On Ice

Today was Canada’s GDP report, and while the results were mixed at best, it looks like any hopes for a rate cut next week were put on ice.

While GDP did appear to grow, up 1% for the last 3 months of 2023, and above the consensus of .8%, again it comes back to PER CAPITA. While GDP appears to have grown by 1%, immigration also grew by slightly more than 1% in the quarter, so net-net, no one got any bigger piece of the pie.

Rest assured though, that all politicians will use this as a battle cry. Numbers can be manipulated in many ways to suit the presenter, and this report is a prime target. While technically GDP did grow ( data shows that ), every individual would not have received any of that growth, as the number of population grew about the same ( data shows that ). While politicians fight over who is right and why it matters, let’s take a glance to the South, and note that US GDP grew 3.20% over the last 3 months of 2023. No matter how you slice it, the US is performing a lot better than Canada – on an economic front at least, and I would expect this to continue.

While every day in Canada thousands of people will renew into much higher mortgage payments, the same is not true for the US, where their mortgages tend to be fixed for 30 years. The average Canadian is facing hundreds of dollars a month in payment shock as they come up for renewal – and the longer rates stay up the more people feel this payment shock, so I would expect GDP to start to feel the hit of less and less disposable income. Every single time a renewal hits, there is hundreds of dollars less to spend in the economy in Canada. Barring any divine or government intervention, I cannot see a path forward to grow GDP if rates stay where they are.

If we start to see GDP pull back ( per capita GDP was already flat for Q4 ) and we continue to see immigration numbers run at or near the numbers they have been, it isn’t out of the realm of possibilities that we see negative GDP growth per capita ( almost certain ) and potentially even the total GDP print could be negative.

However, whether you think the GDP was good or bad, or somewhere in between, it certainly was enough to hold the BOC off on a rate cut next week. Inflation, while coming down is still closer to 3% than 2%, and GDP did show a re acceleration in the flash GDP for January ( likely due to some one time factors ) of .4% month over month. With news stories of multiple offers still happening, the BOC will bide their time, and hold off I believe. Unless something catastrophic happens in the economy between now and next week, I would think a hold the line is in order.

Money markets are currently pricing in an 80% chance of a cut n June, but if we see inflation rear its ugly head for March and April, June could get pushed out. Remember that only a few months ago, money markets were betting on a 25 bp cut in January. Things change fast.

Either way, the ” higher for longer ” narrative is alive and well, and rate cuts – at least for now are on ice. It looks like the Spring market will see renewals at a higher rate than many thought just a few months – hell, even a few weeks ago.