20 Oct

Canadian Inflation Rises Once Again – October 20 2021

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Posted by: Matthew J. Charlton

OCTOBER 20 2021

Prices are Rising Everywhere – Transitory Can Last A Long Time

Today’s release of the September Consumer Price Index (CPI) for Canada showed year-over-year (y/y) inflation rising from 4.1% in August to 4.4%, its highest level since February 2003. Excluding gasoline, the CPI rose 3.5% y/y last month.

The monthly CPI rose 0.2% in September, at the same pace as in the prior month. Month-over-month CPI growth has been positive for nine consecutive months.

Today’s inflation is a global phenomenon–prices are rising everywhere, primarily due to the interplay between global supply disruptions and extreme weather conditions. Inflation in the US is the highest in the G7 (see chart below). The economy there rebounded earlier than elsewhere in the wake of easier Covid restrictions and more significant markups.

Central banks generally agree that the surge in inflation above the 2% target levels is transitory, but all now recognize that transitory can last a long time. Bank of Canada Governor Tiff Macklem acknowledged that supply chain disruptions are “dragging on” and said last week high inflation readings could “take a little longer to come back down.”

Prices rose y/y in every major category in September, with transportation prices (+9.1%) contributing the most to the all-items increase. Higher shelter (+4.8%) and food prices (+3.9%) also contributed to the growth in the all-items CPI for September.

Prices at the gas pump rose 32.8% compared with September last year. The contributors to the year-over-year gain include lower price levels in 2020 and reduced crude output by major oil-producing countries compared with pre-pandemic levels.

Gasoline prices fell 0.1% month over month in September, as uncertainty about global oil demand continued following the spread of the COVID-19 Delta variant (see charts below).

Bottom Line

Today’s CPI release was the last significant economic indicator before the Bank of Canada meeting next Wednesday, October 27. While no one expects the Bank of Canada to hike overnight rates next week, market-driven interest rates are up sharply (see charts below). Fixed mortgage rates are edging higher with the rise in 5-year Government of Canada bond yields. The right-hand chart below shows the yield curve today compared to one year ago. The curve is hinged at the steady 25 basis point overnight rate set by the BoC, but the chart shows that the yield curve has steepened sharply with the rise in market-determined longer-term interest rates.

Moreover, several market pundits on Bay Street call for the Bank of Canada to hike the overnight rate sooner than the Bank’s guidance suggests–the second half of next year. Traders are now betting that the Bank will begin to hike rates early next year. The overnight swaps market is currently pricing in three hikes in Canada by the end of 2022, which would bring the policy rate to 1.0%. Remember, they can be wrong. Given the global nature of the inflation pressures, it’s hard to imagine what tighter monetary policy in Canada could do to reduce these price pressures. The only thing it would accomplish is to slow economic activity in Canada vis-a-vis the rest of the world, particularly if the US Federal Reserve sticks to its plan to wait until 2023 to start hiking rates.

It is expected that the Bank will taper its bond-buying program once again to $1 billion, from the current pace of $2 billion.

The Bank will release its economic forecast next week in the Monetary Policy Report. It will need to raise Q3 inflation to 4.1% from its prior forecast of 3.9%.

 

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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8 Oct

Great News On The Canadian Job Front – October 8 2021

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Posted by: Matthew J. Charlton

OCTOBER 8 2021

Blockbuster September Jobs Report–Further Fuel For Rising Interest Rates

Statistics Canada released the September Labour Force Survey this morning, providing some unmitigated good news on the jobs front. Employment rose by 157,000 (+0.8%) in September, the fourth consecutive monthly increase. The unemployment rate fell by 0.2 percentage points to 6.9%.

Employment gains in September were concentrated in full-time work and among people in the core working-age group of 25 to 54. Increases were spread across multiple industries and provinces.

Employment gains in the month were split between the public-sector (+78,000; +1.9%) and the private-sector (+98,000; +0.8%).

Employment increased in six provinces in September: Ontario, Quebec, Alberta, Manitoba, New Brunswick and Saskatchewan.

Service-sector increases (+142,000) were led by public administration (+37,000), information, culture and recreation (+33,000) and professional, scientific and technical services (+30,000).

Employment in accommodation and food services fell for the first time in five months (-27,000).

While employment in manufacturing (+22,000) and natural resources (+6,600) increased, there was little overall change in the goods-producing sector.

The gains in September brought employment back to the same level as in February 2020, just before the onset of the pandemic. However, the employment rate—that is, the proportion of the population aged 15 and older employed—was 60.9% in September, 0.9 percentage points lower than in February 2020, due to population growth of 1.4% over the past 19 months.

The number of employed people working less than half their usual hours was little changed in September and remained 218,000 higher (+26.8%) than in February 2020. Total hours worked were up 1.1% in September but were 1.5% below their pre-pandemic level.

Among 15-to-69-year-olds who worked at least half their usual hours, the proportion working from home was little changed in September at 23.8%. The ratio who worked from home was lowest in Saskatchewan (12.3%) and Newfoundland and Labrador (12.8%), and highest in Ontario (28.7%). Overall, at the national level, the proportion of workers who worked from home was higher in urban areas (25.2%) than in rural areas (15.9%).

In September 2021, 4.1 million Canadians who worked at least half their usual hours worked from home, similar to the level recorded in September 2020.

The unemployment rate declined for the fourth consecutive month in September, falling 0.2 percentage points to 6.9%, the lowest rate since the onset of the pandemic. The unemployment rate peaked at 13.7% in May 2020 and has trended downward since, with some short-term increases during the late fall of 2020 and spring of 2021, coinciding with the tightening of public health restrictions. In the months leading up to the pandemic, the unemployment rate had hovered around historic lows and was 5.7% in February 2020.

The adjusted unemployment rate—which includes those who wanted a job but did not look for one—was 8.9% in September, down 0.2 percentage points from one month earlier.

Long-term unemployment—the number of people continuously unemployed for 27 weeks or more—was little changed in September. There were 389,000 long-term unemployed, more than double the number in February 2020.

The ability of the long-term unemployed to transition to employment may be influenced by several factors, including their level of education and current labour market conditions. For example, those with no post-secondary education face a labour market where employment in occupations not requiring post-secondary education was 287,000 lower in September 2021 than in September 2019 (not seasonally adjusted).

Bottom Line

The Bank of Canada has repeatedly suggested that it would not begin to tighten monetary policy until the economy returned to full capacity utilization, which they estimate will not be until at least the second half of next year. Employment will need to surpass pre-pandemic levels before complete recovery is declared because the population had grown since the start of the crisis 19 months ago.

Substantial job losses remain in the hardest-hit sectors. The chart below shows the employment change in percentage terms by sector compared with February 2020.

Sectors where remote work has been widespread–such as professional, scientific and technical services, public administration, finance, insurance and real estate–have seen a net gain in employment. However, in high-touch sectors that were deemed nonessential, the jobs recovery has been far more constrained. This is especially true in agriculture, accommodation and food services, and recreation. Ironically, these sectors have high job vacancy rates as many formerly employed here are reluctant to return. Enhanced benefits and compensation in these sectors will help.

Just this week, the BoC Governor Tiff Macklem reiterated that widespread inflation pressures are likely to remain at least until the end of this year. Most are reflective of global supply chain disruptions as well as extreme weather events. Just how long these will last is uncertain, but tighter monetary policy would have little impact on this type of inflation.

Nevertheless, bond markets have sold off worldwide in response to inflation fears and the annual US debt-ceiling antics. The final chart below shows the steepening of the Canadian yield curve since one year ago. The 5-year bond yield has risen sharply over that period, from 0.378% to a current level today of 1.205%. It is no surprise that 5-year fixed mortgage rates are rising. 

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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15 Sep

Insufficient Housing Supply Boosted Home Prices Again In August – September 15 2021

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Posted by: Matthew J. Charlton

SEPTEMBER 15 2021

Home Prices Still Rising As Falling Sales Reflect Insufficient Supply

Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell a slight 0.5% nationally from July to August 2021–the fifth consecutive monthly decline. Over the same period, the number of newly listed properties edged up 0.8%, and the MLS Home Price Index rose 0.9% m/m bringing the year-over-year (y/y) rise to 21.3%. Transactions appear to be stabilizing at a more sustainable, but still strong level (see chart below).

Small declines in the GTA and Montreal were offset by gains in the Fraser Valley, Quebec City and Edmonton.

The actual (not seasonally adjusted) number of transactions in August 2021 was down 14% on a year-over-year basis from the record set for that month last August. That said, it was still the second-best month of August in history.

New Listings

The number of newly listed homes ticked 1.2% higher in August compared to July. As with sales activity, it was a fairly even split between markets that saw declines and gains. New supply declines in the GTA and Ottawa were offset by gains in Vancouver and Montreal among bigger Canadian markets.

With both sales and new listings relatively unchanged in August, the sales-to-new listings ratio remained a tight 72.4% compared to 73.6% in July. The long-term average for the national sales-to-new listings ratio is 54.7%.

Based on a comparison of sales-to-new listings ratio with long-term averages, a small majority of local markets remain in seller’s market territory. The remainder are in balanced territory.

There were 2.2 months of inventory on a national basis at the end of August 2021, down a bit from 2.3 months in July. This is extremely low – still indicative of a strong seller’s market at the national level and most local markets. The long-term average for this measure is more than twice where it stands today. It was also the first time since March that this measure of market balance tightened up.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.9% month-over-month in August 2021. In line with tighter market conditions, this was the first acceleration in month-over-month price growth since February. While the trend of re-accelerating prices was first observed earlier this summer in Ontario, the reversal at the national level in August was less of a regional story and more of a critical mass story. Synchronous trends across the country have been the defining feature of the housing story since COVID-19 first hit, and that still appears to be the case.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 21.3% on a year-over-year basis in August.

Looking across the country, year-over-year price growth is averaging around 20% in B.C., though it is lower in Vancouver, a bit lower in Victoria, and higher in other parts of the province. Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while gains were a little over 10% in Manitoba.

Ontario saw year-over-year price growth still over 20% in August. However, as with B.C. big, medium and smaller city trends, gains are notably lower in the GTA, around the provincial average in Oakville-Milton, Hamilton-Burlington and Ottawa, and considerably higher in most smaller markets in the province.

The opposite is true in Quebec, where Greater Montreal’s year-over-year price growth, at a little over 20%, is almost double that of Quebec City. Price growth is running a little above 30% in New Brunswick (higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is in the 10% range on a year-over-year basis (a bit lower in St. John’s).

Bottom Line

Local housing markets are cooling off as prospective buyers contend with a dearth of homes for sale. Though increasing vaccination rates have begun to bring a return to normal life in Canada, that’s left the country to contend with one of the developed world’s most severe housing shortages and little prospect of much new supply becoming available soon despite all of the election promises. As net new immigration resumes, this excess demand in housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal levels. Federal election promises do not address these issues.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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15 Sep

Canadian Inflation Pressures Mount in August, Even As They Eased In The US – September 15 2021

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Posted by: Matthew J. Charlton

SEPTEMBER 15 2021

Annual Inflation In August Rises to 4.1% in Canada–But Are We Close To The Peak?

Today’s release of the August Consumer Price Index (CPI) for Canada posted another uptick in the year-over-year (y/y) inflation rate, but hidden in the details was some support for the Bank of Canada’s position that the spike in inflation is transitory. The Bank has long suggested that the rise in prices will prove to be the result of base effects (y/y comparisons that are biased upward by the temporary decline in prices one year ago), supply disruptions, and the surge in pent-up demand accompanying the reopening of the global economy.

This morning’s Stats Canada release showed that consumer price inflation surged to a 4.1% y/y pace last month, above the 3.7% pace recorded in June, and the 3.1% pace in May. This is now the fifth consecutive month in which inflation is above the 1%-to-3% target band of the Bank of Canada.

The good news, however, is that the monthly rise in prices slowed on a (seasonally adjusted basis) in August to 0.4% compared to the 0.6% rise in July. As well, core measures of inflation preferred by the Bank of Canada, which exclude food and energy, are considerably lower than the all-items measures of the CPI. All three of the BoC’s core inflation measures rose on a y/y basis last month to an average level of 2.6% vs. the all-items level of 4.1%.

The major contributors to the surge in inflation didn’t change in August. Gasoline prices rose a whopping 32.5% y/y, owing to production cuts and disruptions in the wake of Hurricane Ida. This more than offset the decline in demand due to the rise in the Delta variant, causing a sharp slowdown in China and other hard-hit regions. The homeowners’ replacement cost index, related to the price of new and existing homes, rose to 14.3% in August–the largest annual increase since September 1987. Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, rose 14.3% year over year in August. The easing of travel restrictions boosted demand for airfares and hotel accommodation when labour shortages and rising energy costs pressed these industries. Meat prices have also surged in the past year as restaurant demand spiked. Auto sector prices continued to rise sharply as the inventories of new vehicles, disrupted by the chip shortage, hit new record lows.

Bottom Line

As the first chart below shows, the US has posted the highest level of inflation in the G-7, as the economic rebound there has outpaced that of its counterparts where Covid restrictions were more pervasive. Yet, yesterday’s release of the US August CPI report showed a marked slowdown in inflation pressure, leading some to suggest that the transitory view of inflation has been validated.

One thing to watch, however, is wage rates. Job vacancies and labour shortages have pushed up wages in some sectors, especially in the hardest-hit low-wage hospitality and leisure sectors, including food services and accommodation. If price pressures become validated by enough wage inflation, we run the risk of inflation becoming embedded. Wage-price spiralling has not been a factor since the 1970s when labour unions were much stronger and labour had much more pricing power.

Financial markets appear to be sanguine about the prospect for inflation-induced rate hikes in the near term. Bond yields remain historically low. Next week, we will hear more from the Fed on this subject as the policy-making group releases its report on Wednesday, September 22.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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10 Sep

Good News on the Canadian Jobs Front – September 10 2021

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Posted by: Matthew J. Charlton

September 10 2021

August Employment Report Showed Continuing Recovery

This morning, Statistics Canada provided us with some much-needed good news on the economic front following last week’s surprisingly dismal Q2 GDP report. Canada’s labour market continued its recovery in August, especially in the hardest-hit food services and accommodation sectors. The August Labour Force Survey (LFS) data reflect conditions during the week of August 15 to 21. By then, most regions of Canada had lifted many of the Covid-related restrictions. However, there were capacity restrictions in such indoor locations as restaurants, gyms, retail stores and entertainment venues. Also, for the first time since March 2020, border restrictions were lifted for fully vaccinated non-essential travellers from the US.

However, the reopening of the Canadian economy has been creaky, owing to supply constraints and difficulty in filling job vacancies in sectors that require high-contact interfaces, especially with the concern regarding a fourth wave of the delta variant. Nevertheless, today’s LFS indicated that employment grew last month by 90,200, the third consecutive monthly gain, further closing the pandemic gap. Employment is now within 156,000 (-0.8%) of its February level, the closest since the onset of the pandemic. Moreover, most of the net new jobs were in full-time work. Increases were mainly in the service sector, led by accommodation and food services.

The jobless rate fell from 7.5% in July to 7.1% in August. The unemployment rate peaked at 13.7% in May 2020 and has trended downward since, despite some short-term increases during the fall of 2020 and spring of 2021. In the months leading up to the pandemic, the unemployment rate had hovered around historic lows and was 5.7% in February 2020.

The adjusted unemployment rate—which includes discouraged workers–those who wanted a job but did not look for one—was 9.1% in August, down 0.4 percentage points from one month earlier.

Employment increased in Ontario, Alberta, Saskatchewan and Nova Scotia in August. All other provinces recorded little or no change. For the third consecutive month, British Columbia was the lone province with employment above its pre-pandemic level. Compared with February 2020, the employment gap was largest in Prince Edward Island (-3.4%) and New Brunswick (-2.7%). The table below shows the jobless rates by province.

Bottom Line

The Bank of Canada this week once again suggested that it would not begin to tighten monetary policy until the economy returned to full capacity utilization, which they estimate will not be until at least the second half of next year. Employment will need to surpass pre-pandemic levels before complete recovery is declared because the population had grown since the start of the crisis 18 months ago.

Although August was another solid month for the jobs market, there is a wide disparity across sectors of the job market in the degree to which they have recovered from the effects of the pandemic. The table below shows the employment change in percentage terms by sector compared with February 2020.

Sectors where remote work has been widespread–such as professional, scientific and technical services, public administration, finance, insurance and real estate–have seen a net gain in employment. However, in high-touch sectors that were deemed nonessential, the jobs recovery has been far more constrained. This is especially true in agriculture, accommodation and food services, and recreation.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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8 Sep

Bank of Canada Stands Pat – September 8 2021

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Posted by: Matthew J. Charlton

September 8 2021

Bank of Canada Responds To Weak Q2 Economy–Holding Policy Steady

As we await the quarterly economic forecast in next month’s Monetary Policy Report, the Bank of Canada acknowledged that the Q2 GDP report, released last week, caught them off-guard. In today’s policy statement, the Governing Council of the Bank said, “In Canada, GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Bank’s July Monetary Policy Report (MPR). This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector. Housing market activity pulled back from recent high levels, largely as expected. Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery” (see chart below).

Bank Says CPI Inflation Boosted By Temporary Factors–Maybe

Financial conditions remain highly accommodative around the globe. And the Bank today continued to assert that the rise in inflation above 3% is expected, “boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen but by less than the CPI.”

The Governing Council again stated the Canadian economy still has considerable excess capacity, and the recovery continues to require extraordinary monetary policy support. “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” Concerning forward guidance, the Bank said, “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022.” This seems to be a placeholder statement, allowing the Bank to reassess the outlook next month, possibly delaying the guidance if the economy continues to perform below their July projection.

Similarly, the Bank maintains its Quantitative Easing program at the current pace of purchasing $2 billion per week of Government of Canada (GoC) bonds, keeping interest rates low across the yield curve. “Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective”.

Bottom Line

Only time will tell if the Bank of Canada is correct in believing that inflation pressures are temporary. Financial markets will remain sensitive to incoming data, but bond markets seem willing to accept their view for now. The 5-year GoC bond yield has edged down from its recent peak of 1.0% posted on June 28th to a current level of .80%. In contrast, the Canadian dollar had weakened significantly since late June when it was over US$0.825 to US$0.787 this morning. Clearly, the Bank of Canada is committed to keeping Canadian interest rates low for the foreseeable future.

The next Bank of Canada policy decision date is October 27th. Stay tuned for the Canadian employment report this Friday.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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31 Aug

Canada’s Economy Unexpectedly Contracted in Q2 – August 31 2021

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Posted by: Matthew J. Charlton

AUGUST 31 2021

Housing Dampened Economy in Q2

This morning’s Stats Canada release showed that the economy unexpectedly contracted in the second quarter by 1.1%, down from the revised 5.5% gain in the first three months of the year. The Canadian dollar dipped on the news to $.7921 as questions of resiliency in the face of the delta variant mount. Economists in a Bloomberg survey were anticipating a 2.5% expansion. Adding to the disappointment, economic growth fell a further 0.4% in July, according to a preliminary estimate.

The weak GDP data reduces the odds of the Bank of Canada tapering their bond purchases at their policy meeting on September 8th. It also highlights the output gap–the degree to which the economy remains below full economic capacity–remains a big issue. The Bank has forecast the gap to close by the middle of 2022. While that remains uncertain, we continue to expect growth to rebound in the third quarter.

Increases in investment in business inventories, government final consumption expenditures, business investment in machinery and equipment, and investment in new home construction and renovation were not sufficient to offset the declines in exports (-4.0%) and homeownership transfer costs (-17.7%), which include all costs associated with the transfer of a residential asset from one owner to another.

Housing investment reshapes the economy

Since the third quarter of 2020, housing investment has emerged as the predominant contributor to economic activities and capital stock—with residential capital stock surpassing non-residential capital stock. Moreover, the average housing investment for the previous four quarters was 17% higher than the average over the last five years.

Housing Investment

Both new construction and renovations—the components of residential capital stock—have shown sustained growth since the third quarter of 2020. Because of the ability to work from home, savings from less travel and reduced participation in other activities, low mortgage rates and increases in home equity lines of credit, spending has continued to increase on new houses (+3.2%) and home renovations (+2.4%).After taking on $62.3 billion of residential mortgage debt in the last half of 2020, households added $84.2 billion more residential housing debt in the first half of 2021.

Supply chain disruptions continue to impact motor vehicles

Shortages of microchips and other inputs curtailed trade in motor vehicles and domestic consumption. Household purchases of new passenger cars (-7.2%) and trucks, vans and sport utility vehicles (-1.6%) decreased, while business investment in medium and heavy trucks, buses and other motor vehicles fell 34.2%. Longer plant shutdowns because of international supply chain disruptions have constrained imports of parts and led to significant decreases in exports. Low production of motor vehicles and parts resulted in an 18.9% drop in exports of passenger cars and light trucks and an 8.7% decline in tires, motor vehicle engines and parts exports. Inventories had another quarter of significant drawdowns in response to supply needs.

Double-digit household savings rate continues

The modest rise in household spending (+0.7%, in nominal terms) was outpaced by growth in disposable income (+2.2%), leaving households with more net savings than in the previous quarter. Household incomes were primarily bolstered by employees’ rising compensation and increasing transfers received from the government, which were partially offset by a 2.8% rise in personal income taxes.

Consequently, the savings rate reached 14.2%—the fifth consecutive quarter with a double-digit savings rate—as various pandemic-related restrictions and uncertainty continued to limit the scope of household consumption. The household savings rate is aggregated across all income brackets; in general, savings rates are greater in higher income brackets.

Bottom Line

Today’s release is, in some respects, ‘ancient history.’ It is still widely expected that the economy will rebound in the third quarter. With the surge in household savings and continued growth in personal disposable income, pent-up demand is likely to boost consumption for the remainder of this year. All eyes will be on the August employment report released Friday, September 10th. The Bank of Canada will likely continue to proceed cautiously. Another tapering of the bond-buying program will come under scrutiny, and forward guidance will continue to suggest no rate hikes until the second half of next year.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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18 Aug

Canadian Inflation Hits Highest Reading in Two Decades – August 18 2021

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Posted by: Matthew J. Charlton

AUGUST 18 2021

Annual Inflation Hits 3.7% in Canada–A New Election Issue

This morning’s Stats Canada release showed that the July CPI surged to a 3.7% year-over-year pace, well above the 3.1% pace recorded in June. This is now the fourth consecutive month in which inflation is above the1% to 3% target band of the Bank of Canada. And given the flash election, opposition parties are already making hay. “The numbers released today make it clear that under Justin Trudeau, Canadians are experiencing a cost of living crisis,” Conservative Leader Erin O’Toole said in a statement. He went on to suggest that the Liberal government is stoking inflation with its debt-financed government spending programs.

While it is true that deficit spending has surged during the pandemic, the same is also true for nearly every country in the world. Moreover, accelerating inflation is a global phenomenon and most central banks believe it to be temporary. Certainly, Tiff Macklem is firmly of that view, as is the Fed Chair Jerome Powell.

Supply disruptions and base effects have largely caused the rise in inflation. Semiconductor production, for example, slumped during the 2020 lockdowns, and then couldn’t be ramped up fast enough when demand for cars and electronics returned, leading the prices of new and used autos to rise at a record pace. Prices for airfares and hotel stays also jumped. Companies found themselves short of workers as they reopened, leading some to offer bonuses or boost wages and subsequently raise prices for consumers.

Central bankers believe that the price pressures are transitory, representing temporary shocks associated with the reopening of the economy.  Lumber prices, for example, spiked when demand for new homes returned and have since normalized (see the chart below). To be sure, above-target inflation has heightened uncertainty. The central banks do not want to choke off the economic recovery through misplaced inflation fears. Many Canadians remain out of work, and long-term unemployment is still very high. Moreover, the recent surge of the delta variant proves that the recovery is uncertain.

Governor Tiff Macklem, whose latest forecasts show inflation creeping up to 3.9% in the third quarter before easing at the end of the year, has warned against overreacting to the  “temporary” spike.

Shelter Prices Rising Fastest

Prices rose faster year over year in six of the eight major components of Canadian inflation in July, with shelter prices contributing the most to the all-items increase. Conversely, prices for clothing and footwear and alcoholic beverages, tobacco products and recreational cannabis slowed on a year-over-year basis in July compared with June.

Year over year, gasoline prices rose less in July (+30.9%) than in June (+32.0%). A base-year effect continued to impact the gasoline index, as prices in July 2020 increased 4.4% on a month-over-month basis when many businesses and services reopened.

In July 2021, gasoline prices increased 3.5% month over month, as oil production by OPEC+ (countries from the Organization of Petroleum Exporting Countries Plus) remained below pre-pandemic levels though global demand increased.

The homeowners’ replacement cost index, which is related to the price of new homes, continued to trend upward, rising 13.8% year over year in July, the largest yearly increase since October 1987.

Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, was up 13.4% year over year in July.

Year-over-year price growth for goods rose at a faster pace in July (+5.0%) than in June (+4.5%), with durable goods (+5.0%) accelerating the most. The purchase of passenger vehicles index contributed the most to the increase, rising 5.5% year over year in July. The gain was partially attributable to the global shortage of semiconductor chips.

Prices for upholstered furniture rose 13.4% year over year in July, largely due to lower supply and higher input costs.

Core Measures

The average of core inflation readings, a better gauge of underlying price pressures, rose to 2.47% in July, the highest since 2009.

Monthly, prices rose 0.6% versus a consensus estimate of 0.3%. Rising costs to own a home are one of the biggest contributors to the elevated inflation rate, following a surge in real-estate prices over the past year.

Bottom Line

Today’s inflation data likely did little to alter the Bank of Canada’s view that above-target inflation will be a transitory phenomenon. They are already ahead of most central banks in tapering the stimulus coming from quantitative easing. They do not expect to start increasing interest rates until the labour markets have returned to full employment, which they judge to occur in the second half of 2022. In the meantime, pent-up demand in Canada is huge as people tap into their involuntary savings during the lockdown to pay higher prices at restaurants, grocery stores and gas stations. Financial markets appear to be sanguine about the prospect for rate hikes, as bond yields have been trading in a very narrow range.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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1 Aug

8 Party Tips, Alternative Financing & Canadian Home Sales Slow for Fourth Consecutive Month – August 2021

Monthly Newsletter

Posted by: Matthew J. Charlton

AUGUST 2021

Hello!

In this issue:

  • 8 Steps to the Perfect Summer Party!
  • Alternative Financing and What You Should Know
  • Economic Insights with Dr. Sherry Cooper

8 Steps to the Perfect Summer Party!

There’s something magical about summer and no matter where you live in Canada, backyard BBQ season is the perfect opportunity to spend a little time with family and friends. Nothing says party vibes more than food on the grill and summer drinks flowing. Whether you live in a country house, a suburban townhome or a city condo, gather your crew and these few essentials:

  1. Good Food: To have the most success with your backyard party, you must pre-plan! Take a few hours the night before and meal prep. This includes planning an easy menu with bite size snacks, easy salads and flavour packed options to keep your guests satisfied. And don’t forget to make sure the barbecue has plenty of propane!
  2. Cold Drinks: Depending on your guests, you can either have a cooler full of pop and water. If it is a more adult affair, add a little alcohol to the mix! Boozy lemonades or spiked ice teas are pretty easy to make and very fun to drink. Craft beer, ciders or chilled white wine are other fun options for a hot day!
  3. Did Someone Say Dessert? If you’re planning an all-day affair, you might want to keep some quick and easy desserts or snacks on hand for the evening. Homemade ice cream bars, fruit kabobs or a veggie platter, or even a couple bags of kettle chips can make great options for any peckish guests. And as the sun sets, you can break out the marshmallows and get your S’mores on in front of the fire!
  4. Decor & Ambiance: For suburban hosts, your backyard party would include a sitting area, maybe umbrellas to offer some shady spots and some water fun! But, if you find yourself in smaller city digs, that doesn’t mean your party still can’t be one for the ages. Consider throw pillows, paper patio lanterns and plastic glassware which are all affordable and easy to find to help create that perfect party space!
  5. Choosing Your Tunes: While music can set the ambiance, you need to know your guests. It’s not easy to pick a playlist that will appease all ears, but streaming services like Spotify and Apple iTunes have plenty of mixed playlists that should do the trick. Unwind to some of my handpicked favourites here!
  6. Entertainment: Backyard games such as a bocce ball set, Frisbee and even a football can keep the fun and competition going for hours! If you’re looking for a more chill hang, consider setting up a card table or some board games for those who want to partake.
  7. For the Kids: If your party involves kids, you’ll want to keep the food simple and easy to eat with hands, so burgers, hot dogs, chips and some watermelon are the way to go. You’ll also want to keep them occupied with simple games or more active options such as a soccer ball, mini trampoline or a sprinkler to run through and keep them cool. When daylight starts to fade, you can set up a backyard movie or camp-out with some tents to settle the night down. It never hurts to tire the young ones out so the grownups can have some chill time for themselves!
  8. Other Considerations: Depending on the temperature and time of day for your party, you might want to remind guests to bring sunscreen, hats and/or bug spray to make sure their visit is as comfortable as possible!

Alternative Financing and What You Should Know

When conventional lenders (such as banks or credit unions) deny mortgage financing, it can be easy to feel discouraged. However, it is important to remember that there is always an alternative!

If you’re seeking a mortgage, but your credit score is damaged in some way and big institutions won’t lend you the money, you’ll find yourself in what’s commonly referred to in the industry as the “Alternative-A” or “B” lending space.

Much like the A Lender space (big banks, credit unions, etc.), there are various companies which operate in the B lending space. Alternative lenders cater to individuals who lack a strong credit history, or a guaranteed income (recent immigrants, or the self employed, for instance). As a result, these lenders generally have lower entry qualifications, which are offset by higher interest rates.

Why is alternative lending necessary? 

  • CRA arrears
  • Income issues such as non-traditional income as with self-employed borrowers
  • Credit issues such as low credit score, credit arrears, current mortgage or even bankruptcies
  • Unexpected liens on title
  • Foreclosure situations
  • Unique financing needs/opportunities

Beyond B-lenders are another alternative, which are known as Private or Unregulated lenders. These could just be individuals with money who are looking to invest. They are not regulated by any agency, and their rates and fees could be quite high.

These lenders are not required to stress test mortgage applicants, but many will abide by lower qualification rates. As a result, getting approved for a loan through an alternative or uninsured lender can be much easier than going through a traditional bank or credit union. Again, it is vital to pay close attention to the deal an unregulated lender offers. Lower qualification rates tend to come with baggage in the form of high interest rates or penalties.

Considerations for Alternative Mortgages Due to the “B” Lender space, it is important to take a good look at the conditions for these mortgage products to ensure that you won’t get trapped with rates you can’t afford.

Before considering an alternative mortgage, there are a few things you should ask yourself:

  1. What issue is keeping me from qualifying for a mortgage today?
  2. How long will it take me to correct this issue and qualify for a mortgage?
  3. How much do I currently have available as a down payment?
  4. Am I willing to wait until I can qualify for a regular mortgage, or do I want/need to get into a certain home today?

If you are someone who is ready to go ahead with an alternative mortgage due to a bruised credit score, or you don’t want to wait until you’re able to qualify with a traditional lender, these are five questions you should ask when reviewing any alternative mortgage product:

  1. How high is the interest rate?
  2. What is the penalty for missed mortgage payments? How are they calculated? What is the cost to get out of the mortgage altogether?
  3. Is there a prepayment privilege? For example, are you able to avoid penalties if you give the lender a higher mortgage payment once a month?
  4. What is the cost of each monthly mortgage payment?
  5. What does it look like when it comes to renewal?

When it comes to the alternative lending space, things can get a bit murky. If you are struggling to obtain an A-Lender mortgage, I would be happy to discuss your options with you and help you source an alternative. Get in touch!


Economic Insights with Dr. Sherry Cooper

The Slowdown In Canadian Housing Continued in July

Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell 3.5% nationally from June to July 2021–the fourth consecutive monthly decline. Over the same period, the number of newly listed properties dropped 8.8%, and the MLS Home Price Index rose 0.6% and was up 22.2% year-over-year.

While sales are now down a cumulative 28% from the March peak, Canadian housing markets are still historically quite active (see Chart below). In July, the decline in sales activity was not as widespread geographically as in prior months, although sales were down in roughly two-thirds of all local markets. Edmonton and Calgary led the slowdown, but these cities didn’t experience falling sales until recently. In Montreal, in contrast, where sales began to moderate at the start of the year, activity edged up in July.

The actual (not seasonally adjusted) number of transactions in July 2021 was down 15.2% on a year-over-year basis from the record for that month set last July. July 2021 sales nonetheless still marked the second-best month of July on record.

“While the moderation of sales activity continues to capture most of the headlines these days, it’s record-low inventories that should be our focus,” said Cliff Stevenson, Chair of CREA. Most markets are in sellers’ market territory.

New Listings

The number of newly listed homes dropped by 8.8% in July compared to June, with declines led by Canada’s largest cities – the GTA, Montreal, Vancouver and Calgary. Across the country, new supply was down in about three-quarters of all markets in July.

This was enough to noticeably tighten the sales-to-new listings ratio despite sales activity also slowing on the month. The national sales-to-new listings ratio was 74% in July 2021, up from 69.9% in June. The long-term average for the national sales-to-new listings ratio is 54.7%.

Based on a comparison of sales-to-new listings ratio with long-term averages, the tightening of market conditions in July tipped a small majority of local markets back into seller’s market territory, reversing the trend of more balanced markets seen in June.

Another piece of evidence that conditions may be starting to stabilize was the number of months of inventory. There were 2.3 months of inventory on a national basis at the end of July 2021, unchanged from June. This is extremely low – still indicative of a strong seller’s market at the national level and most local markets. The long-term average for this measure is twice where it stands today.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.6% month-over-month in July 2021, continuing the trend of decelerating month-over-month growth that began in March. That deceleration has yet to show up in any noticeable way on the East Coast, where property is relatively more affordable.

Additionally, a more recent point worth noting (and watching) just in the last month has seen prices for certain property types in certain Ontario markets look like they might be re-accelerating. This could be in line with a re-tightening of market conditions in some areas.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 22.2% on a year-over-year basis in July. While still a substantial gain, it was, as expected, down from the record 24.4% year-over-year increase in June. The reason the year-over-year comparison has started to fall is that we are now more than a year removed from when prices really took off last year, so last year’s price levels are now catching up with this year’s, even though prices are currently still rising from month to month.

Looking across the country, year-over-year price growth averages around 20% in B.C., though it is lower in Vancouver and higher in other parts of the province. Year-over-year price gains in the 10% range were recorded in Alberta and Saskatchewan, while gains are closer to 15% in Manitoba. Ontario sees an average year-over-year rate of price growth in the 30% range. However, as with B.C., gains are notably lower in the GTA and considerably higher in most other parts of the province. The opposite is true in Quebec, where Montreal is in the 25% range, and Quebec City is in the 15% range. Price growth is running a little above 30% in New Brunswick, while Newfoundland and Labrador is in the 10% range.

Bottom Line

Sales activity will continue to gradually cool over the next year, but it will take higher interest rates to soften the housing market in a meaningful way. Local housing markets are cooling off as prospective buyers contend with a dearth of houses for sale. Though increasing vaccination rates have begun to bring a return to normal life in Canada, that’s left the country to contend with one of the developed world’s most severe housing shortages and little prospect of much new supply becoming available soon.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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1 Jul

Changes to the stress test, Common first-time homeowner mistakes & Canadian Jobs Market – July 2021

Monthly Newsletter

Posted by: Matthew J. Charlton

JULY 2021

Hello!

In this issue:

  • The changes to the stress test rules put in place last month
  • All you need to know to avoid common first-time homeowner mistakes
  • Economic Insights with Dr. Sherry Cooper

Changes to the Stress Test and What You Need to Know

As you may have heard, the Bank of Canada recently changed the stress test rules as of June 1, 2021. With these changes, now both insured and uninsured mortgage borrowers will be subject to a stricter stress test when qualifying for their mortgage.

The new qualifying rate on uninsured mortgages – where the down payment is 20% or more – is now the contracted rate plus two percentage points or 5.25%, whichever is higher.

This means that any buyer whose down payment on a home is one-fifth of the purchase price or higher must show they can afford the mortgage payments if the interest rate was two percentage points higher than what the bank is offering, or the new five-year benchmark rate per the Bank of Canada.

Overall, the implementation of these tougher stress test rules will reduce buying power by roughly 4-5% for borrowers. To help illustrate  how this change affects you, consider the following scenario with $100,000 gross income:

The previous stress test at 4.79% would give this individual the ability to borrow $469,530 (based on good credit score with max GDS/TDS qualifications at 39/44%). Now, with the current scenario of 5.25% stress test rate, the they can now only borrow $448,880 (based on good credit score with max GDS/TDS at 39/44%). This is a difference of $20,650 which reduces your home options.

To ensure you are searching in the right price range and budgeting accordingly, it is important to consider this stress test change. If you are looking to purchase your first home or move, please don’t hesitate to contact me today for a better understanding of the rules and what you qualify for.


Avoid These First-Time Homebuyer Mistakes

As a first-time buyer, I am here to give you some tips on homebuyer mistakes to be on the lookout for so you can avoid them for the best experience possible!

Thinking You Don’t Need a Real Estate Agent
You might be able to find a house on your own, but there are still many aspects of buying real estate that can confuse a first-time buyer. Rely on your agent to negotiate offers, inspections, financing and other details. The money you would have saved on commission can be quickly gobbled up by a botched offer or overlooked repairs.

Going With The First Real Estate Agent You Find 
As much as not having a real estate agent can be a disadvantage, having the wrong one can also make the process more difficult. You don’t want to get halfway into house-hunting before realizing your real estate agent is the wrong fit for you. Ideally, you want to source an agent from a friend or family referral. However, if you are stuck or looking for more options, I’d be happy to introduce you to a Realtor partner that’s best suited for your specific search and location.

Getting Your Heart Set on a Home Without Doing Your Homework 
The house that’s love at first sight may not always be what it seems, so it is important to keep an open mind. If you jump in too fast you may be too quick to go over budget or you might overlook a potential pitfall. Taking the time for proper inspections, budget comparisons and long-term family planning can go a long way in ensuring your first home is the right home!

Committing to More Than You Can Afford 
This is one of the most common mistakes that first-time homebuyers can run into, but to ensure your future financial security it is imperative to truly consider your budget. You don’t want to sacrifice retirement savings, an emergency fund or potential holiday for mortgage payments. You need to stay nimble to life’s changes and overextending yourself could put your investments—including your house—on the line.

Fixating on the Lowest Interest Rate
A reasonable interest rate is important, but not at the expense of heavy restrictions and penalties. Make a solid long-term plan to pay off your mortgage and then find one that’s flexible enough to accommodate life changes, both planned and unexpected. I would be happy to discuss all of your mortgage options with you to ensure that you get the best overall mortgage product with a rate that suits YOU!

Choosing a Fixer-Upper Simply for the Cheaper Listing Price
That old character home may have loads of potential, but it is vital to be extra diligent during the inspection period. What will it really cost to get your home to where it needs to be? Negotiating a long due-diligence period will give you time to get estimates from contractors in case you need to back out.

Diving Into Renovations as Soon as You Buy
Whether or not you choose a fixer-upper or simply want to update some things in your new home, it is important not to rush into them. While renovations may increase the value of your home, overextending your credit to get upgrades done fast doesn’t always pay off. Take time to make a solid plan and the best financial decisions. Living in your home for a while before renovating will also help you plan the best functional changes to the layout.

Not Researching the Neighbourhood
It may be the house of your dreams, but annoying neighbours or a nearby industrial zone can be a rude awakening. Spend some time in the area before you make an offer and talk to local business owners and residents to determine the pros and cons of living there.


Economic Insights with Dr. Sherry Cooper

Canadian Jobs Market Rebounds in June As Lockdown Eases.

Canada’s Jobs Recovery Resumed in June As Lockdown Began to Ease
This morning, Statistics Canada released the June 2021 Labour Force Survey showing employment rose 230,700 (1.2%) in June, rebounding from a cumulative decline over the previous two months of 275,000. Total hours worked were little changed. The national unemployment rate fell 0.4 percentage points to 7.8%.

Jobs continue to swing back and forth as the various COVID waves drive lockdowns and reopenings. Hopefully, we’re in the last of the reopenings. Services accounted for all of the gains. Hospitality jobs were the biggest gainer, as expected, adding 101k positions, but they remain well below pre-virus levels. Restrictions are expected to continue easing through the summer, which should mean more solid gains over the next couple of months. Other sectors seeing a boost from the reopening were retail/wholesale (+78k), education (+26k) and health care (+20.5k). Goods sectors were down across the board, with losses concentrated in construction (-23k) and manufacturing (-12k).

Beyond the headline increase, one of the bigger stories in this report is the sharp 0.6 ppt rise in the participation rate to 65.2%. That’s the largest increase in a year and leaves the rate 3-4 ticks away from pre-COVID levels. Compare that to the U.S., where the participation rate is still nearly 2 ppts lower than in early 2020. The rise in the participation rate limited the decline in the jobless rate to 0.4 ppts to 7.8%, still some wood to chop there. The rising participation rate should alleviate some concerns about widespread labour shortages.The bulk of the gains were in pandemic-exposed sectors, like retail, food and accommodation, that got hit most by the new containment measures. Employment in accommodation and food services was up 101,000. The retail sector added 75,000 jobs.

Increasing vaccination rates and falling Covid-19 case counts have allowed the country to finally re-open restaurants, bars and retail stores after months of closures. Ontario began allowing patio dining earlier this month, and several cities in Quebec have further relaxed restrictions, allowing indoor dining for the first time this year.

With the June gains, Canada has recovered 2.65 million of the 3 million jobs lost at the height of the pandemic last year. The nation created 263,900 part-time jobs, with full-time employment down 33,200.Employment growth in June was entirely in part-time work and concentrated among youth aged 15 to 24, primarily young women. Increases were greatest in accommodation and food services and retail trade, consistent with the lifting or easing public health restrictions affecting these industries in late May and early June in many jurisdictions.

The number of employed people working less than half their usual hours fell by 276,000 (-19.3%) in June. Total hours worked were little changed and were 4.0% below their pre-pandemic level.

The employment increase in June was in part-time work, which rose by 264,000 (+8.0%) following combined losses of 132,000 over the previous two months. The overall level of part-time employment was essentially the same as in February 2020, before the COVID-19 pandemic. Increases in the month were driven by accommodation and food services and retail trade—two industries where part-time workers represent an above-average proportion of employment—and were concentrated among youth.

After falling by 143,000 over the previous two months, full-time work was little changed in June and was 336,000 (-2.2%) lower than its pre-pandemic level.

GAINS WERE DRIVEN BY PRIVATE-SECTOR EMPLOYEES, WHILE SELF-EMPLOYMENT DECLINES.
The number of private-sector employees rose by 251,000 (+2.1%) in June, following two monthly declines. As of June, the number of private-sector employees was 2.5% lower (-313,000) than in February 2020.

In the public sector, employment rose by 43,000 (+1.1%) in June, bringing it to 180,000 (+4.6%) above pre-pandemic levels. Employment in this sector has trended up following the initial wave of the pandemic, particularly driven by increases in health care and social assistance, public administration, and educational services.

The number of self-employed workers fell by 63,000 (-2.3%) in June and was down 7.2% (-207,000) compared with February 2020. Self-employment is a broad category that includes workers in various situations, including working owners of incorporated or unincorporated businesses and independent contractors. Compared with June 2019, declines in the number of self-employed were widespread across multiple industries and were concentrated among the self-employed with paid help.

THE EMPLOYMENT RATE REMAINS BELOW PRE-PANDEMIC LEVELS.
To fully understand current and emerging labour market trends, it is essential to consider employment change against the backdrop of population change, which totalled 1.1% (+334,000) between February 2020 and June 2021. To keep pace with this population growth and maintain a stable employment rate—that is, employment as a proportion of the population aged 15 and over—employment would have had to grow by 203,000. Instead, total employment was 340,000 lower in June than in February 2020, and the employment rate was 1.7 percentage points lower (60.1% compared with 61.8%).

NUMBER OF CANADIANS WHO WORKED FROM HOME DROPS BY NEARLY 400,000
Among Canadians who worked at least half their usual hours in June, the number who worked from home fell by nearly 400,000 to 4.7 million. For 2.6 million of these people, working from home represented an adaptation to the COVID-19 pandemic, as this was not their usual work location. At the same time, the number of people working at locations other than home rose by approximately 700,000 to 12.3 million.

Almost one-third (31.4%) of workers aged 25 to 54 and more than one-quarter (27.2%) of those aged 55 and older worked from home in June. Due to their concentration in industries where working from home is less feasible, such as accommodation and food services, a far smaller proportion of youth aged 15 to 24 (12.9%) did so.

Regionally, Ontario and Quebec led the way higher, though B.C. and Nova Scotia had solid increases as well. Interestingly, even with restrictions easing through most of the country, only five provinces reported job gains.

Bottom Line 

The jobs report is the last major piece of economic data before next week’s Bank of Canada policy decision, where it’s expected to continue paring back its stimulus efforts. The Bank of Canada is among the first from advanced economies to shift to a less expansionary policy, having already cut its purchases of Canadian government bonds to $3 billion weekly from a peak of $5 billion last year.

Analysts anticipate that will come down to C$2 billion per week at the July 14 meeting before eventually falling to a weekly pace of about C$1 billion by early next year. In addition to the bond tapering, the market has priced in at least one interest rate hike by this time next year.

Canada’s economy remains 340,000 jobs shy of pre-pandemic levels. The unemployment rate was below 6% before the pandemic.

With vaccination rates rising and restrictions easing, economists are predicting a strong rebound in the second half. According to a Bloomberg News survey of economists earlier this month, Canada’s expansion is seen accelerating to an annualized pace of 9.1% in the third quarter, with a 6% gain in the final three months of 2021. Consumer and business confidence regarding the outlook has recently hit record highs.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

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