Fear, Hype, and Bullshit

As we are now through the first 6 months of 2025, I think it is a great time to take a bit of a look back on the last 180 days, and see where we go from here. Tensions were high coming into the year with Canadian Parliament being shut down, DJT preparing for his 2nd term, and the eventuality of a Canadian election.

I will take this time to point out, like I usually try to that 90% of the time, the ‘experts’ get it wrong, or get it right for the wrong reasons.

Housing: Well, almost every social media dancing star and realtor was anticipating the rush in the Spring market. Well, I think we all know how that went? Housing has taken it on the chin in the first half, and the numbers seem to be setting the second half up for a set of lower lows. No matter which metric you look at in housing, it is a complete shit show. Prices are down, listings are at a record, dog crate condo’s are not selling, rents are falling, and we are entering a time in the next 12 to 15 months where a lot of renewals are coming up. This will likely lead to more downward pressure on house prices. I do however think that by the end of 2025 we will have put in a bit of a bottom, and we can start looking for a new uptrend to be put in place. We need blood in the streets. We need every single headline in every newspaper to be about just how bad housing is before we get the rebound. We are close, and I think, when we look back in time, it will be Q3 or Q4 of 2025 where we saw the turn. This means that it is probably a great time for people seeking to enter the housing market to get their proverbial ducks in a row – pay down the unsecured debt, have all the paperwork ready, get a pre approval ready to go, and start looking so that as prices come down, you have a great comparison base so when you find ‘the one’ you can pull the trigger. The 1 problem I forsee with housing in the last half of the year is when the builders and developers get into trouble. When this happens, the government – whether it is Federal, Provincial or Municipal will have to, in some form or another, bail them out. This will create a lot of problem with the general public.

Bond Yields: Well, strike 2 to the ‘experts who predicted bonds would either plummet to explode higher. In fact, bond yields have done nothing more than move around for 6 months to finish the first half about where they started. We saw a high on 3.28% on the Canada 5 year, and a low of 2.46%, which represents a move of 82 bps from high to low, but we ended June plus or minus 3 or 4 bps from where we started January. Oddly enough, we really didn’t see fixed mortgage rates move 82 bps ( or anywhere even fucking close ) which means lenders are padding in the margin right now. Why do you think so many lenders are willing to give rate exceptions, generous buy downs etc.? Because they can, because margins on mortgage lending is pretty healthy.

Overnight Rate: As expected, we saw some reductions in the overnight rate during Q1. Tiff and Co. decided that we needed 2 25 bp cuts, and held the overnight rate for the last 2 meetings at 2.75%. Now many people have been calling for 2 or 3 more cuts by the end of 2025, but I am not so sure. I think there is a lot that has to go wrong before we get 75 bps of cut from Uncle Tiff. 75 bps would most likely be 3 meetings with a 25 bp cut, or a jumbo cut of 50, and 25 sometime thereafter. The BOC is widely expected ( as of the date of this writing anyways ) to cut the overnight rate by 25bps at the end of July.

With inflation stuck stubbornly high right now, I think getting 75 bps of rate reduction is going to be tough for the BOC. In order for this to happen we would need to see things collapse extremely fast, and inflation to nosedive into the ground almost overnight, which is going to be a tall order with tariff talk popping up almost weekly.

Canadian dollar: This is probably my favourite topic to discuss, as there were so many naysayers back in late December of 2024. On Jan 1 of 2025, a USD bought $1.4385 Canadian. Everyone was convinced the Canadian dollar was going to drop and drop and drop. My call back at the end of 2024 was for the Canadian dollar to loose some ground early in the year, and to use that opportunity to lock in any USD assets back to Canadian dollars. I figured the USD would top out somewhere in the first 45 to 60 days of 2025 against the Canadian dollar, and then retreat. Right on que, the USD rallied, and by early Feb a USD got you $1.4524 Canadian. That was the peak, and it slowly retreated from that number, and ended Q2 at $1.355, a drop of about 10 cents from peak in early Feb to June 30. This is great news, as it will help to lower inflation in Canada, as it costs less to import US products. If the USD had stayed up at the $1.45 mark, it would have added around .3% to the inflation reading for May 2025. The dollar will remain volatile for the remainder of 2025, but I cannot see any scenario where it goes back to $1.45 USD. In fact, the USD/CAD is sitting right around where it was before the US election – funny how shit works out sometimes.

Inflation: It seems that the first 180 days of the year did bring some good news on inflation as it edged down from 1.9% in January 2025 to 1.7% in May 2025 ( last month data is available ). While headline appears to be dropping, the core inflation number is still stuck stubbornly high at the 2.5% range. One would hope that lower headline inflation will drag down the core number, but I am not so sure. But hey, inflation stopped going up, and even moderated a bit, so I guess that is something to be excited about. For the back half of the year, I would expect inflation to stick between 1.5% and 2% on the headline number. Don’t rule out a one off month where the number comes in higher than expected. Core inflation is what we really need to watch to see if we can get it to come back down to around the 2% mark. I think it is going to be awfully difficult for Uncle Tiff to get those 3 rate cuts in with core inflation stuck up at 2.5%, and a tariff war looming. Housing will continue to be a net drag on the inflation number, but importing products will want to pull the inflation reading up year over year.

Looking forward I think we will still see a lot of uncertainty – especially with DJT as it relates to Canadian trade. I surmise a monthly news headline about the on again off again trade war, and that will move things like the exchange rate and bond yields. Canada and the US seem to have a hard time coming to the table and working with each other, and we need to get this thing settled. The one thing that is becoming quite clear is that the US data is diverging from the Canada data. US GDP is growing while Canadian GDP is falling. US employment is growing – although slower than in the past, while Canadian employment has hit stall speed. With DJT’s big beautiful bill passing late last week, it will supercharge growth in the US ( while adding trillions to the debt ) and that could make US GDP climb a lot higher and faster. Hopefully this is good news for Canadian companies who export to the US.

On the Canadian 5 year bond yield front, I still see 3% being the resistance level for now. If we cannot clear 3% on the yield, then we stay stuck in the 2.7% to 2.98% range. Trouble for rates really only happens if we get over the 3% range and hold for a couple of sessions.

Broker on!!!