By Michael O’Neill

The race to tame inflation is far from over, but in the skate to the finish, the Stars and Stripes are waving proudly, while the Maple Leaf needs raking. It is fall, after all.

Fed Chair Jerome Powell is probably as proud as a peacock for engineering what may become the fifth “soft landing” since 1965. He joins an elite club of Fed chairs which includes William Martin Jr., Paul Volcker, Alan Greenspan, and Janet Yellen.

The evidence supporting a soft landing is starting to add up. October retail sales declined by 0.1%, Producer prices fell 0.5%, and inflation and Core-CPI ticked down to 4.0% from 4.1% in September. However, it is not the magnitude of the moves but the trend in direction that spurred a massive stock market rally while sinking the US dollar and Treasury yields at the same time.

JPMorgan economists suggest a soft landing for the economy is possible due to strong private sector fundamentals and a recent downshift in global growth that reduces recession risks. Key factors supporting this outlook include better-than-expected US supply-side performance and allowing job growth to coexist with low inflation. In addition, recent US developments, like stable GDP growth, progress in reducing inflation, and improved labor productivity further support the likelihood of a soft landing.

Fund managers are all-in. The Bank of America Fund Managers Survey showed respondents believe that Fed rates have peaked. In fact, two out of three investors expected a soft landing in 2024 and they are holding the biggest overweight positions in bonds since 2009.

The CME FedWatch tool is pricing a 57.3% chance that the Fed will begin easing at the May 1, 2024, meeting.


Picture by DALL-E

It’s a different story in Canada. The only thing that Bank of Canada Governor Tiff Macklem has engineered is more money for his staff. The BoC paid out $26.7 million in bonuses and raises in 2022. If you recall, that was the year they missed all the signs that inflation was heating up to problematic levels, while their forecasting performance was abysmal.

Hardly bonus-worthy, but these are the people who must manage Canadian monetary policy in a challenging environment, a lot of which is beyond their control. For starters, the war in Ukraine and Iran and its proxies’ war against Israel in Gaza can lead to a sudden spike in oil prices from supply disruptions in the regions. The BoC Summary of Deliberations from the October 25 meeting revealed a lot of uncertainty among policymakers in understanding and interpreting earlier bond market turmoil and they were concerned about China’s economic woes weighing on global growth. No fault there – central bankers worldwide struggled with the same issues.

Policymakers felt pretty good about the drop in inflation from 8.1% in June 2022 to 3.8% in September but were less enamored with inflation risks going forward, enough so that they raised their near-term outlook for CPI from 3.3% in Q3 2023 to 3.7%.

But that doesn’t mean they are going to hike rates any time soon, or even in the next year. That’s because they can’t.

Canada is facing a mortgage renewal crisis of epic proportions. Noted Canadian economist David Rosenberg, President of Rosenberg and Associates, said, “The macroeconomic math relating to Canada’s looming wall of mortgage renewals should be terrifying for the Bank of Canada.” Then he predicted the BoC would be forced to cut rates by 2-3% in the next 12-18 months. That’s because about 70% of all Canadian mortgages will be up for renewal in the next 3 years. That 1.9% fixed rate mortgage from 2020, if renewed at today’s rates, would be 6.27%. To put it in perspective, a homeowner with a $600,000 mortgage at 1.9%, fixed for five years/25 year term, paid $2,514.02 per month. In 2025, that same mortgage is now $480,821 but the monthly payment would jump to $3,177.78.

That’s $664.00/month that won’t be spent in restaurants, travel, entertainment, durable goods, vehicles, clothing, etc. There are about 6 million mortgages in Canada, which if 70% are up for renewal, then 4.2 million people could be over $600/month poorer, sucking $360 billion dollars of disposable income out of the economy.

Governor Tiff Macklem owns part of the mess. When the Governor of the central bank tells Canadians that borrowing rates would remain at historic lows for a long time, like he said on July 15, 2020, people trusted him to know what he was talking about. He didn’t. He still has his job and probably got a bonus as well.

The mortgage renewal nightmare is just one reason why Canadian interest rates won’t be going higher. Another major reason is Canada’s total debt. It ballooned by 85% from $612.3 billion in 2015 to an astronomical $1,134.5 billion because Canadians elected a Prime Minister who famously declared, “I don’t think about monetary policy.” Somebody should, because at current rates, more and more federal government revenues will go to service debt, not improve health care or other government initiatives.

The pandemic left the major developed market countries with sharply higher debt, and Canada joined the party. The US national debt jumped from $18.15 trillion in 2015 to $31.42 trillion in 2023. The difference is their economy. The US economy grew at 4.9% y/y in Q3 while Canada’s economy was flat, which suggests the US can grow their way out of a deficit problem far faster than Canada.

The risk of Bank of Canada rate cuts combined with lagging economic performance vis-à-vis the US suggests the downside for USDCAD is limited to the 1.3200 area.

In the monetary policy speed skating arena, the Americans are vying for Gold while the Canadians may earn a “DNF.”