True North – Strong and Troubled

This morning was the monthly release of the Canadian employment report. To sat it was abysmal, would be the understatement of the year.

The report missed on almost every possible metric, and managed to come in below even the most conservative estimates.

Total jobs added came it at 17,500, lower than the 22,500 estimate, the unemployment rate ticked up from 5.5% to 5.6%, while average hourly wages also continued their downtrend coming in at 5.0% from a year earlier, down from 5.30% in just September. While adding jobs overall, Canada saw a net decline in full time jobs, and the jobs that were added were all part time. Not exactly good news for an economy.

Shortly after the employment numbers were released, data from S and P Global showed that Canada’s service sector contracted yet again. It is expected that inflation and higher borrowing costs are starting to bite, leading to contraction in the service sector.

The unemployment rate has now risen in Canada for 4 of the last 6 months. Not good under any circumstance, but when you also add in the fact that Canada is welcoming around 80,000 people a month, the unemployment rate should be coming down. Imagine how much unemployment would be up if we were not adding 80,000 people to the population a month. Now I know not all of these people are working age, but lets assume a full third of them are? 1 in 3 sounds reasonable. Even at 1 in 3 people being employable, it means that we would have to add around 26,500 jobs a month just to keep up with immigration.

Canada is in a lot worse shape than even the report suggests, and it is now starting to filter out into the economy. Company after company after company is starting to indicate that arrears are up, delinquencies are up, payments are slow, and the consumer is not spending. Most of these are consumer debt related and not mortgage related, but how long until it trickles into mortgages? Wait until the employment report shows job losses for the month, on top of 80,000 new immigrants!!

The silver lining may be that relief is closer than many may think. While the odds of a BOC rate hike in December were down to a meager 10%, the futures are now pricing in an 8% chance of a rate CUT in December 2023, after the October employment numbers were released. I think when we look back in the history of this time period, the Sept, Oct, and Nov data will be where the turning point was. Over the next 4 weeks we will get :

Manufacturing, new motor vehicle sales, and wholesale sales on November 15th.

Inflation report on November 21. Estimate is for inflation to truck in around 3.40%, down from 3.80% a month ago. That is quite a drop of .40% month over month.

Retail sales, weekly earnings, and Federal Budget numbers on Nov 24.

Unemployment report on Dec. 1st

There is going to be a lot of data released before the BOC makes their interest decision on December 6th. A lot of data!! Based on the trajectory of the latest batch of results, I don’t see it turning around. Now, I am hesitant to predict a rate cut in December, but if the data over the next few weeks is horrible, the odds will increase.

There is always a but……and this is no exception. Even IF we see a rate cut from the BOC on December 6th it won’t matter. Banks will simply adjust the variable spread to compensate. So, if a lender is Prime -1.00% today, and the BOC cuts, they will simply move the variable to Prime -.75%. Net net it won’t change a damn thing.

If you want to be able to game the system a little bit, watch variable discounts over the coming 3 weeks or so. If you start to see a lot of lenders moving the discount, it will tell you that they are starting to hedge towards a rate cut.

Banks always win, and the margin will always be protected. This week we saw Canada 5 year yields plummet by 40 bps, and we have not really witnessed any rate reductions. I know, it is an elevator up, and an escalator down, but with massive moves taking place to the downside, we would expect to see some cuts. Next week we will start to see some small reductions ( 10 to 15 bps would be my guess ), we will see some quick close specials, or maybe the return of some bonus compensation – but we certainly won’t see the uninsured rate drop 40 bps. Risk management is the name of the game right now, and is witnessed by a 100 bp spread between insured and uninsured. I don’t recall it ever being such a high spread for this long, and it would indicate the lenders are cautious. Cautious people don’t drop rates quickly – or a lot.

However, if you start to see some drops, it could make qualifying that much easier for some clients at the margin. If we could see 15 or 20 bps of rate reduction on fixed rates, it may give a client that extra 10 or 20 thousand dollar bump on their offer price.

Also of note this week was the drop in commodity prices. Commodity prices are usually a good indication of inflation expectations. This week saw some pretty nasty declines in the prices of commodities. Oil ( WTI ) was down 4.25% , Orange Juice is down 16.10% in the last 2 weeks, cotton prices are down almost 9% in the last week, and fertilizer prices continue their drop of 2023, finishing up well down on the week. Inflation expectations will come down as we head into the end of 2023, and with it rate cut expectations will grow. Watch the volatility – especially in the shorter term bonds like the 1 year and 2 year, as they will be most sensitive to rate change expectations.

The coming 30 to 60 days will be a great time for brokers to take advantage of rate drop requests. Banks may have locked in an approval with the currently high rates, and you may be able to scoop some business by using new lower rates if they become available. You may also be able to scoop some renewals that were sent out when rates were higher. Work hard, grind it out, and you will be able to make a living no matter how bad the economy may get.