Inflation Back at 2%: A Turning Point?
In August, Canada's annual inflation rate dropped to 2%, reaching the Bank of Canada's target for the first time since early 2021. This marks a significant milestone in the battle against inflation, which was fueled by high energy prices during the pandemic. The decline was largely driven by lower gasoline prices, while food prices saw a moderate increase of 2.4% year-over-year. Economists like Benjamin Reitzes of BMO consider this a positive development but caution that price levels remain high, and Canadians shouldn't expect immediate relief. With inflation stabilizing, experts predict that the Bank of Canada may begin to cut interest rates to stimulate the economy, possibly by 25 to 50 basis points. However, labor market data and GDP performance will heavily influence future rate decisions.
Source: Global News
Canadian Housing Market in August: Modest Gains Amid a Holding Pattern
In August, Canadian home sales rose by 1.3% from July, though they were down 2.1% compared to August 2023, according to the Canadian Real Estate Association (CREA). While the Bank of Canada's recent rate cuts gave a slight boost to the market, CREA economist Shaun Cathcart noted that the housing market remains in a "holding pattern," with buyers waiting for further rate reductions to improve affordability. New listings increased by 1.1% in August, and the national average home price held steady at $649,100. Experts like BMO’s Robert Kavcic anticipate that a significant rebound in housing activity may still be a few rate cuts away.
Source: CTV News
Canada Eases Mortgage Rules to Address Housing Crisis
On September 16, Finance Minister Chrystia Freeland announced new measures to ease mortgage rules, increasing the cap on insured mortgages from $1 million to $1.5 million and extending 30-year loan terms to more buyers. These changes aim to make housing more affordable and boost construction by incentivizing homeownership with smaller down payments and longer amortization periods. While some experts, such as Penelope Graham of RateHub.ca, believe the move will help first-time buyers, others, like economist Marc Desormaux, argue it could drive prices higher in the long term. The broader concern is that increasing demand without addressing supply constraints—like labor shortages and high construction costs—may worsen affordability.
Source: CBC News
Fed Cuts Interest Rates by 50 Basis Points to Address Labor Market Cooling
The U.S. Federal Reserve cut its benchmark interest rate by 50 basis points, lowering it to a range of 4.75% to 5%. This marks the Fed’s first rate reduction since 2020, as officials aim to prevent a cooling labor market from worsening. Fed Chair Jerome Powell stated that the cut reflects confidence in stabilizing inflation, which is nearing the Fed’s 2% target. The move was more aggressive than expected, signaling concerns about rising unemployment and slowing job growth. Economists are divided on whether further cuts will help stimulate the economy, with some warning that housing affordability challenges and existing debt burdens may limit the impact of lower rates.
Source: The Wall Street Journal
US Dollar Slumps as Interest Rate Expectations Weigh on Outlook
The US dollar has weakened, reaching its lowest levels in over a year, as Wall Street anticipates a Federal Reserve rate cut. The US Dollar Index has fallen 3% since August, reflecting bets that the Fed will lower interest rates for the first time since 2020, with a potential 0.5 percentage point cut. Meanwhile, other currencies like the yen have appreciated, further pressuring the dollar. Analysts suggest the "dollar smile" phenomenon, where the US currency strengthens in both booms and downturns, could soon lift the dollar again if global economic conditions worsen. Despite current declines, the US economy remains relatively strong, as reflected in rising retail sales and GDP growth forecasts.
Source: Financial Times
US Housing Starts Surge in August Amid Improved Demand Outlook
US housing starts increased 9.6% in August, reaching an annualized rate of 1.36 million, the fastest pace since April, according to government data. The rise was driven by a nearly 16% increase in single-family home construction, as builders respond to improving demand due to falling mortgage rates. However, multifamily projects saw a decline. Building permits, a key indicator of future construction, also rose 5%. Despite the positive trend, homebuilders remain cautious due to high inventory levels. While expectations of a Federal Reserve rate cut may further boost the housing market, sustained growth is likely to follow improvements in affordability.
Source: BNN Bloomberg
Market Insight
BlackRock Weekly Commentary
The Federal Reserve is set to cut interest rates for the first time since the pandemic as inflation cools, but central banks, including the Fed, will maintain relatively tight policies. According to BlackRock, recession fears are overblown, with unemployment rates rising due to an expanded workforce from immigration, not job losses. The Fed is unlikely to make deep cuts comparable to past recessions, though markets have priced in aggressive cuts. Short-term U.S. Treasury yields have fallen, but BlackRock remains underweight on Treasuries and overweight on U.S. stocks, expecting that the Fed's cuts will be more limited.
Source: BlackRock
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