items CPI were lower prices for travel tours.

A Bumpy Road To The Inflation Target

On a monthly basis, the CPI fell 0.3% in December after a 0.1% gain in November. Lower month-over-month price movements for travel tours (-18.2%) and gasoline (-4.4%) contributed to the monthly decline. The CPI rose 0.3% in December on a seasonally adjusted monthly basis.

Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — increased, averaging 3.65%, from an upwardly revised 3.55% a month earlier. That’s faster than the 3.35% pace expected by economists. The trim rate rose due to the movements of rent and passenger vehicle prices.

Another important indicator, a three-month moving average of underlying price pressures, rose to an annualized pace of 3.63% in December from 2.94% in November, according to Bloomberg calculations. The Bank of Canada follows this metric closely because it reveals shorter-term inflation trends.

A Bumpy Road To The Inflation Target

According to Bloomberg News, following the release of today’s CPI data, “the yield on two-year Canadian government bonds rose about four basis points to 3.857%…Traders in overnight swaps pushed back bets on when the Bank of Canada will start cutting rates to July, from as early as April before the release.”

Bottom Line

This is the last major data release before the Bank of Canada meets again on January 24th. I concur with the widely held view that the rate pause will continue at the next meeting despite evidence that the economy is slowing. Governor Tiff Macklem will err on the side of caution before beginning to cut overnight rates. The last reading on wages showed a 5.4% y/y rise, and yesterday’s housing release showed a bump in sales. Macklem and Co. will keep their powder dry until they see an all-clear signal that core inflation is sustainably below 3%.

A Bumpy Road To The Inflation Target

Questions? Comments? Reach out:

📲 705-606-2727

📧 jmuir@dominionlending.ca; jon@jonmuirmortgages.ca

💻 https://jonmuirmortgages.ca

🌎 https://g.page/r/CXZmhubK7M5xEAE

Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.

License #: 10145

92 Caplan Ave #609, Barrie, ON L4N 9J2

A Bumpy Road To The Inflation Target

Canadian Home Sales Surprisingly Strong in December

Statistics released today by the Canadian Real Estate Association (CREA) show national home sales were up noticeably month-over-month in December 2023. The December rise of 8.7% was one of last year’s strongest monthly performances.

The actual (not seasonally adjusted) number of transactions was 3.7% above December 2022, the largest year-over-year gain since August.

On an annual basis, home sales totaled 443,511 units in 2023, a decline of 11.1% from 2022. It was technically the lowest annual level for national sales activity since 2008, although it was very close to levels recorded in each of the five years following the 2008 financial crisis, as well as the first year the uninsured stress test was implemented in 2018.

Canadian Home Sales Surprisingly Strong in December

CREA is forecasting a 10.4% gain in home sales this year, boosted by the expected easing of monetary policy by the Bank of Canada in the second half of 2024.

“While December did offer up a bit of a surprise in sales numbers to cap the year, the real test of the market’s resilience will be in the spring,” said Larry Cerqua, Chair of CREA.

New Listings

The number of newly listed homes dropped by 5.1% month-over-month in December, bringing them to the lowest level since June.

With sales up and new listings down in December, the national sales-to-new listings ratio tightened to 57.8% compared to just 50.5% in November. The long-term average for the national sales-to-new listings ratio is 55%.

There were 3.8 months of inventory on a national basis at the end of December 2023, down notably from 4.2 months at the end of November. The long-term average is five months of inventory.

Canadian Home Sales Surprisingly Strong in December

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) declined by 0.8% month-over-month in December 2023. In line with firming market conditions, this measure was smaller than the 1% decrease recorded in November and the 0.9% decline logged in October.

Price declines of late have been predominantly located in Ontario markets, particularly the Greater Golden Horseshoe and, to a lesser extent, British Columbia. Elsewhere in Canada, prices are mostly holding firm or, in some cases (Alberta, New Brunswick, and Newfoundland and Labrador), continuing to climb. As market conditions have recently been evolving, price trends are becoming more of a mixed bag where the regional differences are less clearly defined.

The Aggregate Composite MLS® HPI was up 0.7% on a year-over-year basis in December 2023, up slightly from the 0.6% year-over-year gain in November.

CREA is forecasting modest price increases on a national basis in 2024.

Bottom Line

The Bank of Canada released its Business Outlook Survey today, showing that Canadian businesses experienced a downtrend in sales in the fourth quarter, citing factors including consumer financial stress from high interest rates and inflation. Firms report a muted sales outlook, modest investment intentions and weak hiring plans. There is also concern that upcoming mortgage renewals will further reduce consumer disposable income. The hardest hit were construction and real estate businesses–reporting that some projects have been postponed owing to high financing and construction costs and rising uncertainty.

The report said that consumer-facing firms such as retail, housing and accommodation, food and recreation need help to obtain credit. “This often reflects lenders’ expectations of continued weakening in consumer spending.”

Canadian Home Sales Surprisingly Strong in December

Consumers report increasing uncertainty about the economic outlook, weighing on their spending plans.

Tomorrow, Stats Canada will release the inflation data for December. Economists expect inflation to likely tick up last month, mainly due to base effects. This will only set off alarm bells if underlying price pressures do not ease.

Mounting evidence suggests that growth remained weak in Q4, suggesting the Bank of Canada will begin cutting interest rates by the spring home-selling season.

Canadian Home Sales Surprisingly Strong in December

Questions? Comments? Reach out:

📲 705-606-2727

📧 jmuir@dominionlending.ca; jon@jonmuirmortgages.ca

💻 https://jonmuirmortgages.ca

🌎 https://g.page/r/CXZmhubK7M5xEAE

Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.

License #: 10145

92 Caplan Ave #609, Barrie, ON L4N 9J2

Canadian Home Sales Surprisingly Strong in December

Brisk Wage Gains in December Will Keep The BoC Watchful

Today’s StatsCanada Labour Force Survey for December was a mixed bag and far more robust than the weak headline figure suggests. Total employment in Canada barely budged, rising by a mere 100 jobs in the final month of last year. However, the labour force participation rate fell, leaving the unemployment rate at 5.8%. Most economists had been expecting considerably more robust job growth and a rising unemployment rate.

Brisk Wage Gains in December Will Keep The BoC Watchful

Canada has one of the world’s fastest-growing populations owing to high immigration levels. However, employment growth has been slower than labour force growth in recent months.

The employment rate–the proportion of the working-age population with jobs–trended downward in 2023 among core-aged men and women (aged 25 to 54).

The participation rate—the number of employed and unemployed people as a percentage of the population aged 15 and older—fell in December (-0.2 percentage points) to 65.4%. This was down from a recent peak of 65.7% in June. Most of the decline from June to December was attributable to a drop in the youth participation rate, which decreased 2.1 percentage points to 63.5% over the period. On a year-over-year basis, the labour force participation rate fell 3.3 percentage points to 85.4% among youth not attending school. At the same time, it declined 1.0 percentage points to 46.4% among youth who were students (not seasonally adjusted).

Brisk Wage Gains in December Will Keep The BoC Watchful

The participation rate held steady among those in the core-aged group (88.7%) and people aged 55 years and older (36.9%), compared with June 2023 and December 2022.

Total hours worked rose 0.4% month-over-month in December and 1.7% from a year earlier. That followed a 0.7% month-over-month drop in November.

Employment in professional, scientific and technical services increased by 46,000 (+2.4%) in December, following little change in the three previous months. This was the second monthly increase in the industry in 2023, the first having been a rise of 52,000 in August. On a year-over-year basis, employment in this industry was up by 78,000 (+4.2%) in December.

Following four months of little change, employment in health care and social assistance rose by 16,000 (+0.6%) in December, building on increases in June (+21,000) and July (+25,000). On a year-over-year basis, health care and social assistance employment increased by 124,000 (+4.8%) in December. According to the most recent data from the Job Vacancy and Wage Survey, the job vacancy rate in healthcare and social assistance was 5.3% in October 2023, down from a peak of 6.3% in April but still the highest rate across all sectors.

Brisk Wage Gains in December Will Keep The BoC Watchful

In December, employment fell in wholesale and retail trade (-21,000; -0.7%) for a third consecutive month. From August to December, work in the industry decreased by 80,000 (-2.7%). This followed gains from December 2022 to August 2023, when employment increased by 108,000 (+3.7%).

Employment rose in British Columbia (+18,000; +0.6%), Nova Scotia (+6,300; +1.3%), Saskatchewan (+4,800; +0.8%), and Newfoundland and Labrador (+2,400; +1.0%) in December, while it declined in Ontario (-48,000; -0.6%). Employment in other provinces was primarily unchanged.

The most concerning thing for the Bank of Canada was the acceleration in wage inflation to 5.4% y/y last month, compared to 4.8% in the prior two months. With Canadian productivity falling, this is particularly troublesome for the overall inflation outlook. For this reason, the Bank of Canada will continue to be cautious.

Bottom Line

The next Bank of Canada confab is on January 24, before which we will see the December inflation data on January 16. Given the mixed labour force survey, particularly the wage spike, the Bank of Canada will remain cautious. They will wait until inflation is sustained meaningfully before 3% before cutting the overnight policy rate for the first time this cycle.

Brisk Wage Gains in December Will Keep The BoC Watchful

Questions? Comments? Reach out:

📲 705-606-2727

📧 jmuir@dominionlending.ca; jon@jonmuirmortgages.ca

💻 https://jonmuirmortgages.ca

🌎 https://g.page/r/CXZmhubK7M5xEAE

Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.

License #: 10145

92 Caplan Ave #609, Barrie, ON L4N 9J2

Brisk Wage Gains in December Will Keep The BoC Watchful