It’s All Baked In

This morning brought the release on the Canada Inflation number, and it, like almost all the other data in Canada was underwhelming, and missed expectations. Inflation was expected to be at 3.20%, but missed and came in at 3.10%. A month ago we were running 3.80%, so we shaved 70 bps off of inflation in just 31 days. Yes, it cane happen that quickly. Imagine if we saw the same rate of deceleration over the Nov and Dec period? That would put inflation at 1.70% – well below 2%. Not saying it will happen, but in this business things can change rapidly. As Brad Pitt said in Ocean’s Eleven ” In this town your luck can change just that quickly”.

So, with a big miss, and inflation in a bit of a free fall, why is the 5 year bond and the CAD actually up? Why haven’t yields plummeted, and the Canadian dollar sunk like a rock? Well, the easy answer is that it was already factored in, or baked into today’s numbers.

After last week’s surprising drop in inflation state side, a lot of people started to take the opinion that the Canadian number would be underwhelming as well – and they were right, however, the bets had already been placed. Analysts, economists, and traders had already figured that inflation would be lower than we thought, and so they had arranged their funds accordingly. In fact, maybe people were a little too pessimistic, and so we are having a bit of a relief rally in the bond yield and the CAD. Sure it was a bad number, but it could have been worse. It is very similar to when my wife goes shopping with my credit card – you know the number will be bad, but sometimes it isn’t as bad as you think, so you go out for dinner to celebrate.

No matter how you slice it, the increased interest rates and unemployment numbers are starting to work their way through the economy. Housing has taken a marked decrease in both activity and prices, car sales, and car prices have dropped, and we are slowly sopping up the excess liquidity that was literally printed into existence through the COVID spending years of 2020 to 2022. While the BOC and the US Fed continue their quantitative tightening, and reduce the M2 money supply monthly, it will have the desired outcome of slowing things down.

The large change for me in the last 30 days is how quickly markets changed their opinion of rates. We went from 1 to 2 more hikes, to no more hikes, to moving up the timeline for rate cuts. This happened in a matter of 30 days. While on the surface you saw no change ( Prime remained the same ) much like a duck that appears calm on the water, there was a lot of paddling underneath in a flurry of activity. Again, I ask, if we saw those big changes in 30 days, what does the next 30 or 60 bring?

Some things to ask yourself as we head on into the remaining weeks of the year:

What IF inflation comes down .70% a month for the next 2 months?

Can rate cuts happen faster than we think?

Could the BOC and FED cut rates more than the market is currently pricing in?

What happens if central banks switch from quantitative tightening ( QT ) and go back to quantitative easing ( QE ) ? What happens IF central banks stop reducing M2 money supply, and instead print it, and INCREASE M2 money supply?

What happens if bond yields fall, and mortgage rates stay stuck stubbornly high?

What will today’s Federal Government financial update bring, and how will I position my business around any changes that are announced?

And for my US subscribers, the most important question is what Black Friday sale to hit up?