Inside the Market: Money Markets Become Convinced September BoC Rate Cut Is Coming
The surprisingly weak U.S. jobs report this morning has not only spurred speculation on whether the U.S. Federal Reserve will cut its key interest rate by an aggressive 50 basis points next month, but it also has market players pondering the possibility that the Bank of Canada may need to accelerate its monetary easing as well.
The market was bracing for a weak U.S. nonfarm payrolls report following unexpectedly soft weekly U.S. jobless claims on Thursday. However, the report still managed to surprise. Nonfarm payrolls increased by only 114,000 jobs last month after rising by a downwardly revised 179,000 in June, according to the Labor Department’s Bureau of Labor Statistics. Economists had forecast payrolls advancing by 175,000 jobs. The unemployment rate increased to 4.3%, and job wage gains also slowed.
The U.S. rate futures market is now pricing in a 65% chance of a 50 basis-point cut at the September 18 Fed meeting, up from 19% late on Thursday. The market has also priced in about 110 basis points in cuts this year, up from 75 basis points on Thursday.
All this is trickling down into Canadian markets, pushing key bond yields lower as traders reassess the outlook for rate cuts in Canada, given concerns that the U.S. could be on the brink of a recession. The Bank of Canada has already cut its trend-setting overnight rate by a quarter of a percentage point twice this year, while the Fed has kept its key interest rate unchanged.
Both Canada’s five-year and two-year bond yields were down 10 basis points in morning trading to their lowest levels in just over two years. The five-year yield is closely watched because of its influence on fixed mortgage rates, while the two-year is particularly sensitive to shifts in the outlook for Canadian monetary policy. Bond yields are down even more in the U.S., with the two-year down about 20 basis points – a significant one-day move for bond markets.
For the first time this economic cycle, implied probabilities in swaps markets suggest traders are pricing in modest – but not insignificant – odds that the Bank of Canada will cut interest rates by an aggressive 50 basis points at its next policy meeting on September 4. Money markets suggest at a minimum the bank will cut rates by a quarter point at each remaining policy meeting this year, with some risk that there will be an additional quarter point cut at some point in the next five months.
Here’s a closer look at the probabilities when it comes to how much the bank may cut in September. A 25 basis point Bank of Canada rate cut in September is still seen as the most likely scenario by money markets. However, there is now 100% certainty, based on market pricing, that a cut of some sort will arrive. Just a week ago, the market-implied odds of a quarter point cut at the bank’s next meeting were about 70%.
The Canadian jobs report for July, expected next Friday, is anticipated to show more softening in the labor market. RBC is currently predicting only 15,000 new jobs added, with the unemployment rate ticking up to 6.5% from 6.4% in June.
Doug Porter, chief economist with the Bank of Montreal, weighed in on the situation, stating that markets and analysts were revising down their forecasts for fed funds in the wake of the weak employment figure. He emphasized that the much bigger concern is the grinding rise in the jobless rate and the lack of growth in household employment. Porter believes that the case for restrictive rates has almost vanished, and the Fed will now proceed with haste to get back to something approaching neutral. Consequently, Porter is revising his call to include a series of consecutive cuts for the Fed, and also expects the Bank of Canada to cut in each of the next four meetings, quickly taking their overnight rate down to 3.5% by January and to 3.0% by mid-2025.
David Rosenberg, founder of Rosenberg Research, commented that there was no silver lining in the report, adding that the Fed is behind the economic curve just as it was behind the inflation curve back in 2021 and 2022. He warned that there will be significant repercussions for this policy misstep, especially given the tense political environment with an election just three months away.
Stephen Brown, deputy chief North America economist at Capital Economics, indicated that the sharp slowdown in payrolls and the further rise in the unemployment rate cast doubt on the Fed’s argument that it is still too soon to loosen policy. Brown now expects 25 basis point cuts at each of the remaining three meetings this year and will be watching for signs that a larger 50 basis point move could be on the cards, depending on the economy and labor market.
Economists from National Bank Financial noted that the morning’s data was terrible for those in the ‘soft landing’ camp, with a miss on headline job creation and the fourth straight higher-than-expected print on the jobless rate. They stressed that moves in unemployment tend to be non-linear, making it hard to abate once it begins rising. They see a debate over whether the Fed should cut 25 or 50 basis points in September, but ultimately expect the Fed to ease at each of the final three meetings of the year.
Derek Holt, vice-president of Scotiabank Economics, highlighted the weak job growth signaled by the report and noted the market’s violent reaction. He suggested that distorted seasonal adjustment factors during the pandemic era may have artificially inflated earlier employment reports and deflated later ones, echoing Chair Powell’s point about considering the totality of the year’s evidence when evaluating jobs.
Katherine Judge, senior economist with CIBC, pointed out that while it’s only one data point, it adds to evidence of a less rosy climate this summer following an upside surprise in Q2 growth. She maintains her forecast for a Fed rate cut in September and sees risks tilting towards more cuts for the rest of the year.
Claire Fan, economist at Royal Bank of Canada, observed that the U.S. labor market started the third quarter with a downside surprise and noted the clear deceleration in labor market conditions. She expects the Fed to cut interest rates at the next meeting in September and sees the potential for more cuts for the remainder of the year.
With the global economic landscape rapidly shifting and monetary policies poised for significant changes, how should individuals and businesses prepare for the potential impacts on their financial planning and decision-making?
Cost of Living: Four Mistakes Mortgage Shoppers Should Avoid
After two years of historically high interest rates, the cost of borrowing is finally trending lower in Canada. The central bank has cut rates, and with more reductions expected, bond yields are falling back to year-ago levels, leading lenders to chop their fixed-rate offerings. However, navigating this rapidly evolving marketplace can be challenging for mortgage shoppers. Here are a few common stumbles to avoid when seeking out the best mortgage.
First, not getting a preapproval. Many buyers think the first step in their home search is to check out open houses and call a real estate agent or two. But entering the market without a mortgage preapproval is going in blind. A preapproval is a commitment from a mortgage provider that lays out the maximum amount you can borrow, at a particular rate. With this information, home buyers can narrow their search, knowing exactly how much they can afford and what they’ll be committing to paying each month on their mortgage. Additionally, a preapproval secures a specific rate for between 90 to 120 days, protecting you if interest rates rise during this time frame. In competitive real estate markets, most sellers won’t even entertain an offer from a buyer without a preapproval in hand – that is, an offer conditional on getting financing approval. Preapproval is a crucial first step that sets buyers up for success.
Second, taking the first rate offered by your bank. Would you buy a new appliance or tires for your car without shopping around for the best features and price? Your mortgage should be no different. Canada’s banking landscape is unique in its homogeneity – our Big Six banks have immense brand recognition and trust among borrowers, but they won’t always offer you the best deal. It’s in the best interest of mortgage shoppers to compare rates from all types of lenders, including credit unions and smaller specialty lenders, to find their lowest possible rate. This is where using a mortgage broker comes in handy, as they can conduct this search on your behalf for free. However, not all brokers are connected to all banks. Those who prefer to do their own research can use online resources, such as rate comparison websites, to weigh their options. Or, they can take a full do-it-yourself approach and use an online platform to find their rate, upload their documents, and secure their financing without a mortgage pro middleman. If you still want to go with the bank you have other accounts with, being armed with the knowledge of what you could get elsewhere is important leverage – they may match it.
Third, immediately signing your renewal letter. If you’re coming up for a mortgage renewal – as nearly half of Canadian mortgage holders will be over the next two years – it may seem tempting to stick with your existing lender and be done with it. Banks know borrowers want simplicity here, and they make the process as easy as possible by sending you a renewal letter at least 21 days before your term is up. Sign on the dotted line, and you’ll be all set – except it might do you a great disservice. Lenders are less likely to offer competitive renewal rates to existing customers – they save those for new clients. That’s why it’s a great idea to call your broker early – you can start the renewal process up to 120 days before your term expires – to compare your options. Think of your mortgage renewal like clearing an Etch-A-Sketch; you can start from scratch with a new rate, term, or even pay it off entirely without incurring a penalty. It’s a good time to re-examine what mortgage product best suits your needs. One important caveat is that borrowers without mortgage insurance – those who’ve paid more than 20 percent down – will be required to qualify with a new stress test if they switch to a new lender at renewal. Those with insured mortgages are not, assuming their original mortgage size and amortization remain the same. Don’t let this scare you off – the savings from a lower mortgage rate can save you thousands of dollars over the course of your term.
Lastly, locking into a longer fixed rate. Fixed mortgage rates are by far the preferred mortgage choice among Canadians, accounting for 69 percent of all mortgages this year. Borrowers like knowing their payments won’t change, even during periods of market volatility. But locking in can be a hindrance when interest rates are trending lower, which they currently are. With the Bank of Canada expected to cut rates further in the coming months, and bond yields pulling fixed rate options lower, no one wants to stay stuck at an elevated rate for the long term. This is why shorter fixed terms have boomed in popularity over the past year, especially among renewing borrowers. According to Canada Mortgage and Housing Corporation’s 2024 Mortgage Consumer Survey, the number of renewers who picked a three-year term rose to 24 percent from just 18 percent in 2023. Meanwhile, those who chose a five-year term dropped to 43 percent, from 53 percent the year prior. Going with an even shorter term, such as a two-year fixed, provides greater flexibility to make a change to your mortgage sooner, preferably when the Bank of Canada hits the bottom of its hiking cycle.
In the face of fluctuating interest rates and a complex lending landscape, how can mortgage shoppers best balance the need for stability with the benefits of flexibility?
Toronto Real Estate: Stronger Fall Seen Breaking Toronto Housing Market Lethargy
The malaise hanging over the Toronto-area real estate market appears set to linger into August, but signs are pointing to renewed vigor in the fall, according to one industry veteran.
Sales have been lethargic in recent weeks, and even the Bank of Canada’s recent move to cut its benchmark interest rate to 4.5 percent from 4.75 percent doesn’t appear to be the catalyst needed to rejuvenate prospective buyers. John Lusink, president of Right at Home Realty and Property.ca, says the rate cut of 25 basis points is unlikely to provide more than a small psychological boost for buyers. He had been hoping for a more hefty cut of 50 basis points. “I think that would have really helped move things a little faster,” Lusink noted.
Lusink highlights the stringent criteria for fixed-term mortgage approvals, which make it difficult for many people to qualify for financing. Banks have become extremely conservative when it comes to handing out approvals. “It has to translate into favorable mortgage rates and terms, and banks and lenders wanting to put out money,” Lusink says. “There are an awful lot of people that just aren’t being qualified at the moment.” Posted rates for mortgages with a popular three-year term, for example, were recently hovering around 6.99 percent.
Despite the current stagnation, Lusink is optimistic that the market will pick up in the fall, especially if the central bank lowers its key rate again at the next scheduled meeting on September 4th. Bank of Canada Governor Tiff Macklem sounded more dovish at the July meeting, telling reporters it is “reasonable” to expect additional rate cuts this year. Olivia Cross, North America economist at Capital Economics, interprets this shift in tone as an indication that policymakers are becoming almost as concerned about the rate of inflation falling below their 2 percent target as they are about it exceeding the target. Cross forecasts the central bank will cut the policy rate at each remaining meeting this year.
Some aspiring home buyers appear to be holding out until they see the lower rates Bay Street is predicting become a reality. There’s also a stalemate occurring: buyers believe stubborn sellers will eventually have to cave on prices, and sellers say they will pull their listings or lease the property if they can’t get the price they’re aiming for.
In the meantime, inventory at Right at Home and Property.ca offices throughout Ontario has been inching up each week during July, though the pace of the increases has slowed. Currently, supply at the firm sits 44 percent higher than it did at this time last year. Lusink expects more listings will trickle in during August as some homeowners fret that supply will only continue to rise in September. “They say, ‘I’d like to get in on the market now before we are competing with even more people,’” he explains.
Sales have been bumping along at their lowest level since the early 2000s. Lusink advises potential sellers who seek his advice that they are better off waiting for the fall if they don’t have a pressing need to sell. “If you don’t have to be on the market in the summer months, don’t be,” he advises.
An analysis of Lusink’s firm’s data shows that the average price has dipped about 2 percent so far in 2024. This follows an 8-percent drop in 2023. He believes prices could slip another 3 to 5 percent, but he doesn’t anticipate a more severe correction than that. The weak performance of the resale condo segment has dragged down the average price, but in some brackets and neighborhoods, prices are holding steady. For instance, a house in the family-friendly Toronto neighborhood of Moore Park will have no problem selling if the asking price is around the $3 million mark or below. In the suburbs, where supply is more abundant, homeowners need to be priced to sell. “Depending on the market you’re in, it’s either balanced or a buyer’s market,” Lusink says.
Lusink recommends that sellers who are wondering whether a price reduction is a good strategy sit down with their listing agent and go over what’s happening not only at a macro level but also at a micro level drilled right down to their own street. Sellers need to grasp that prices have decreased, he adds. Rentals currently make up about 49 percent of the firm’s transactions, compared with 35 to 37 percent in more typical years.
While Lusink anticipates an improvement in sales, he remains concerned about consumer sentiment and the broader economic picture, including the weakening labor market in Ontario. Economist Rebekah Young, a vice-president at Bank of Nova Scotia, says Canadians are grappling with a sense of discontent about almost everything these days. “Pessimism pervades issues spanning the economy, government, and society,” says Young in a note to clients. “Life satisfaction has taken a toll.” She points to inflation, interest rates, and housing costs as some of the main economic preoccupations.
Young cautions that it’s not clear today’s downbeat attitude is warranted. With consumers feeling gloomy and business leaders reporting an uncertain outlook, Young says a sentiment check is in order – otherwise, the pessimism can become self-fulfilling. She points out that many forecasters who had been heralding a recession for more than two years have backed away from that call as economic activity eclipsed expectations. While risks still lurk, Young notes that real disposable income sits above 2019 levels for working-age Canadians across all income brackets. And while real estate markets have cooled, she reminds homeowners that the average home price still sits about 33 percent above pre-pandemic levels.
In this fluctuating real estate landscape, one must ask: How much influence do interest rates truly have on the market, and are we overestimating their power to drive significant change?
-The TanTeam Editorial
