North America


A last hurrah for housing

We are not convinced by the Bank of Canada’s view that the renewed strength of house prices is due to “extrapolative expectations”. With mortgage rates jumping recently, the large price gain in October may reflect buyers with pre-approved mortgages, at far lower borrowing rates, rushing to transact before their agreements expire. Either way, we continue to expect house price inflation to slow sharply in 2022.

2 December 2021

Bank to keep policy rate guidance unchanged

Growing wage pressures and the renewed strength of house prices are likely to concern the Bank of Canada but, with oil prices plunging in the past week due to fears about the Omicron variant, we doubt the Bank will make any changes to its forward guidance for interest rates at its meeting next week.

1 December 2021

GDP (Q3)

We wouldn’t put too much weight on the stronger-than-expected pace of third-quarter GDP growth because it mainly reflects a downward revision to GDP in the second quarter. Nevertheless, the latest GDP data are positive, with the preliminary estimate pointing to a 0.8% m/m jump in October.

30 November 2021
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Canada avoids winter wave, but new variant a threat

Winter is coming but, unlike Europe and the US Midwest too, Canada hasn’t seen a new wave of coronavirus infections. The emergence of a new potentially more-virulent coronavirus strain in South Africa could pose a new threat, however, particularly if the mutations make it more vaccine-resistant than the Delta strain.

Wage growth picking up

The sharp slowdown in the pace of hiring in the October Labour Force Survey caught the headlines, but the more important development was the sharp rise in fixed-weight average hourly earnings. Based on our seasonal adjustment, the fixed-weight index, which attempts to correct for the distortions that the pandemic has had on the normal average hourly earnings series, rose by 0.6% m/m. While the annual growth rate remained at a modest 2.2%, the 3m-on-3m annualised rate jumped to 3.9%. In a speech last week, Deputy Governor Lawrence Schembri confirmed that, based on the Bank’s assumption that underlying annual productivity growth is close to 1%, the Bank would be concerned about the inflationary implications of wage growth when it rises above 3% y/y. The strong monthly gains in the fixed-weight index last December and January should prevent the annual rate from reaching that level in the next few months, but there is a strong chance that annual wage growth will surpass 3% by the end of the first quarter. Nevertheless, given the short-term risks to the economic outlook from the recent removal of the government support programs and the extreme weather in British Columbia, for now we remain comfortable in our view that the Bank will wait until July to raise interest rates.

House prices surge, floods devastate BC

The renewed surge in house prices could persuade the Bank of Canada to raise interest rates sooner than we forecast, although the hit to activity from the devasting floods in BC this week reduces the chance of the Bank becoming more hawkish any time soon.

Retail Sales (Sep.)

The ongoing supply chain disruptions and unseasonably warm weather explain most of the weakness of retail sales in September, but it seems likely that the winding down of fiscal support to households also played a role. As the CRB program ended in October and the flooding in BC this week will worsen the supply chain disruptions, there is little chance of sales volumes rising strongly over the rest of the year.

We think US inflation compensation will rise further

US 10-year inflation compensation has risen by another 20bp or so over the past month and we think it will increase further as inflation in the US proves more persistent than most expect. This is one of the reasons why we forecast the yields of long-dated US Treasuries to rise over the next two years.

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