Economic Indicators Show Converging Path to US and Canada Rate Relief

Economic Indicators Show Converging Path to US and Canada Rate Relief

The Canadian economy saw a slight increase of 0.8% in its 2023 Q4 GDP, bucking a recession once again. The Real GDP showed a minor decrease this quarter, following a revised increase in the previous quarter. This month’s growth was led by goods-producing industries, which saw the most significant growth since last year. 

Stateside, US core personal consumption expenditures (PCE) inflation rose 0.4%, now at 2.9%, compared to 4.9% a year ago. Today’s report from the US Commerce Department reported that consumer spending slowed in January, held back by a drop in spending on goods such as cars, furniture, and other durable household goods.

Why It Matters

Gross Domestic Product (GDP) is a reliable indicator of a country’s economic health. When GDP rises, it’s a sign of good economic health, while a contracting GDP might indicate an economic recession. 

Inflation, measured through the Consumer Price Index (CPI), is crucial to a country’s stability. When inflation is steady and predictable, it signifies a stable economy. However, high inflation or deflation can indicate economic instability, while disinflation could signal an economic downturn. 

Just like GDP, monitoring inflation rates is vital for understanding the overall health of an economy and gauging longer-term outcomes for the mortgage and housing market.

The Details

Central bankers expect core inflation to move higher across the board, and mid-month, we’ll see if they’re right.  Inflation in the United States picked up in January as the cost of services such as housing and finance soared. Still, the year-over-year increase was the lowest in nearly 3 years, suggesting that a Federal Reserve interest rate cut in the summer is likely.

The 5-year GoC yield, the leading indicator of Canada’s most popular fixed rate, must stay under its last month’s high to avoid a rebound in mortgage rates. Should it dip below the previous month’s low, odds would improve for meaningful rate relief this summer.

The Big Picture

Canada’s GDP data for this quarter showed a decrease; meanwhile, the numbers for the previous quarter were revised to show an increase. This revision in data removes the country from fitting the technical recession criteria. According to the preliminary estimate for the next month, GDP growth is expected to increase.

Although Canada’s inflation reading last week came back lower than expectations for January, the US CPI came higher than expectations, pushing Canadian fixed rates higher – indicating a divergence in the economies. 

However, core inflation easing in the US and a slight increase in Canada’s revised quarterly GDP indicate a converging timing for a rate cut. Steady economic indicators in Canada and the US have contributed to gradual declines in fixed mortgage rates. However, there will always be bumps along the road.

Bond markets anticipate 3 rate cuts this year, likely starting in mid-summer. This forecast hinges on inflation trends going in the right direction in the upcoming months. Next week’s much-anticipated policy rate announcement in Canada and February’s CPI will be closely watched for more indications of a soft landing.

What This Means for Homebuyers and Homeowners

As recession risks abate, borrowers could move forward with their purchase or renewal in time for rate cuts. You should contact your mortgage expert to continue the conversation to lock in your mortgage rate. 

It’s wise to look for a lender who offers at least one float-down option if fixed rates slide further before your closing date. If your finances allow some room for risk, choose an adjustable-rate mortgage (ARM) to save you money as rate cuts roll in.