7 Days Makes one Weak

It’s Friday!!! End of a week, and time to re charge., Of course, people in the mortgage business and real estate sector hardly ever get weekends off.

I wanted to take a look at just how quickly things can change. Over the last week, we have seen some numbers, data, and research that is showing the economy is weakening. Hence the title of the blog.

From Nov 24 to Dec 1 we have had some MASSIVE changes in assumptions of interest rate cycles in the US. Of course, the US and Canada are different, but since the US economy is performing well above the Canadian economy, it may give you pause to think about where rates may be headed North of the 49th.

On Nov 24, Mr. Bond Market was pricing in 3 Fed rate cuts, starting in June 2024.

On Dec 1st Mr. Bond Market is pricing in a total of 5 cuts, with the first starting in April 2024.

So, in the course of 7 days the market increased it expectations of rate cuts from 3 to 5 ( a 66% increase in rate reductions ) and sped up the timeline by 60 ish days. That is a monumental move in a short period of time. Keep in mind that the US GDP this week came in ABOVE expectations, so even in the face of that, the market has decided that the Fed will cut more, and sooner.

This was reflected in the CAD as we saw a pretty substantial move higher in the CAD this week vs. the USD. It wasn’t so much that Canada is doing better than the US, and the currency is strengthening, but rather the US is expected to drop rates sooner than previously thought, so it is less attractive as a currency relative to others.

Now, I am not here to say that rate cuts are coming tomorrow, but it certainly makes someone re position when we see the market pricing of rate cuts move around so quickly.

While the US Fed and the BOC do not have to move together, if the Fed were to cut rates, and the BOC did not, the Canadian dollar would skyrocket. While this is good for every cross border shopper – it is bad for the Canadian economy. A dollar going up makes exports less attractive, and allows leakage of money to the USA. The higher the CAD goes against the US greenback, the more people cross border shop ,and spend money outside the country.

A couple of months ago everyone was worried about a plummeting CAD and ho the BOC would never let it happen. I said then, and I say it again now – The BOC does not have a Canadian dollar mandate – however, they know damn well, that if we see too much strengthening in the CAD, it means bads news bears for the Canadian economy.

We know lower rates will be coming for various reasons, however, the key is to figure out why. Will rates drop because the economy falters, unemployment goes up, and we enter a recession, or will the economy falter, unemployment go up, and a recession arrive because rates are too high? If you can figure out the answer to that question – then you are smarter than most people with advanced economic degrees.

We must also remember that over the last 15 years or so, we have seen a very important shift in debts loads. Heading into 2007 it was the average consumer that held all the debt. Then the great financial crisis came along, and society transferred all the debt over to the banks, and then lately society transferred the debt over to the governments. Remember the famous quote not too long ago ” We are going to borrow the money so you don’t have to?”

Government are the largest debtors on the planet, and if bond yields and Prime rates stay too high, they will be forced to refinance their debt at rates that will make the interest payments on debt the largest line item in the budget. Up until now, governments have gone to the taxpayer trough to get the funds needed to pay the interest burden on the debt. They have raised income taxes, user fees, cut tax deductions, and even added a tax to make the weather better – but at some point the citizenry has enough, and will not allow the increased taxes needed to service the interest payments on the debt, and a civil war ensues. Perhaps we are in need of another tea party in the harbour?

However, there is an easy way to avoid all of this – lower rates. If interest rates drop, and governments can refinance their debt at more attractive rates, then we avoid all of the above. Easy peasy lemon squeezy. Again, I would hate to suggest that governments can manipulate the yield curve to their own benefit – but I would be lying if I thought they wouldn’t.

Either way, lower rates are coming. At this point it is simply a matter of when and how much. I don’t have that answer, and neither does any other pundit, economist, or self proclaimed expert.

The reason I mention all of this is to help you in your client conversations. People are scared shitless of renewals. Your client base is beyond scared that at renewal rates could jump, they could lose the house, and life could take a turn for the worst. If you client is more than 6 months away from renewal – good news – things can change.

In just a week we saw a massive move in time and rate in the futures, so imagine what we could see in another month? Put the plan together, work with the client, manage the expectations, but keep in mind that in finance – like many things in life, change takes longer than you think, but happens faster than you can imagine.