Canadian rate hikes working better than it looks: CIBC economist

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

CIBC senior economist Andrew Grantham discusses the argument that interest rates are not working to slow inflation (he disagrees),

“Focusing on recent growth rates, it is easy to come to the conclusion that the rate hike has not yet affected consumer spending plans. In fact, inflation-adjusted spending on items that generally considered to be the most sensitive to interest rates increased by almost 15 percent since the first increase was given last year … The amount of spending in these interest rate sensitive areas is still 1 percent below the level of Q4′ 19. That is clearly worse in per-capita terms, given the rapid population growth seen recently, and represents a roughly 10-15-percent shortfall relative to its pre-pandemic trend … While supply issues are certainly holding back spending to some extent, with airlines, restaurants and other service providers still trying to recruit staff, and car dealers still working through in unfilled orders, these issues are developing and may no longer completely cause a lack of spending in areas related to their pre-pandemic trend. In other words, the rate hike may already be working to dampen demand, and the real test in terms of growth rates is yet to come. If rate hikes have worked to cool demand more than is apparent by looking at growth rates alone, history may show that the Bank of Canada’s recent rate hike (and any subsequent -next moves) are unnecessary, and at worst wrong.

“Will rate hikes never work?” – CIBC Economics

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Citi US strategist Scott Chronert isn’t worried about the S&P 500’s forward price-to-earnings ratio rising above 20 times,

“The PULSE framework is negative on Qrice and Uunyacipated, neutral to Sentity and Liquidity, and positive Eworks. The S&P 500 P/E breaking above 20 this week may turn some investors and market prognosticators more bearish. However, valuation alone is not a good indicator of the market’s medium-term direction. For context, weekly data since 1949 show that the S&P 500 P/E is likely to de-rate below -1x on average over the next six months if multiples break more than 20 times. In addition, 40 percent of the time index P/E is moving higher from the 20 times starting point. For us, valuation alone is not enough to make a near-term bearish call. While we expect a back-and-forth after key gains, our views are largely driven by higher near-term earnings expectations and potential EPS softness in 1H 2024 ″

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BMO economists Aaron Goertzen and Erik Johnson examine the possibility that household savings from pandemic-related government stimulus saved the economy,

“Conventional wisdom says that high mortgage rates should make Canadian households more sensitive to changes in interest rates, but so far they have shown remarkable resilience while monetary policy is tightening … inflation, it clearly takes the steam out of household borrowing. The speed of household credit growth has almost halved from an average of 7.0% per year in 2021 and 2022 to 3.2 percent annually announced in 2023 year-to-date … , the personal saving rate jumped from the low single-digits to more than 25 percent … Excess savings were directed in part to equities and real estate, which drove earlier booms in the markets, but households also stock large assets in liquid deposits, which suggests an intention. spending. Between the end of 2019 and 2022, total household deposits held by chartered banks increased by $333 billion (or 30 percent)… This contrasts with the situation in the United States, where consumers actually tapped into their earlier savings… It turns out that instead of using their deposits to finance consumption, Canadian households are reallocating funds to interest-bearing products”

“Cash Flushing: What Does Household Finance Mean for the BoC?” – BMO economy

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Diversion: “Are you tall? Mars Helicopter Finally Made Contact After Two Months of Silence” – Gizmodo

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