Michael Watkins
December 22, 2023
Weekly Market Update
As we wind down before the Christmas break next week, it looks like Santa came a little early this year. Markets have been on a tear for the last month-and-a-half, pushing up portfolio values to close out 2023.
On the economic front, in a reminder of its “persistent” nature, inflation remained unchanged in November compared to October. The rate was higher than economists were expecting, suggesting that there could still be bumps in the road to challenge inflation’s potential path toward the Bank of Canada’s (BoC) 2% target. BoC Governor Tiff Macklem expects rates to approach this target by the end of 2024.
- Annual inflation for November was 3.1%, which matched the rate from October, according to Statistics Canada (StatsCan). The result came in above market expectations of 2.9%.
- Grocery price growth eased. Compared to November 2022, food prices climbed 4.7%, decelerating from the 5.4% increase in October.
- Mortgage interest costs played a major role in the stubborn level of inflation. If the cost of shelter is completely excluded from inflation data, the rate would be 1.9%. This highlights the impact of housing costs on Canada’s economy and consumers.
- Cell phone plan prices declined. In a separate report from StatsCan, deals on Black Friday led to a year-over-year decrease in plan costs. Plans purchased in November 2023 cost 22% less on average compared to plans from November 2022.
- Markets might need to adjust their long-term interest-rate expectations. Prior to the pandemic, the financial community enjoyed an era of low to ultra-low interest rates. Market commentators, including Macklem, have cautioned that these rates might not return.
Even though the latest inflation data might have missed expectations, economic conditions are expected to help moderate price increases. The stickiness of inflation in Canada supports the BoC’s more cautious tone compared to the US Federal Reserve Board. It seems that BoC policymakers are looking for inflationary pressures to continue to decrease into 2024 before joining the rate-cut conversation.
In other news, Statistics Canada (StatsCan) reported that retail sales in Canada grew in October as consumers proved their relative strength. Canadian consumers are benefiting from pent-up savings and a robust labour market, helping them brush aside concerns over tight financial conditions. However, the outlook for November does not appear promising.
- Retail sales in Canada grew by 0.7% in October, adding to the 0.5% increase posted in September. Back in August, retail sales had fallen. A Bloomberg survey of economists expected a 0.8% increase in October.
- October’s increase was driven by an increase in sales at motor vehicles and parts dealers. Canadians also spent money elsewhere. There was a robust increase in sales for furniture, clothing and health care products. Online sales also edged higher over the month.
- Conversely, sales at gasoline stations fell by 3.1% in October. Oil prices fell over the month, translating to lower prices at the pump for Canadians. Gasoline prices have been a major contributor to Canada’s higher inflation rate over the past few years. Headline inflation has eased this year in part due to falling energy prices.
- While October’s sales proved to be relatively strong, early November estimates are concerning. StatsCan estimated that there was no growth (0.0%) in retail sales over November. This might be a sign Canadian households are being hindered by high interest rates and elevated inflation.
Consumer spending is a key driver of Canada’s economy, which makes retail sales an important statistic as we seek information on the country's economic health. While many economists are expecting spending to slow and weaken the economy, the Bank of Canada is expected to reduce interest rates next year, which might help ease the burden on Canadian households and businesses.
Looking to the south, data released yesterday showed the US real estate market is under pressure. After a period of strong demand, which helped push prices up, the market has pulled back in 2023 amid high mortgage costs and already elevated prices. Canada’s real estate market has experienced largely the same trajectory.
- Mortgage applications in the US fell over the week ended December 15, marking their first decline in seven weeks. The week’s 1.5% drop was driven by a fall in applications for both home purchases and refinancings.
- Mortgage applications have risen higher in recent weeks amid a drop in mortgage rates. According to the Mortgage Bankers Association of America, the rate on a 30-year fixed-rate mortgage dropped to 6.83% over the week from 7.07% in the previous week.
- The mortgage rate hit a 2023 peak of 7.90% during the week of October 22. Mortgage rates in the US have fallen substantially over the past month on heightened expectations that the US Federal Reserve Board will begin cutting rates in 2024.
- While demand has shown signs of improving amid falling mortgage rates, home sales activity has been relatively muted. The real estate market has been hampered by low listings as people are staying put in their existing homes. Existing home sales edged higher in November, but the volume was close to levels not seen since 2010.
- We have seen much the same in Canada’s real estate market. The air has been let out of the post-COVID boom, which sent prices soaring higher. The Bank of Canada’s aggressive rate hikes lifted borrowing costs, subduing demand.
A lack of listings in both Canada and the US is weighing on their respective real estate markets. While demand appears to be picking up, real estate market activity remains subdued. Affordability is a big concern, which has put significant pressure on governments to increase the housing supply. Despite any periods of weakness, real estate has proven to be an attractive investment over the long term, along with providing some protection against inflation.
As always, give us a call if you have any questions, or if you’d like to get together for a portfolio review. Most of the Team will be away for the few days between Christmas and New Years, but Karen will be on deck to handle any incoming requests.
Have a wonderful holiday and we’ll see you all in the New Year!
Source: CIBC Morning Market Brief