Oh oh. More good news that could be bad for your economic health

On the surface, the return of ‘ask sold’ signs for real estate seems like an encouraging signal for the Canadian economy, especially for highly invested homeowners who have seen prices fall from last year’s highs.

But a growing number of economists are concerned that a series of recent indicators, the latest being Wednesday’s rise in Canadian retail sales, may instead be a red flag to central bankers, prompting them to push for more rate hikes that ultimately leave many Canadians miserable. could feel.

With every new hint of optimistic data, money market traders are pointing to an increasing likelihood that central bankers will hike rates again. A growing number of Canadian banking economists agree that another rate hike will come when the Bank of Canada’s Tiff Macklem rate decision on July 12.

Tariff increase ‘baked in’

“We expect a 25 basis point increase baked in for July,” RBC economist Carrie Freestone said Wednesday, shortly after the retail data came out.

That will mean more pain for short-term and floating rate borrowers, whose interest costs are rising with the Bank of Canada’s overnight interest rate.

Borrowers seeking longer-term, fixed-rate loans are more directly influenced by the Federal Reserve stopped last week after 10 consecutive rate hikes, while warning that two more quarter-point hikes are likely before the year is out.

Fed Chairman Jerome Powell repeated that warning before a hostile US congressional committee on Wednesday.

“Inflationary pressures remain high and the process of bringing inflation down to 2 percent has a long way to go,” Powell told the House Financial Services Committee.

The fact is, very few people, including members of Congress, like rising interest rates. Share prices, which had been on the rise recently, slumped after Powell spoke.

The continued rise in the price of everything, long after prices had to be controlled by rising interest rates, is not just an American and Canadian phenomenon. As the This was reported by the Wall Street Journal this week “inflation around the world just won’t go away”.

Exuberant global outlook

Policymakers worry that the effect of rate hikes is fading, the Journal reports. The fall in house prices seems to have stopped and unemployment is starting to fall again.

“Canada, Sweden, Japan and the United Kingdom have avoided recessions after growth unexpectedly recovered,” he said the Wall Street Journal report. “Business surveys point to relatively good prospects.”

In the US, there are many reports that a continued rising stock market is making the Federal Reserve nervous. In the words of the Journal, a rising market told Powell, “You haven’t done enough.”

BMO’s chief economist, Doug Porter, echoed that point in a recent market review.

“The Canadian housing market is sending the same message to the Bank of Canada,” he wrote, noting that sales have now recovered to last year’s levels and prices are also rising.

So we’re seeing the return of “sold on questions” signs.

“We suspect that for the entire Bank [of Canada]’s talk about Q1 GDP [economic growth]April CPI [inflation] and a strong labor market, the resurgence in the housing market really hit a nerve,” said Porter.

And that may mean that rate hikes should continue until homebuyers feel the effect. Conventional economics tells us that if interest rates get high enough, even if there is a housing shortage, eventually no one will be able to afford a loan to pay for the high house prices. But apparently we’re not that far yet.

More spending, but not as much stuff

The latest retail data indicates that some consumers are beginning to feel the pinch as loan costs and prices exceed incomes.

While retail sales rose more than one percent in dollar terms, consumers received less value for their money. The actual amount of stuff they could buy only increased by a third of a percent, and sales of things like furniture and appliances, which many people borrow to buy, actually fell.

As RBC’s Carrie Freestone pointed out in a CBC interview on Wednesday, before the Bank of Canada makes a decision, there are many other indicators besides retail sales and homes to show if prices are reacting to the central bank’s action, including new inflation figures and employment data. .

Central bankers both here and in the US have repeatedly warned of inflationary expectations, a self-fulfilling prophecy that keeps prices rising as people expect higher prices. But it may be that Macklem and Powell are facing a different kind of expectation, with people refusing to believe that an emerging economy is coming to an end.

Certainly Canadians who have learned to ignore nearly two decades of gloomy housing forecasts and thus benefit from huge returns in an unquenchable residential real estate market may be hard to convince.

That continued optimism is hard to reconcile with the latest warnings from banks and regulators that some serious bad news is on the way. The latest warning came from the Office of the Superintendent of Financial Institutions, which again raised capital requirements as “insurance” for a coming financial storm.

“Today’s decision reflects our assessment that the vulnerabilities of the financial system remain high and in some cases have continued to increase,” banking regulator Peter Routledge said this week. “Households and [companies] remain highly leveraged, making them more vulnerable to economic shocks.”

But until that shock comes, many Canadians who have heard similar warnings before may not be inclined to listen.