Weekly Digest

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November 9th, 2023

Fixed Rate Improvements

5 year bond, October 19th = 4.36%
5 year bond, November 7th = 3.82%

The last time the 5 year bond was at this level was in September. Why the sharp drop?

After the US Fed meeting Nov 1st (more on this below) and the Bank of Canada’s meeting on October 25th, the market thinks both are done with rate hikes. This has caused downward pressure on the bond.

Watch for fixed rate to drop imminently with lenders and we should start seeing more rates in the “5%’s”.

Variable vs

Fixed Rates

Variable rates are becoming the new favorite again for many borrowers. With fixed rates declining (as mentioned above), and the spread between the two rates being razor thing. The added convertibility of the variable rate product should be used to its advantage. Taking a 5 year variable rate now, and waiting for fixed rates to decline further will enable clients to lock in at lower rates. Additionally, with projected rate cuts in 2024, this will give additional discounts.

Unemployment vs Inflation

Higher unemployment = lower inflation. Unemployment numbers are creeping up and will reach 6% imminently (currently sitting at 5.70%). This marks the 4th monthly increase in the past 6 months.

US Fed Meeting

Last Wednesday marked the US FED meeting, and there were no changes to rates (held at 5.50%). Given that Canada’s rate is directly correlated with our neighbors to the south, this is promising for the narrative of “no more rate hikes”.

With last weeks decision, the 5 year yields have been dropping. This is a sign that the market and bond traders believe there will be no further rate hikes. This does not mean rate cuts are around the corner, however; it appears that we are finally at the end of the rate hike cycle.

US GDP numbers also cooled to just 1.2%, which means the lagging effects of high rates appear to finally have their intended effects.

GDP

Canadian GDP was unchanged in August & September. Canada’s population is growing at a rate of 2.9% and we have created 387,000 jobs in 2023, yet our GDP is growing 0%. 

Positive productivity is dis-inflationary.  Adding 387,000 jobs with no change to GDP is inflationary. We are now in a “technical recession”.

Winter (and Pain) is Coming

The Bank of Canada estimated the financial impact of rate hikes usually sets in after 18 to 24 months. BMO noted last week, “We are likely now entering the period (between now and early 2024) when the full impact of rate hikes will be absorbed.” The chart below illustrates BMO’s estimate of how monetary policy is transmitted to the economy.

Current Interest Rates

CONVENTIONAL

• 5 year fixed, 30 yr amortization – 6.24%

• 3 year fixed, 30 yr amortization – 6.50%

• 5 year variable, 30 yr amortization – Prime – 0.20% = 7.00%

• 5 year fixed, 25 yr amortization – 6.14%

• 3 year fixed, 25 yr amortization – 6.41%

• 5 year variable, 25 yr amortization – Prime – 0.30% = 6.90%

INSURED

• 5 year fixed, 25 yr amortization – 5.69%

• 4 year fixed, 25 yr amortization – 5.69%

• 3 year fixed, 25 yr amortization – 6.04%

• 5 year variable, 25 yr amortization – Prime – .90% = 6.30%

Fast Facts

• 90% – What the January futures contract for concentrated orange juice rose by this year. OJ prices have surged to their highest levels since contracts began trading in 1966. 

• $81.05 – the cost of crude oil per barrel. With a downward trend on pricing, this is good news for the inflation battle.

• $669,650 – How much the federal government paid consulting firm KPMG for its advice on cutting consulting costs, part of Treasury Secretary Anita Anand’s broader cost-cutting effort.