Lower for Longer?
by JDH on October 14, 2023
Last week, I said that interest rates have peaked, and I showed this chart:
So far, so good. The 5-year Canada Government Bond Yield closed at 4.212%, a further drop since last week, so the prediction still holds.
But what about the future? Let’s review some history:
Interest rates were low, personal savings were non-existent, but then the lockdowns started, and governments around the world printed money, and asset prices boomed. But that caused inflation, so in March 2022 the Fed and the Bank of Canada started raising interest rates, but in the first few months it didn’t matter, because there was a lot of money in savings, so that cushioned the blow.
Spending continued. Well positioned consumers and businesses locked in mortgages and debt at low interest rates to continue spending.
But the consumer is now running out of money. The savings rate in Canada, which was zero before the pandemic and hit over 25% in the middle of 2020 is now trending back towards zero again. We have no dry powder. We have nothing left to spend.
But what we do spend tends to be on services, not goods. We don’t make anything in North America; we import it. Only services are provided locally. Wages are “sticky”, meaning they don’t change daily. If the union negotiates a three year contract, wages remain predictible for three years, regardless of what’s happening in the world. That’s one reason why changes in interest rates and other changes in monetary and fiscal policy do not immediately impact the overall economy.
There is a huge time lag.
The point: just because a recession is not immediately apparent, does not mean it’s not happening. It will arrive, just slower than expected.
Stay tuned.
Lower for Longer?
by JDH on October 14, 2023
Last week, I said that interest rates have peaked, and I showed this chart:
So far, so good. The 5-year Canada Government Bond Yield closed at 4.212%, a further drop since last week, so the prediction still holds.
But what about the future? Let’s review some history:
Interest rates were low, personal savings were non-existent, but then the lockdowns started, and governments around the world printed money, and asset prices boomed. But that caused inflation, so in March 2022 the Fed and the Bank of Canada started raising interest rates, but in the first few months it didn’t matter, because there was a lot of money in savings, so that cushioned the blow.
Spending continued. Well positioned consumers and businesses locked in mortgages and debt at low interest rates to continue spending.
But the consumer is now running out of money. The savings rate in Canada, which was zero before the pandemic and hit over 25% in the middle of 2020 is now trending back towards zero again. We have no dry powder. We have nothing left to spend.
But what we do spend tends to be on services, not goods. We don’t make anything in North America; we import it. Only services are provided locally. Wages are “sticky”, meaning they don’t change daily. If the union negotiates a three year contract, wages remain predictible for three years, regardless of what’s happening in the world. That’s one reason why changes in interest rates and other changes in monetary and fiscal policy do not immediately impact the overall economy.
There is a huge time lag.
The point: just because a recession is not immediately apparent, does not mean it’s not happening. It will arrive, just slower than expected.
Stay tuned.