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More trouble may lie ahead for risky assets

We think “risky” assets will continue to struggle over the next year or so, even if a recession is avoided in most major developed markets.

24 May 2022

Core inflation still rising, as housing slumps

The Bank of Canada will have eyed this week’s data releases and market moves with some trepidation. The further acceleration in core CPI inflation in April means the Bank is all but guaranteed to push ahead with another 50bp interest rate hike at its upcoming policy meeting, particularly with gasoline prices spiking even higher this month. But the reported slump in home sales (and prices) and the sell-off in global equity markets, are warnings that overly aggressive monetary tightening by the Bank of Canada (and other central banks) could backfire, plunging the global economy into recession.

20 May 2022

Consumer Prices (Apr.)

CPI inflation edged up to a new cyclical high of 6.8% in April, from 6.7%, and, together with the more marked increases in core inflation, that almost guarantees the Bank of Canada will hike its policy rate by another 50bp next month.

18 May 2022
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Fall in house prices to contribute to lower CPI inflation

The 10% fall in house prices that we expect over the next 12 months will also help to pull down CPI inflation, via its impact on shelter costs. Admittedly, shelter inflation is unlikely to decline meaningfully until 2023, because of soaring mortgage costs, but this is nevertheless one reason to expect headline inflation to drop back sharply next year.

Manufacturing Sales (Mar.)

The rise in manufacturing sales in March was entirely due to higher commodity prices, but the orders data and the business surveys suggest that sales volumes will do better in the coming months.

Gasoline price jump to drive CPI inflation above 7%

The unexpected further jump in gasoline prices, reflecting a sharp widening of refiners’ margins, means we now expect headline CPI inflation to rise above 7% in May. While the rise in refiners’ margins presents an upside risk to our inflation forecasts over the rest of 2022, we expect this to be largely offset by the impact of a fall in house prices on shelter inflation.

Will a housing downturn crash the economy?

We expect higher interest rates to cause a 10% fall in house prices over the next 12 months and an even steeper fall in residential investment. With the rest of the economy still recovering from the pandemic and benefitting from higher commodity prices, that weakness should cause GDP growth to slow sharply rather than turn negative, but the downside risks of recession are rising. Canada Drop-In (10th May, 12:00 EDT/ 17:00 BST): We’ll be discussing the impact of monetary tightening on the economy and whether the Bank of Canada is risking a policy mistake in this special 20-minute briefing. Register now

Cracks in housing market risk turning into chasms

The slump in home sales in April, combined with the unexpected fall in hours worked, point to downside risks to GDP last month. While hours worked are set to rebound in May, there is likely to be much more weakness to come for the housing market. Canada Drop-In (10th May, 12:00 EDT/ 17:00 BST): We’ll be discussing the impact of monetary tightening on the economy and whether the Bank of Canada is risking a policy mistake in this special 20-minute briefing. Register now

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