Market update

Canada's Consumer Price Index (CPI) rose 6.9% on a year-over-year basis in September. On a seasonally adjusted monthly basis, the CPI rose 0.4%. It is the third consecutive monthly slowdown in headline inflation.

That decline has largely been due to moderating gasoline prices while grocery prices rose 11.4% in September, the fastest pace since 1981.

Home prices fell for a fifth consecutive month in September, breaking the previous record set in August, falling 3.1% in September, compared to a month ago.

Canadian retail sales in August rose by 0.7% from a month earlier, versus estimates of a 0.4% rise. The increase was led by food and beverage stores and motor vehicle and parts dealers. On a yearly basis, retail trade rose by 7% in August.

U.S. housing starts fell 8.1% in September after a revised 13.7% rise in August. On a year-over-year basis, housing starts are down 7.7% in September. U.S. building permits rose 1.4% month-over-month in September.

U.S. initial jobless claims fell to 214,000, a three-week low, versus the expectation for 230,000 as more people who could not work after Hurricane Ian returned to their jobs.

U.S. existing home sales fell by 1.5%, a 10-year low. Higher U.S. mortgage rates are causing a sudden slowdown in the housing market as the average rate on the 30-year fixed-rate home loan is now just over 7%.

U.S. housing starts dropped 8.1% last month. Data for August was revised downwards from previously reported.

Retailers were sitting on $548.8 billion of inventory in July, a 21.6% increase from last year, according to U.S. Census data.

U.K. Prime Minister, Liz Truss quit on Thursday after the shortest, most chaotic tenure of any British prime minister, forced out after her economic programme shattered the country's reputation for financial stability and left many people poorer.

New inflation data for the U.K. and assessed rate hike expectations and recession fears. UK inflation accelerated by more than expected to 10.1% in September versus consensus 10.0% and prior 9.9%, taking it back to the 40-year high seen in July.

The biggest jump in food prices since 1980 pushed British inflation back into double digits last month, matching a 40-year high hit in July in a new blow for households grappling with a cost-of-living crisis.

Inflation in the eurozone reached 10% last month, as the region grapples with soaring energy prices that have raised the risks of a recession this winter.

German economic data showed 2-year German government bond yields rose to their highest since December 2008 while U.S. 10-year Treasury yields touched a 14-year high.

Oil prices were mixed ending slightly lower for the week with fears of an economic slowdown and lower fuel demand from China weighing on concern over tight supplies following reports of lower inventories in the United States offset fears of lower demand from China.

Scheduled release of this week's Chinese GDP and activity data were delayed, along with customs trade that was originally slated for last week. The unusual move comes as the Communist Party of China holds its 20th National Congress

The yen weakened past the 150 per dollar level, marking a 32-year low and keeping investors on watch for further intervention to support it. Japan’s trade deficit was smaller than expected with exports beating estimates, as imports remain elevated.

Gold prices and the dollar rose slightly while investors expect a large Federal Reserve rate hike to ease inflation.

 

Weekly change: TSX: 3.0%; DOW: 4.9%; S&P 500: 4.7%; NASDAQ: 5.3%; GOLD: 0.5%; WTI: -0.6%

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

Schwab Market Updates Podcasts - https://www.schwab.com/resource-center/insights/section/schwab-market-update

 

Real Estate Market Insights by Jon Makowsky and Ryan Grierson, CIBC Mortgage Advisors

 

“There are two roads to a lower inflation world; an overshoot in interest rate hikes or sitting on the precipice of a recession”.

According to CIBC Capital Markets, an overshoot in interest rate hikes drives the economy onto the “low road,” with a serious recession in the next few quarters, followed by an uphill growth path spurred by rate cuts later in 2023. But there’s also a “high road” that sees rates moving to, but persisting at a lower plateau, keeping the economy on the precipice of a recession but seeing a smattering of growth here and there.

Overall, the next five or six quarters will be a period of transition, with inflation entering like a lion and exiting like a lamb. The uncertainties lie in just how large a bite the lion takes out of economic growth before it leaves the stage.

Excess consumption on goods during the pandemic, most notably in the US, has cut into inventories and pushed prices up in Canada as well. However, so too have continued supply chain issues. While interest rate hikes both here and in the US will cool demand for goods, seeing inventory-to-sales ratios climb and reducing inflationary pressures, ongoing supply issues will mean that this process takes longer than anticipated.

As is typically the case in a rising rate environment, the housing sector will bear a disproportionate burden in the economic slowing ahead. That will have ripple effects beyond contractors directly engaged in construction, with decelerations or outright declines in furniture, appliances and other housing-related goods and services.

New Housing starts Consensus being reported next week shows a decline from 267.5K to 251K. We will also hear on Inflation, PPI and CPI.

October 26^th is the next Bank of Canada Interest Rate decision.

 

Calgary Market:

New listings in the city of Calgary decreased 9.7% year over year (YoY) and 3.4% month over month (MoM) to 2,625 homes, while the sales to new listings ratio stood at 72%, a moderation compared with last month’s 79%. Inventory decreased 6.8% MoM and currently stands at 4,453 homes equaling 2.34 months of sales compared with 2.2 months last month. Compared with spring 2022, we are moving from a tight market favoring sellers toward a balanced market.

The benchmark price of a detached home in Calgary increased 13% YOY while decreasing 0.8% MOM

971 detached homes show a 23% YOY and 9% MOM DECLINE in the number of homes sold.

Teranet-National Bank Composite House Price Index experienced its largest contraction ever in a single month due to rapidly rising rates and a slowing resale market. Data is unique as out of 31 cities covered by the index, all declined except for three: Calgary, Edmonton and Lethbridge (which is unprecedented). High isolated increases of energy / oil and many other commodities helped to buffer declines in these markets.

 

Variable vs. Fixed Rate?

Variable rate markets are directly affected by Bank of Canada Interest Rate decisions, with the next decision set for October 26^th where is we follow suit with the US, we should see another increase with inflation coming in at a consensus YOY or 6.8%.

Fixed Rate markets are affected / influenced by the Canadian bond market (see chart below)

Variable	202213-Sep	2022Dec	2023Mar	2023Jun	2023Sep	2023Dec	2024Jun	2024Dec
Overnight target rate	3.25	3.75	3.75	3.75	3.75	3.75	3.25	2.75
10-Year Government Bond	3.23	3.50	3.40	3.20	3.00	2.90	2.75	2.55

 

Per above commentary, we may see an extended unwinding of inflation, supply chain issues etc. that could keep our overnight rate elevated for the coming year. We may start seeing a decrease in fixed rate mortgages based on projected bond yield starting early spring. Regardless, a conversation is always prudent to make sure you are in the best type of product for you and your financial wellbeing.

 

WOWA Reference Link

House Price Reference Link

BOC Reference Link

Canadian Mortgage Trends Reference Link

CIBC Economics Reference Link

 

Changing composition of inflation strengthens central bankers by Benjamin Tal  Link to Article

We often meet with CEOs from different corners of the Canadian economy, and recently, our questions have naturally focused on the labour shortage, profit margins, and supply chains. And almost universally, CEOs have indicated no improvement in their ability to attract low-wage labour.

Many have suggested that it’s becoming more and more difficult to pass through higher costs to the consumer, which carries clear implications for the bottom line. Supply chains have somewhat improved in recent months, mainly for shipments arriving from China, which is important as the Fed and the Bank of Canada are helpless in controlling supply-driven inflation.

And now deriving to what extent supply issues are driving inflation. The San Francisco Fed did the hard work and according to its estimates, just over 40% of the gap between current US core inflation and its 2019 pace is due to supply-driven inflation, 35% of the gap is explained by demand factors, and the rest is ambiguous. This reasonably concludes that current inflation is driven almost evenly by demand and supply — more or less. More important here, however, is the fact that the contribution of supply factors to inflation is on a clear declining trajectory.

That changing composition of inflation might work to reduce the likelihood/magnitude of any overshooting by the Bank of Canada and the Fed. Every basis point decline in the contribution of supply-driven inflation leaves more control in the hands of central bankers to tamp down inflation, as it becomes more responsive to policy.

 

Global Insights

More Canadians are opting to lease their condominiums as a surging demand for rental properties persuade individuals to hold onto their properties, according to a RE/MAX Canada report.

In RE/MAX’s 2022 Canadian Condominium Report released Thursday, it found the condo market is “losing inventory to an attractive rental market, as would-be sellers simply opt to lease their units long-term.”

Bloomberg

One term in the Biden administration’s new controls on semiconductor sales to China could ensnare hundreds of Chinese American tech executives working for the country's tech companies—and perhaps force them to choose between their citizenship, or their job.

The new rules bar “U.S. persons,” which includes both U.S. citizens and permanent residents, from supporting the “development or production” of advanced chips at Chinese factories without a license. It's the first-time export controls on China extend to people, rather than just organizations or companies.

Bloomberg

U.S. President Joe Biden announced a plan on Wednesday to sell off the rest of his release from the nation's emergency oil reserve by year's end and begin refilling the stockpile as he tries to dampen high gasoline prices ahead of midterm elections on Nov. 8.

Biden is seeking to add enough supply to prevent near-term oil price spikes that could punish Americans and assure U.S. drillers that the government will enter the market as a buyer if prices plunge too low.

Reuters

A third term for Xi Jinping would risk a cold war, or even a hot one. But the prospect of China’s nationalistic leader staying in power, which the ruling Communist Party is almost certain to approve at its congress this week, isn’t all bad for the rest of the world. Xi’s policies are hurting the economy. That makes it harder for the People’s Republic to throw its weight around – and helps fight climate change.

Reuters

CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc.

"CIBC Private Wealth Management" is a registered trademark of CIBC, used under license. "Wood Gundy" is a registered trademark of CIBC World Markets Inc.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2022.