Happy Monday Morning! It looks like inflation might not be transitory after all, and the bond market is finally figuring that out. Bonds have been selling off hard lately, sending yields much higher, and tightening financial conditions in the process. This is particularly important for the Canadian housing market. If there was ever a catalyst to prick the bubble that everyone has been talking about for over a decade it would be higher mortgage rates crushing demand and highly leveraged households. I would argue the 5 year bond in Canada is the most important metric to watch. The 5 year bond yield effectively prices the 5 year fixed mortgage rate. It took a 30 year high in inflation and a war to finally get it moving, but the 5 year bond yield has been on a tear in recent weeks. It is now sitting at 2.497%, the highest reading since 2010. As a result, fixed rate mortgages are on the move, with all major Canadian banks now offering mortgage rates north of 3.5%, and they could reach 4% within the next few weeks. Some banks have had to increase fixed rates 3 times over the past week, trying to keep

Consumer prices ripped to a thirty year high in Canada, rising 5.7% from last year. Shelter inflation was up 6.6%, the highest since 1983. Per ScotiaBank, much of that is being driven by the homeowners’ replacement cost, which was up 13.2% y/y. Unlike the US that uses owners’ equivalent rent, Canada captures housing primarily through the house-only part of builder prices (ex-land) as the main driver of replacement costs. I can assure you the cost of construction or replacement of a home is up much more than 13% but the same can be said about most of Stats Canada’s inflation basket. For example, let’s take a further look into housing. Officially shelter costs are up 6.6%, however national housing data just released by CREA (Canadian Real Estate Association) shows home prices are now up 29% from last year, the fastest pace of increases on record. Once again, house price inflation is widespread across the nation: Toronto +36% Montreal +20% Vancouver +21% Calgary +16% Ottawa +16% The good news is housing is starting to slow, at least in the two major markets of Vancouver & Toronto. However, inventory remains at crisis levels and just a moderation in prices is the best

Inflation concerns continue to percolate. US CPI inflation ripped to 7.9% in February, the highest reading in over 40 years. So now we basically have inflation at 8% and interest rates at zero. Of course this has major implications not only from a financial perspective but a societal perspective. It’s also a fundamental driver behind massive house price gains, or rather, the ongoing currency debasement. Savers have unfortunately been annihilated over the past couple of years, and it is becoming difficult to see how things get any better. Based on recent projects it is likely we will see inflation north of 10% in the coming months. The last time inflation was at 10% US debt to GDP was 30%, today it sits at 130%. In other words, it’s going to be incredibly difficult for central bankers to fight inflation without triggering something. While we are mostly talking US figures here, the same applies to Canada and then some. Our debt figures are even worse and even more concentrated in the private sector which has limited ability to absorb higher rates, ie they can’t issue new debt to pay for old debt like the public sector can. This doesn’t mean the Bank

Brace yourselves, we have liftoff! The Bank of Canada officially raised interest rates a mere 25bps last week. This was the first move since 2018 and comes at a time when inflation is running at 30 year highs. Markets believe another 5-7 rate hikes are still coming this year and some are calling this the Paul Volcker moment. In case you forgot, Paul Volcker was the head of the US Federal Reserve in the 1980’s, the last time inflation was running this high. Volcker raised rates from 11% to 21% in order to squash inflation which undoubtedly caused a lot of pain. Things got so bad that home builders started mailing 2×4 lumber in the mail to Volcker as part of a protest, claiming their lumber was no longer needed since nobody was buying houses. So is this our Volcker moment? I think some much needed context is in order. Back in the 1980’s, Canada’s household debt to GDP sat at roughly 40%. Today it is over 100% of GDP. In other words, it’s not going to take much to severely tighten financial conditions. Per David Doyle at Macquarie Macro Research, when you account for private sector debt levels in