October 25, 2022 | The Beatings Will Continue

Inflation in Canada slowed less than expected, growing by 6.9% year-over-year in September, economist expectations were at 6.7%. A small miss that will have big ramifications. Markets immediately repriced Bank of Canada rate hike odds for October 26th, now expecting another jumbo 75bps rate hike. In other words, the beatings will continue until morale improves.

Not to beat a dead horse, but the CPI index is a lagging indicator. Per Stats Canada, one of the reasons inflation didn’t come down as much as expected is because furniture and car prices accelerated higher. Really? Every furniture store you go into these days is slashing prices and cutting their workforce. Let’s not forget the comments from the CEO of Restoration Hardware in September,

“Anybody who thinks we’re not in a recession is crazy,” Friedman told analysts. “The housing market is in a recession, and it’s just getting started. So it’s probably going to be a difficult 12 to 18 months in our industry.”

They say stocks have information in their price. Here’s Restoration Hardware, taken to the woodshed, down 55% year to date.

No need for a new couch when nobody’s moving. As the housing market goes so do the things tied to it. Here’s a chart of used car prices in the US, down 10% from the highs.

Some people say new car prices haven’t dropped, but let’s be realistic it’s only a matter of time, financing rates are through the roof and households are feeling the pinch. Global wealth has plummeted US$23.6 trillion from its peak.

Maybe it doesn’t seem like it, but inflation is easing, give it time. The ironic part is central banks say it takes about 12 months for interest rates to work through the economy. In other words, later this week we will have raised rates 400bps in seven months and we don’t even know the impact of said rates. Not crying over spilled milk here, just pointing out the obvious.

If you want a sneak peek of where the economy /inflation might be heading just watch the housing market. In 2007, Edward Leamer presented a paper at Jackson Hole titled, ‘Housing IS the Business Cycle’

Makes sense given its most households largest asset, it’s also highly sensitive to interest rate movements.

So what gives?

National house prices in Canada fell another 1.4% in September, now down 14% from the peak in March. Steepest correction since the index was created in 2005.

And this is September data which also tends to lag a few months. In other words, house prices have been falling for awhile and mortgage rates have only gone up since. We are inching closer to 6% mortgage rates in Canada. Draw your own conclusions.

Steve Saretsky October 25th, 2022

Posted In: Steve Saretsky Blog

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