Fed and fed up: U.S. rates may rise, Canadian home sales will tumble

This week is all about the Fed, being fed up, and being overfed.

First up, on Wednesday, is the Federal Reserve, which economists expect will raise its benchmark interest rate again by one-quarter of a percentage point. The following two days bring reports on Canadian home sales and household debt and wealth.

FED

Markets expect the U.S. central bank’s Federal Open Market Committee, the policy-setting group, to raise the federal funds rate’s target range to 1.75 to 2 per cent.

“A rate rise this week isn’t really in doubt, however the narrative for the remainder of this year is what markets are more likely to be more fixated on,” said CMC Markets chief analyst Michael Hewson.

“How does the Fed see the U.S. economy, and what concerns do they have about recent trade tensions, and the impact on investment decisions, as well as expectations around the run rate for inflation, alongside their tolerance levels for a minor overshoot?”

Fed chair Jerome PowellCharles Rex Arbogast/The Associated Press

A rate hike would also mark something of a milestone in the recovery from the financial crisis, with the target range eclipsing a measure of inflation that strips out volatile items such as energy and food prices, noted Bank of Montreal deputy chief economist Michael Gregory.

A quarter-point jump would put the midpoint of the target range at 1.875 per cent, he said.

That would top what’s known as core personal consumption expenditures inflation, which now stands at an annual rate of 1.8 per cent, though it would remain below the pace of all prices.

“Although real policy rates will still be slightly negative relative to headline PCE inflation (2 per cent), this is an important milestone on the road to policy normalization (a trip that began 2 1/5 years or 175 basis points ago),” Mr. Gregory said.

With an interest rate increase expected, markets will focus on the Fed’s updated economic forecasts and the so-called “dot plot,” which spells out the rate-hike timeline expected among individual policy makers.

“With second quarter GDP growth tracking at between 3.5 and 4 per cent, annualized, and signs that underlying price pressures are picking up, the accompanying statement and economic projections may well hint that a further two rate hikes are coming in the second half of this year,” said Michael Pearce, senior U.S. economist at Capital Economics.

OVERFED

Statistics Canada may buoy the hearts of policy makers who have been trying to curb the voracious credit appetite of consumers, and apparently succeeding.

On Thursday, the agency releases a first-quarter report expected to show the pace of debt growth slowed as, among other things, new mortgage-qualification rules came into effect.

Household credit growth

Residential mortgage credit and home equity lines of credit

percent change, right scale)

Consumer credit, excluding home equity lines of credit

(percent change, right scale)

Level of the debt-to-disposable-income ratio (left scale)

175%

10%

November FSR

170

165

160

155

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Household credit growth

Residential mortgage credit and home equity lines of credit

percent change, right scale)

Consumer credit, excluding home equity lines of credit

(percent change, right scale)

Level of the debt-to-disposable-income ratio (left scale)

175%

10%

November FSR

170

165

160

155

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Household credit growth

Residential mortgage credit and home equity lines of credit percent change, right scale)

Consumer credit, excluding home equity lines of credit (percent change, right scale)

Level of the debt-to-disposable-income ratio (left scale)

175%

10%

November FSR

170

165

160

155

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

“While income growth wasn’t spectacular to start the year, it was far stronger than a year ago, which should dampen debt ratios,” said Benjamin Reitzes, BMO’s Canadian rates and macro strategist, referring to the widely watched measure of household debt to disposable income.

“Note that the ratio generally falls in Q1 (averaging 0.7 of a percentage point since 2010) as housing is usually softer through the winter, but look for a steeper drop this year,” he added, citing the fact that the report also details wealth levels.

“Net worth as a share of disposable income climbed in Q4, but a drop in the TSX and home prices suggests we’ll see a decline in net worth in Q1. Over all, Canadian balance sheets are in decent shape, despite the persistent concerns about the debt burden.”

FED UP

Expect to see an ongoing slump in housing markets when the Canadian Real Estate Association closes out the week Friday with its report on May sales and prices.

This, too, will buoy the hearts of policy makers in British Columbia and at the Office of the Superintendent of Financial Institutions, the bank regulator, whose measures have eased the inflated Vancouver and Toronto markets.

The Ontario government, whose fair housing plan also played a big role, is about to be replaced by a Conservative administration led by Doug Ford, who mused during the election campaign about possibly killing the tax on foreign buyers of Toronto area real estate.

Year-over-year growth in quality-adjusted

benchmark house prices

Greater Vancouver Area, Vancouver Island,

Victoria and Fraser Valley

Greater Toronto Area, Barrie and district, Guelph and district

Calgary, Edmonton, Saskatoon and Regina

Ottawa, Montreal and Moncton

Canada

35%

November FSR

-5

-10

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Year-over-year growth in quality-adjusted

benchmark house prices

Greater Vancouver Area, Vancouver Island, Victoria and Fraser Valley

Greater Toronto Area, Barrie and district, Guelph and district

Calgary, Edmonton, Saskatoon and Regina

Ottawa, Montreal and Moncton

Canada

35%

November FSR

-5

-10

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Year-over-year growth in quality-adjusted benchmark house prices

Greater Vancouver Area, Vancouver Island, Victoria and Fraser Valley

Greater Toronto Area, Barrie and district, Guelph and district

Calgary, Edmonton, Saskatoon and Regina

Ottawa, Montreal and Moncton

Canada

35%

November FSR

-5

-10

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Having already seen several local real estate board reports, including those from Vancouver and Toronto, BMO’s Mr. Reitzes expects CREA’s national number to show home sales tumbled 17 per cent in May from a year earlier, with average prices down 5 per cent.

The MLS home price index, which observers believe is a better measure, is expected to show a gain of just 1 per cent, the slowest pace since late 2009.

On a monthly basis, expect to see a “flat to lower” showing in sales in May from April.

“There are some early signs that the market is stabilizing but we’re still waiting on a rebound,” Mr. Reitzes said.

“Toronto and Vancouver remain soft (outside a still-robust condo market), along with Calgary, while activity has plateaued in the hot markets of Montreal and Ottawa,” Mr. Reitzes said.

The fed up part of this refers to homeowners who won’t sell as prices ease.

At last count, in April, new listings were down 4.8 per cent from March, falling to a nine-year low for that month and sitting 10 per cent below their 10-year monthly moving average.

The rest of the calendar:

MONDAY: FED WELL

The International Economic Forum of the Americas - Conference of Montreal kicks off, drawing speakers from across the globe to discuss issues from geopolitical threats to artificial intelligence.

Montreal Mayor Valérie Plante gets it started. Later in the day, Quebec Premier Philippe Couillard and others highlight what will no doubt be a grand opening luncheon.

TUESDAY: FEEDING FRENZY

The U.S. reports its key inflation numbers, which sets the stage for Wednesday’s Fed decision. Economists believe consumer prices rose 0.2 or 0.3 per cent in May from April, with annual inflation at 2.8 per cent.

The vehicle carrying North Korean leader Kim Jong-un makes its way to the Istana in Singapore June 10, 2018TYRONE SIU/Reuters

That, of course, will be overshadowed by the meeting in Singapore between North Korea’s Kim Jong-un and President Donald Trump, fresh from having ruffled feathers at the G7 summit. Expect a feeding frenzy at this historic get-together.

“The meeting is a big deal politically, but even if a major breakthrough is announced, the impact on South Korea’s financial markets and economy is likely to be fairly modest,” said Gareth Leather of Capital Economics.

WEDNESDAY: FAST FOOD

Besides the afternoon Fed announcement, the new projections and a news conference with central bank chair Jerome Powell, Britain reports May inflation numbers.

“At the most recent inflation report, the Bank of England downgraded its inflation target for this year to 2.5 per cent, which in light of recent sharp rises in oil prices seems remarkably optimistic on its part,” said CMC’s Mr. Hewson.

“For the most part, inflation has fallen back from peaks of 3.1 per cent at the beginning of the year to 2.4 per cent now, however there is no evidence that any of this reflects the recent surge in oil prices, which saw a sharp jump in EU [inflation] to one-year peaks in its most recent numbers,” he added.

“If this is translated into the U.K. numbers, we could see inflation tick higher.”

Also, quarterly results from Roots Corp.

THURSDAY; FOOD FOR THOUGHT

A biggie for central bank watchers, with the European Central Bank at centre stage.

And, noted BMO senior economist Jennifer Lee, the ECB is “finally getting what it has always wanted” in terms of faster inflation. She cited the latest consumer price report that showed annual inflation in the euro zone at 1.9 per cent in May, the highest pace in a year and almost bang on the 2-per-cent goal.

“Even core inflation (which removes the impact of food, energy, alcohol and tobacco) rose 1.1 per cent, a pace not seen in eight months,” Ms. Lee said.

“And, with the heat from Italy dialled down a notch, the ECB will now be able to freely discuss (and admit to it) the prospects of scaling back its bond-buying program this year,” she added.

“Don’t expect any details, just discussion.”

Markets will also be watching for the May report on U.S. retail sales, expected among economists to show an increase of 0.4 per cent.

FRIDAY: COMFORT FOOD

Besides home sales, Canada’s manufacturers also get to see how they fared in April.

“We expect manufacturing sales were little changed in April — not increasing but also not giving back any of the cumulative 4.1-per-cent jump over the prior two months,” Royal Bank of Canada economists said in a lookahead, expecting to see prices up and volumes down by about 0.2 per cent.

The Bank of Japan also releases its decision, but no change is expected.

FED