One More Thing

The trend continues to be the Bank of Canada’s friend. The first quarter ended with a whimper, implying a lacklustre carryover to Q2. Markets were quick to pare down expectations for a June cut following the strong headline employment numbers this month, but this might have been shortsighted. The Bank of Canada focuses on labour market slack, and the April jobs report showed there was still plenty of it. This week’s weak wholesale and manufacturing reports further underscored that the economy is not yet on solid ground.

Another overhyped theme three months ago was the notion that impending rate cuts would make for a hot homebuying season this spring. Yet April was another soft month External link. for home sales. In the GTA, sales fell for a third consecutive month. The GTA is also coming off its weakest quarter of new condo sales since 2009. Home sales fell by more than the national average in Quebec. And in Vancouver, some developers are giving purchasers their deposits back as they cancel projects failing to hit pre‑sale thresholds. With listings on the rise, it looks like sellers are the more enthusiastic bunch, while buyers are late to the party.

What we’ve seen play out is fairly consistent with what we’ve been expecting. Our research External link. indicated that the anticipated rate cuts would only improve affordability at the margin. The real challenge for the Bank of Canada may be the persistent lack of affordability on the homeownership side, which continues to drive rent increases, delaying prospects for any significant reduction in shelter inflation. That’s different than concern about a renewed real estate frenzy.

Speaking of concerns for the BoC, don’t look to the US either. The reassuring inflation and retail sales published stateside gave a bit of support to the loonie as the US dollar pulled back against most currencies this week. For now, this should alleviate concerns about the loonie reducing the BoC’s latitude to cut rates. Research by our macro strategy team finds that interest rate differentials have exerted less influence on the loonie than other factors such as the USD index (ex‑CAD), risk sentiment and oil prices. The direct currency pass‑through to overall Canadian inflation is also fairly modest, and the more compelling case for the BoC to react is if exports are boosted to a significant extent. But that’s only plausible in a much‑lower‑for‑longer scenario for the CAD.

Taken together, and for the purposes of the initiation of rate cuts in June, we shall treat all these developments as constructive news. But as Steve Jobs used to say, “One more thing.” That thing is the April CPI report next Tuesday. If our call for core inflation to continue to weaken comes to fruition, a June cut will be close to a done deal. Our updated forecast External link. published this week calls for three additional cuts during the year, putting the overnight rate at 4%.