The Two Minute Market Update is intended to keep readers apprised of what’s going on in local real estate markets and in the global financial markets that affect real estate via inflation, interest rates, capital flows and public policy. It is best suited for those not able to keep up with all the news every day, but still wanting to be informed.
Two Minute Market Update, August 26th, 2024
The summer doldrums continue as the prevailing conditions have shown little indication of relenting – even with lower interest rates providing buyers with more purchasing power. Sentiment is that sellers want to wait for even more favourable lending conditions upcoming and buyers want to wait for more supply to hit the market after the summer season.
The US federal reserve removed all doubt about their expected rate cutting campaign beginning on September 18th. They’ve now seen enough data to indicate slowing inflation and weakening employment. Futures markets expect a total of 100 bps of cuts before the end of the year, meaning one of the three meetings remaining would need to see a jumbo cut (50 bps). Markets in general celebrated the news. Implied odds for Canadian rate cuts have also risen, now showing a 91% chance of 3 more cuts on top of the 2 already done. They are also implying with high confidence this will continue into 2025, settling at 3% by early next summer. Having the US fed on board with monetary policy allows the Bank of Canada to be more aggressive without sacrificing the currency.
Government bond yields on both sides of the border are anticipating these future cuts and trending downward although volatility remains elevated. While the market is looking at this lowering inflation/weakening economy trend as a given, it bears considering what would happen if there was some sort of shock to this outlook. External supply shocks, policy induced inflation (presidential campaign, fledgling coalition gov’t) or a stronger than expected economy could derail the rate cut plans, pushing them out further or halting them altogether. Our job here is to first acknowledge what “the market knows”, but also identify what it is not considering to avoid being caught off-guard.
Stock markets are broadly hitting new all-time highs or nearing previous highs as risk appetite has returned despite some of the risks laid bare in past weeks. Aftershocks from the August 5th event remain possible, but with low volume the path of least resistance is higher on most asset prices.
Bitcoin is a risk asset that would typically do well in an environment of a less-restrained monetary policy. With rate reductions already being implied as inflation has only just returned to the target range, protection of purchasing power is top of mind for some participants, attracting more investors to crypto. Gold, similarly, is making new all-time highs above $2500, setting itself up to benefit from prolonged increases of liquidity from Central banks. Also affecting both commodities are expectations of a fiscal Chinese bazooka intended to lift their slowing economy. The lack of transparency with data and governance in China makes this less believable than from other countries. However, increased demand for major commodities is often the result of their interventions, so we will look to upward price pressure to see if it will eventually trickle through to inflation and economic growth data abroad.
Matthew Stiles
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Disclaimer: The information provided in this column is for general informational purposes only and does not constitute financial, investment, or other professional advice. While I strive to provide accurate and up-to-date information, I make no warranties or representations as to its accuracy, completeness, or reliability. Any actions taken based on this information are at your own risk. Always consult with a qualified financial advisor before making any investment decisions.