After four months of little change, private sector jobs finally took the lead in April. Employment gains were widespread across various industries within the services-producing sector, particularly in professional, scientific and technical services (+26,000; +1.3%), accommodation and food services (+24,000; +2.2%), health care and social assistance (+17,000; +0.6%) and natural resources (+7,700; +2.3%). However, there were declines in the goods-producing sector, notably utilities (-5,000; -3.1%).

Across Canadian provinces, employment increased in Ontario (+25,000; +0.3%), British Columbia (+23,000; +0.8%), Quebec (+19,000 +0.4%) and New Brunswick (+7,800; +2.0%).

The central bank meets again on June 5. The April CPI report will be released on May 21. This is by far the most important economic report for the Bank. They will look at the three-month trend in the core inflation measures. These figures have already fallen sharply, but given the strength in the jobs report, the central bank will likely wait another month before they begin cutting interest rates.

Shelter prices increased 6.5% year over year in March, rising at the same rate as in February.
The mortgage interest cost index rose 25.4% y/y in March, following a 26.3% increase in February. The homeowners’ replacement cost index, which is related to the price of new homes, declined less in March (-1.0%) compared with February (-1.4%) on a year-over-year basis.

Rent prices continued to climb in March, rising 8.5% year over year, following an 8.2% increase in February. Among other factors, a higher interest rate environment, which can create barriers to homeownership, puts upward pressure on the index.

Prices for services (+4.5%) continued to rise in March compared with February (+4.2%), driven by air transportation and rent. This outpaced price growth for goods (+1.1%), which slowed compared with February (+1.2%) on a yearly basis.

On a seasonally adjusted monthly basis, the CPI rose 0.3% in March.

Most importantly, the three-moving average of all core measures of Canadian inflation fell to below 2%, the Bank of Canada’s target inflation level. Governor Tiff Macklem got exactly what he was hoping for: Further confirmation that core inflation was falling within the target range.

Shelter remains the single most significant contributor to total inflation. Excluding shelter, inflation is tracking just 1.5% and has been below the central bank’s 2% target for most of the past six months. This has slowed economic activity, reducing consumer discretionary spending and making it more difficult for businesses to raise prices. Once interest rates fall, mortgage interest costs—a large component of shelter costs—will start falling.

The three-month annualized rates of the Bank of Canada’s core-median and trim indicators slowed to just 1.3% (see chart below), and the average year-over-year rates are down a tick to 3.0%. According to the economists at Desjardins, “the share of components in the CPI basket that are rising more than 3%, an indicator closely watched by Governor Macklem, is down to 38% from 41%. And the share of components showing price growth of less than 1% is up to 44% from 38% in February. Both suggest that the breadth of inflationary pressures is becoming more consistent with the Bank of Canada’s 2% target”.

We will see the April inflation data on May 21, before the next BoC decision date. While gasoline prices have continued to rise this month, so far, the gain has been more muted than in March. With any luck, today’s data will set the stage for the first BoC rate cut in June.

There is significant pent-up demand for housing owing to rapid population growth and first-time homebuyers’ fears that prices will rise sharply once the Bank of Canada cuts interest rates. Moreover, Ottawa has been handing out goodies for first-time buyers–leaking what’s to come in the April 16 federal budget. The Finance Minister has already announced the resumption of 30-year amortization on insured mortgages for first-time buyers of new construction. While this is less than meets the eye, in that pre-sales typically require a 20% deposit, the homebuilders’ association is pretty excited.

In addition, Ottawa has eased restrictions on the RRSP Home Buyers’ Plan, allowing F-T buyers to withdraw $60,000–up from $ 35,000 (never mind that the $35K ceiling is hardly ever broached)–with 5 years until repayments must begin, up from two years.

Ottawa is also providing assistance to at-risk homeowners, telling lenders to work with these households to lower payments “to a number they can afford, for as long as they need to” by allowing longer remaining amortizations. The Department of Finance is encouraging lenders to begin working with these at-risk households two years before scheduled renewals. The unintended consequences of this could be significant. For example, what happens to the mortgage-backed securities market and other investors in mortgages? Also, this reduces competition by discouraging refinancings and could raise the cost of borrowing for all participants.

Ottawa has never been very good at considering the second-order effects of their actions. A case in point is the decision to markedly increase immigration (for lots of good reasons) without considering where all of these new people would live. This has led to a massive housing shortage and the least affordable housing in Canadian history. Now that Trudeau’s approval ratings have suffered, they are scrambling to remediate, but increasing demand for housing is obviously not the answer.

There will be more news on Tuesday when I dissect the federal budget’s housing initiatives. The more government money spent, the more money borrowed, which will only raise interest rates from what they will otherwise be.

Back to the March data, national home sales edged up a mere 0.5% month-over-month, although activity rose 1.7%. That was a much smaller gain than those recorded in the previous two months, although a part of that does reflect a mostly inactive market during the Easter long weekend.

The number of newly listed homes declined by 1.6% month-over-month in March. “While the official March monthly numbers were quite flat, anecdotal evidence from late last month and early April suggests activity is ramping up,” said Larry Cerqua, Chair of CREA.

With sales edging up and new listings falling in March, the national sales-to-new listings ratio tightened to 57.4%. The long-term average is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

At the end of March, there were 3.8 months of inventory nationwide, unchanged from the end of February. The long-term average is about five months of inventory.

New listings rose sharply in late March and early April–good news on all fronts.

The actual national average home price in March was up 2% year-over-year from a markedly depressed level. The MLS Home Price Index was roughly unchanged, down markedly from its early 2022 peak when the central bank’s overnight policy rate was a mere 25 basis points before they started hiking rates in March, two years ago.

With pent-up demand for housing rising with every rent increase, the spring housing season is likely to be robust, even before the central bank cuts interest rates. We believe the BoC will begin reducing the policy rate in June or July, depending on the next two CPI reports. March inflation data will be released on Tuesday (a big day for economic news), and April data will come out on May 21st. The next Bank of Canada decision date is June 5th.

Excluding gasoline, the headline CPI slowed to a 2.9% year-over-year increase in February, down from 3.2% in January. Prices for rent and the mortgage interest cost index continued to apply upward pressure on the headline CPI.

On a monthly basis, the CPI rose 0.3% in February, the same as in January. The most significant contributors to the monthly increase were higher travel tours and gasoline prices.

On a seasonally adjusted monthly basis, the CPI rose 0.1% in February.

Prices for food purchased from stores continued to ease year over year in February (+2.4%) compared with January (+3.4%). Slower price growth was broad-based, with prices for fresh fruit (-2.6%), processed meat (-0.6%), and fish (-1.3%) declining. Other food preparations (+1.4%), preserved fruit and fruit preparations (+4.0%), cereal products (+1.7%), and dairy products (+0.6%) decelerated in February.

While grocery price growth has been slowing, prices continue to increase and remain elevated. From February 2021 to February 2024, prices for food purchased from stores increased by 21.6%.

The next meeting of the Bank of Canada Governing Council is on April 10. Before then, we will see two more important data releases:

1. The Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectation and;
2. The Labour Force Survey for March.

Neither of these reports will likely derail the central bank’s move to cut interest rates by the June 10 meeting. Indeed, they could begin to cut rates at the April meeting. This would no doubt trigger a whopping Spring housing market, which is likely to be strong. There is significant pent-up demand for housing, and the prospect of home price increases could well move buyers off the sidelines if a surge in new listings comes to fruition.

The Canadian economy is particularly interest rate sensitive because of the vast volumes of mortgages that will be renewed in the next two years. Mortgage delinquency rates are already rising, so a gradual decline in interest rates is welcome news.

As the chart below shows, the three-month rolling average growth rates for the CPI trim and median core measures averaged 2.2% in February–their lowest reading in three years.

According to the Royal Bank economists, “Building on the January CPI report that was already showing broad-based easing in price pressures in Canada, the February report today reaffirmed those trends. Different measures of core inflation decelerated, and the diffusion index that measures the scope of inflation pressures also improved. That measure, however, was still showing slightly broader price pressures than pre-pandemic “norms”, suggesting there’s still room for more improvement.”

With the economy’s slow growth trajectory, the central bank has every reason to begin cutting interest rates soon.