FIRE!!!!

The Canadian jobs report is out, and it is fire!!! Canada added 90,000 jobs in April – far exceeding the estimates. All in all it was a decent report with a majority of the jobs being in the private sector for a change, although the part time number was a little high, but all in all I give this a B+ for employment.

However, for every silver lining there is a cloud. For those of you hoping for a June rake cut, your camp just got a lot smaller. The bond market moved instantly with a June rate cut going down to around 45%. With employment up, wages up almost 5% year over year, and inflation going the wrong way, the chance of a June rate cut is quickly becoming wishful thinking.

Pretty much everyone agrees that the April inflation number that is due to be released in the next 10 days will be the determining factor. This inflation number will be watched by everyone, and will give the BOC the data it needs to either hold rates, or drop 25 bps. But, lets also keep in mind that Central Banks as a group are always late. The BOC in particular was too late raising rates. It should have started in mid 2021, but held off until Q1 of 2022. They spent all of 2021 calling inflation ‘ transitory’ when everyone in the profession was telling them it was not. Central bankers have a tendency to hold on too long to a position, and have always been late in either raising or cutting – why would this time be any different?

Either way, the inflation data will paint us a picture in the not too distant future. If inflation is anywhere near flat or above, you can kiss a June rate cut goodbye. Even an inflation report that shows slightly slowing inflation should not be enough to move the BOC. With hiring picking up, inflation still running well above the 2% comfort level, and a federal government that is racking up billions in spending deficits, it is hard to make a case that we need monetary stimulus from lower rates.

The question that I think needs to be asked is what happens if we DON’T get the June rate cut? How many people are barely hanging on, and are banking ( literally and figuratively ) on a June cut? How many people decide to list their house if we don’t get a June rate cut? How many people go see a bankruptcy trustee if rates don’t give them some relief come June? As is usually the case, it isn’t so much a question of what it is, but rather what it represents.

With the release yesterday of the BOC report we saw them mentioned several times that Canadians will have to get used to higher rates. Canadians will have to get used to mortgage payments resetting at higher payments. Canadians will have more of their income going to interest costs. This isn’t exactly the talk you would think you would see if the BOC was getting ready to prime the pump with lower rates, now is it? If we continue to see the economy muddle along, then get used to rates being this high. In order to get a cut of any significance we will need to see the economy deteriorate in a big way. This causes a little bit of a problem though: who cares how low rates are if you are unemployed and don’t qualify to borrow? Ironically, almost every Canadian bank in their Spring update released in the last 3 weeks has said that Canada will probably avoid a recession. I am not exactly sure how that is possible at this point, but if we do somehow manage to avoid a recession, then what exactly is going to bring rates down? Recessions are usually what brings rates down, so I am a little lost.

And finally, let’s not forget that high rates are not exactly the devil we think they are. Paul Volcker of the United States Federal Reserve absolutely crushed inflation in the late 70’s by raising rates to an unthought of level. By purposely causing financial pain and suffering for 18 months with high rates, it cleared the crap out, and set the US up for a 20 year bull market. Had the BOC had the same balls that the US Fed did in the late 70’s, they would have jacked rates early, left them high the entire time, and purposely caused a financial washout. This cycles rate raising started in early 2022, and here we are a little over 24 months in, and the pain is still being felt bit by bit. Too bad the BOC and other central banks for that matter didn’t just rip the band-aid off, and we could already be on the road to recovery.

A lot to look out for in the next couple weeks, but you may find that interest rate relief will be a lot like the Toronto Maple Leafs winning the cup…..it will remain illusive.