Weekly Digest — June 17th, 2023

South of the Border

The Federal reserve in the US took a break this week from hiking rates, but it has signalled for more hikes before the end of the calendar year. After 500 basis points of hikes, the Fed paused for the first time in 11 meetings.  

The predictions moving forward in the US is listed below; 

• 0.50% more Fed hikes by end of calendar year 

• A 5.75% peak in the Fed rate 

• 1% of cuts in 2024 

• 2.20% of cuts by year-end 2025 

• U.S. core inflation near the 2% target in 2025 

• The median projected long run Fed rate to stay at 2.50%

‘Short Term’ Pain

What does the above mean for Canadians? Canada’s prime lending rate has over a 90% correlation with the Fed funds target rate. Peak rate expectations have jumped from 5.0% up from 4.50% just a few short weeks ago.

The next crucial date in the calendar is the June 27th inflation report. Inflation should dip into the 3% range by this date which will help future rate expectations.

The Fed and the Bank of Canada is chasing the data which consistently lags behind.  Until unemployment runs higher, rates are likely not restrictive enough. The glass floor of rates will not break until the central bank cuts become extremely obvious and fixed rates are increasing because traders expect another hike.  

Markets now predict a 73% chance of one final hike on July 12th before cuts to follow in 2024. 

Fixed Rates Continue to Climb

Short term rate expectations have increased dramatically with the recent spike to the bond yields. Interest rates are approaching the peak of October 2022.

As short term fixed rates remain a popular strategy, all fixed rates have moved upwards of 0.50% in the last 10 days.

• 1 and 2 year fixed terms are now back over 6%.

• 3 year fixed terms are now over 5.50%.

The below chart compares the trend of the 5 year fixed rates to the 5 year Canada bond.

CONVENTIONAL

• 5 year fixed, 30 yr amortization – 5.59%

• 3 year fixed, 30 yr amortization – 5.81%

• 5 year variable, 30 yr amortization – Prime – 0.60% = 6.35%

• 5 year fixed, 25 yr amortization – 5.49%

• 3 year fixed, 25 yr amortization – 5.71%

• 5 year variable, 25 yr amortization – Prime – 0.70% = 6.25%

INSURED

• 5 year fixed, 25 yr amortization – 5.09%

• 4 year fixed, 25 yr amortization – 5.14%

• 3 year fixed, 25 yr amortization – 5.59%

• 5 year variable, 25 yr amortization – Prime – .90% = 6.05%

Trends

• Business are investing less in buildings and equipment because of high interest rates 

• Average mortgage size is down, but monthly payment are up 

Fast Facts

• $16.3 billion – What Volkswagen’s Canadian EV battery plant is estimated to cost the federal government over ten years, up from $13 billion. 

• $1.85 – that’s the average in debt for every dollar of disposable income across Canada