The inverted yield curve is now even more inverted. Sadly, the economy looks to be seriously breaking down.
The yield on the two-year Treasury hit 3.87% on Friday, up from 3.78% on Thursday and now running higher than its long-term average of 3.14%. To put it simply, when interest rates for short-term lending are higher than interest rates for long-term lending (10 year at 3.45%) that means lenders see greater risk in lending today than they see lending to someone in the future.
You were warned on August 5.
“We’re facing a severe economic slowdown globally,” Edwards Jones investment strategist Mona Mahajan told CNBC’s Squawk Box this morning. “We had the hotter than expected inflation report this week…and the S&P from a technical perspective is looking weaker as well. We need to see the inflation picture improving. The consumer is still in decent shape, but we are not seeing recession conditions.”
We will.
The market is testing the Fed at this point, daring them to raise rates amid an economic slowdown. But considering how no one is willing to say the U.S. is in an actual recession — only a technical one — what is stopping the Fed from sticking to its mandate to fight inflation? To them, there is no recession, really. The job market is too strong. Unemployment isn’t even 4%.
They’re in a Catch-22. If they keep hiking rates, the economy will slow for sure as companies become wearier about their finances. Job cuts begin. The Fed then gets its recession and can stop increasing rates, assuming inflation declines.
“There is nothing but economic contraction that comes from the 2-year yield rising above the 10-year yield,” says Vladimir Signorelli, taking time out of his cruise to Mexico on Friday. Signorelli is the head of Bretton Woods Research, a macro investment research firm out of Long Valley, NJ.
Higher nearterm interest rates mean higher mortgage rates. That’s good for those looking to buy a house and have been priced out. But housing prices need to fall further before a lower sticker price makes up for a higher mortgage rate.
Federal Reserve Board Chairman Jerome Powell. Don’t blame me for this mess. (Photo by Alex … [+] Wong/Getty Images)
Getty Images
On a year-over-year basis, existing home sales and new home sales are down 20.2% and 29.6%, respectively. That’s because prices are still outrageous. This week Zillow revised its 12-month outlook and now predicts that U.S. home values will climb 1.4%. That’s the wrong way. Housing inflation is not helping the U.S. economy one bit. Some of this is due to supply chain problems because apparently the U.S. can’t make lumber and bathroom fixtures so it has to import everything by boat from China, which is in and out of Covid lockdowns. And the European multinational shippers have spent the better part of the last two years jacking up shipping prices. Also not helpful.
If housing slows, headwinds are coming for construction workers and all of those businesses on the margins kept alive by government stimulus during the pandemic. That stimulus is gone. And now the economic rug is being pulled out from under them.
At this rate, barring the captains of the Titanic shifting hard to starboard, a “deep recession” in the core economies is likely, as Barclays said last Friday and has reiterated all week.
“Unless Powell gets a clue, this is disastrous Federal Reserve policymaking in the making,” says Signorelli.
It is rare for central banks to raise rates in an economic downturn. But these same banks have had rates at zero, or near to it, when the economy was humming. That’s mainly because inflation was around 2% on a good day. Today it is closer to 9%, with some items like food as high as 10% versus a year ago.
“Hawkishness with interest rates is being mimicked elsewhere, like in Europe, India, and Brazil ,” Signorelli says. “It’s never good to see half the world’s central banks deciding their best efforts should now focus on curbing economic growth.”
World Bank President David Malpass recently warned central banks to turn back or a big global recession loomed for next year. It might be better to focus on encouraging production and economic growth.
“The increasing likelihood that the Fed is going to doom us to deep recession in an ill-fated attempt to un-bake an inflation cake borne of a bad 2021 recipe, is entering the popular narrative,” says Brian McCarthy, head of Macrolens in Stamford.
“I’m salivating to load up on 5-7 year bonds,” McCarthy says in a note to clients on Friday afternoon after market hours. “Soft-landing odds are falling towards zero. Salivate as I might…I’m afraid we’ll need to let this one stew just a little bit longer.”
The two-year Treasury says Wall Street investors — and lenders — think it’s time for a breather.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
