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Residential Market Commentary - Rate cut seems certain

Sep 3, 2019
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First National Financial LP

Market watchers have really come around to the idea that the Bank of Canada is going to be cutting interest rates.  The only point that is up for debate is when.

The latest GDP numbers, which surprised just about everyone, are not going to be enough to prevent the BoC from trimming rates before it wants to.

Second quarter, annualized growth came in at 3.7%, well above the Bank’s forecast of 2.3% and the 3.0% predicted by economists.  It is an impressive jump, but it is just that - a jump.  There is no sustained loft.  The increase is largely based on a spike in exports, an increase in oil prices and the movement of product that had been stuck in place by bad winter weather.

A deeper look shows that the economic metric known as Final Domestic Demand dipped sharply in Q2.  This drop in consumption, business investment and government spending means there is no economic support for a GDP rebound.  The trade headwinds blowing out of the White House and the resulting trajectories of the U.S. and global economies make it likely that Canada will see growth diminish.

Housing has been a bright spot in all of this, with sales increasing and mortgage generations on the rise.  But generally, consumers are reducing their spending.  The household saving rate rose to 1.7%, up from 1.3% in the first quarter.

Third quarter results are widely expected to be the tipping point.  Most analysts expect, at least, a quarter-point rate cut by the end of Q1 2020.