Not Bullish Sentiment

Steve Saretsky -

While this is probably getting tiresome at this point, inflation came in hot once again in March, hitting a 30 year high. Consumer prices are up 6.7% from last year, and are likely to hit 8% in April based on Stats Canada finally adding used car prices to the CPI basket. This is ramping up rate hike expectations, with traders placing a two-thirds chance of a 75bps rate hike at the banks next meeting in June.

Suffice to say this would be a disaster for housing which is already slowing precipitously. Again, just to reiterate many of these rate hike forecasts do not include house price declines. Raising the overnight rate to 3% will result in house price declines, it’s just a matter of how much. In other words, if you want to make money you should probably fade CMHC’s latest prediction, this time calling for a 10% increase in home prices this year. You can run models all day, but at the end of the day housing markets run off sentiment and liquidity, and both have turned south.

Of course this is not just a Canadian problem. Mortgage rates in the US are the highest they’ve been since 2010, resulting in new mortgage applications falling 5% from last week, and getting cut nearly in half from last years levels. Wells Fargo confirmed it has begun laying off mortgage staff, the third major lender to announce layoffs following weaker than expected demand. Don’t forget the US Federal Reserve has only raised rates by 25bps and things are already slowing. As highlighted by Dr Lacy Hunt of Hoisington Investment Management, Since the Fed’s founding in 1913, monetary tightening has resulted in hard landings in all but about 10 % of the cases. Some of the soft landings avoided a U.S. recession but still caused a financial crisis.

I continue to believe rate hike forecasts are too optimistic but don’t be surprised if our central bankers get this wrong again. The conversation will ultimately shift from inflation to financial stability risks, it’s just a matter of when.

Looking forward, year-over-year base effects are going to start looking ugly. For example, we should see Greater Vancouver home sales down 30% year-over-year in April. Keep in mind this was inevitable due to very strong base effects, as 2021 marked a record high for sales. However, all that matters here is how the media opts to portray this. You can the see the headlines already, “Vancouver home sales crash 30% on higher interest rates”. Again, not bullish for sentiment.

Stay nimble my friends.

Three Things I’m Watching:

1. The total return of Bloomberg Global Bond Aggregate Index is down 10% YTD. This is unprecedented. (Source: Jim Bianco)  8dfcf992-0071-f494-8b02-503195b1edff-3406672

2. Canada’s CPI inflation should hit 8% next month once used car prices are added. (Source: Scotia Bank)

3. Consumer confidence is decelerating across Canada. (Source: Nanos Research)

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