Intelligent Investment
Mixed Signals
Canada Monthly Mortgage Commentary
May 30, 2023 2 Minute Read
The drama surrounding the U.S. debt ceiling negotiations drove headlines this month and the threat of downgrades from U.S. rating agencies sent bond yields higher. A deal between the White House and Speaker of the House appears to have been reached although it still requires ratification from a divided Congress and Senate. The winds of good news have reversed some of the recent climb in bond yields, however, debt markets remain susceptible to any further disruptions that may arise before the revised deadline of June 5th.
As attention starts to shift back to the underlying economic fundamentals, recent indicators have presented mixed signals that cloud the outlook on interest rates over the next few months. GDP growth, while stronger than expected in Q1 2023, is still projected to slow over the coming months with the wildfires providing an additional drag as it shuts down some of Canada’s oil production. Meanwhile, employment continues to hold strong with the unemployment rate steadfastly hovering near its record low. Inflation remained sticky, reversing direction and rising ever so slightly in April.
The Bank of Canada has always maintained that the current pause on interest rate hikes is conditional on the economy progressing as planned. With this recent pivot in the direction of inflation, it presents a potential cause for concern that the central bank will need to consider. In the meantime, speculation for interest rate cuts towards the end of the year have now completely reversed. Instead, another 25 bps increase is being fully priced in for September with a high probability that it could happen as early as July. Over the longer term, most economists expect interest rates to decrease in 2024. However, the Bank of Canada has warned that interest rates will likely not be returning to the ultra-low levels seen over most of the last 15 years.
Economic Highlights:
- Employment grew for the eight consecutive month in April 2023 by 41,400 jobs and the unemployment rate holds at 5.0%.
- Inflation accelerated for the first time since June 2022, rising slightly to 4.4% in April 2023.
- Retail sales fell by 1.4% in March 2023 with preliminary estimates of a slight rebound of 0.2% in April 2023.
Viewpoints:
- Biden, McCarthy Voice Confidence Debt Deal Will Pass in Time
- Inflation ticks higher in April, testing Bank of Canada rate pause
- Canadians should not expect BoC to return to low rates, Macklem says
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