Our reports: Economic Impact

The latest financial news made simple. Here’s everything you need to know, thanks to our experts Stéfane Marion and Martin Gagnon. 

Market rebound to be confirmed

November 7, 2022        Transcription

In this video: The U.S. dollar stabilizes | Consumer confidence at an all-time low | The Canadian job market, tightening cycle and demographics

Fed raises the stakes

October 11, 2022        Transcription

In this video: The effects of the rising U.S. dollar on the global economy | Interest rates and the recession | Money supply on the decline: what does it mean? | The real estate market cooling down

Central banks on shaky ground

September 20, 2022        Transcription

All eyes are on central banks. Will rate hikes have the desired effect? What will be the impact of financial stress as it starts to weigh on the global economy?

Finally, a break for inflation

August 15, 2022        Transcription

Martin Gagnon and Stéfane Marion sit down to talk about the global economic situation and its impact on the Canadian market.



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Little details that matter

Hello, everyone and welcome to this November 7th Economic Impact video for the National Bank of Canada family. As usual, I am with our chief economist, Stefane Marion. Hello Stefane.

Hi Martin.

Stefane, we have some pretty good numbers from the stock market for the fourth quarter.

Yeah, after a dismal few weeks, we are seeing a decent rebound so far this quarter as of November 4th. The quarter is not over Martin, but the message that we see is equity markets are doing well across the world and the bond market has been struggling again this quarter. There might be hope for a better performance in the coming quarters, but important to note that the S&P TSX is doing well. Of course, these are markets quarterly performance in Canadian dollars.

And let's take a look at the US dollar to see the impact of maybe a little bit of a slowdown from the Fed.

Yeah. And the reason the stock market globally, most, most regions are doing well, Martin, is because U.S. dollar is finally stabilizing. I think this is an anticipation that the Federal Reserve might take a pause in the not-too-distant future, although that has yet to be confirmed, but markets tend to anticipate in the future, right, so US dollar stabilizing, that means that the hopes are that the Fed will be able to take a pause in the not too distant future and then assess its situation. That would be good news for the global economy because what we're seeing right now is a very tangible slowdown. And if you look at the manufacturing, global manufacturing activity we're talking about contraction, Martin, and for the second month in a row So clearly a deceleration is happening, or contraction is happening in certain sectors of the economy.

And Stefane, that's for the business side, but on the consumer side, some worries on the horizon.

Yes, but Martin, if the Fed hopes to cool inflation, consumer inflation, CPI, clearly you have to see some cooling on, in certain indicators. And what we're seeing now is that consumer confidence is at a record low across the OECD. And that reflects the fact that consumers are hit left, right and center with higher interest rates, higher food prices, higher energy prices and also certain asset classes are coming down in prices such as the housing market. So clearly not, not a very joyful mood for consumers across the world.

And in order to go by, actually we've seen the US consumer digging in their pockets.

Yeah. Even though that's interesting because even though the gross domestic product, so economic activity surprise in the third quarter after two contractions, it was a rebound in US GDP that was achieved on the back of consumers who had to lower their savings rate in order to consume. And savings rate in US is back to the lowest level that we've seen since 2007. So, less firepower on that front for sure Martin in the coming months.

And another element affecting the consumer is housing prices.

Yeah, so if you want to reduce consumer spending in order to reduce inflation, drop in confidence, lower savings rate, but on top of it, you have a negative wealth effect coming from home prices that are dropping, falling, Martin. We've seen a drop in Canada in recent months, but this is also happening in US and note on this chart, that home prices increased more than in Canada during the pandemic, 56% versus 48% on this side of the border. Both countries will show a drop. We're expecting 15% in Canada and between 15 to 20% in the US. So, the wealth effect will not contribute to more spending. Quite the contrary.

Let's take a look at profit expectations and again, some worries on that side. Well, I think what's key also for central banks, to cool inflation, you want to reduce the hiring cycle, you don't want to collapse it, Martin. But what we're seeing now in the US is that the share of US corporations that are guiding upwards for their earnings per share for the coming year has come down significantly. It's actually the worst diffusion since the pandemic. Only 20% of corporations are guiding upwards and at the end of the day under these circumstances, Martin, what you're seeing across the world is that even though we've seen this rebound in equity market so far in Q4, we're waiting to see what happens with the Federal Reserve, because most equity markets are in bear market 20% or more.

But Canada is resisting.

Yes, that's interesting, down only 12% since the peak and that is a reflection of some resilience of our economy, but also the composition of the S&P TSX that is more skewed towards commodities and commodities are really helping maintain some, you know, higher levels of profits than would otherwise be the case.

And Stefane, we had some good numbers. Again, the labor market surprisingly strong.

Yeah, but there's a twist on that Martin, because yes, labor markets surprised on both sides of the border. However, with this uncertainty regarding the earnings outlook, corporations are more cautious and yes, they're adding to total employment. But note that full time jobs have stalled on both sides of the border. So, what it seems to indicate, Martin, is that corporations are more likely to go into a hiring freeze scenario as opposed to outright layoffs. That's why people that were saying that, claiming, that both Canada and US were already in recession, the last employment reports actually dismiss that view. They're saying that it's a hiring freeze, stall speed, but it's not the major contraction that we've seen in the past that would qualify as a real recession. So the jury is still out in terms of what type of slowdown we'll see.

And Stefane, we had 50 basis point, not 75, your take on this.

Ah, well, I think from a Bank of Canada standpoint, they could afford to surprise market and by being less aggressive because inflation is clearly decelerating on this side of the border, not the case in the US. I think there's a reason for that. I think people forget that when it comes time to analyze the impact of how your food and energy prices, particularly on the energy side, on the energy front, particularly as we enter the winter months where people have to heat their homes. And electricity is really important component. What we're seeing in Canada versus the US - is electricity prices are much more stable than we've seen in the US, an increase of 5% since the start of, or 6%, since the start or since 2019 versus 30% or so in the US, much more than that in Europe. So that explains why the savings rate in Canada is a little bit higher than what we're seeing in the US. But at the same time it helps explain why you have this faster deceleration of inflation.

And we have to be careful, there's a huge difference between Europe, the States and Canada on that front.

Ohh, absolutely. But the key message is that if you're trying to explain the resilience Canada versus the others on the consumer sector, while energy has been much less of a drag for household expenditures.

And another reason to explain how Canada is doing is demographic. And we talked a lot about the 500,000 new immigrants.

We're getting a lot of questions as to why are home prices, why are we expecting only 15% decline versus others that are climbing much worse than that. And the reason why we're a little bit less pessimistic is the reason that we still have these great demographics that support the housing sector. And the federal government upped the ante last week by announcing its intention to welcome 500,000 people a year, and most of those are economic immigrants. That supports the household formation, thus limiting the downside to home prices and Martin, at the same time, it increases your taxpayer base, which is really important going forward if you want to keep your social programs the way they are right now.

So Stefane, in conclusion, a similar message as last month we’re not in the recession camp. We still believe there's a slowdown but not a contraction of the economy, right?

Well. Economic slowdown for sure, Martin. Outright layoffs on a significant scale for North America that would qualify as a real recession. Again, the jury is still out on this one. But, again to get the scenario that we're forecasting, we need the central banks to take a pause. And again, I insist on the fact that it's great news for Canada. Now we need better news on the inflation front from the US so we have to play defensive for the next few weeks and or in order to confirm this slowdown on inflation.

So, we remain prudent, lots of volatility. Maybe some more interest rate hikes, but modest.

We're hoping that, come December, the central banks will be able to take a pause and that would be great news for the global economy in order to not fragilize what is already an incoming slowdown, even more.

Thank you very much Stefane. Thank you for listening to us and send us your comments. We'll be back in about a month. Thank you.


Hello, everyone, and welcome to this Economic Impact video. Today is October 11. This is for the extended family of National Bank of Canada. My name is Martin Gagnon and, as usual, I am with our economist, Stéfane Marion. Hello, Stéfane.

Hi, Martin. The last time we spoke it was mid-September. We said, "let's be careful" and just after that we did have some pretty hawkish comments from the Fed.

Yeah, Martin, no pivot yet for the Federal Reserve. If anything, they've added even more market uncertainty by providing their forecast for interest rates where they now claim that they will move interest rates higher than what they said earlier this summer. And, then, they will keep them higher for longer, Martin, through 2023. So, clearly, not a market-friendly message that we got on September 21 from the U.S. Federal Reserve.

And, we did see quite an impact on the currency market. And I think that's important to mention, Martin. The U.S. dollar actually surged to a new record high. We're actually exceeding the worst that we saw during the pandemic. What's happening, Martin, is that this is, this is the Fed leading all other central banks with their higher interest rates - leading to currency appreciation, which increases global financial stress, Martin, because other central banks are forced now to defend their currencies. So, if you take it all together, U.S. raising interest rates, U.S. dollar appreciation, other central banks raising interest rates, global financial stress now is well above average. The good news is we're not back to the worst that we saw during the pandemic or in 2012. But, clearly, Martin, more financial stress globally is now being observed.

And, there is some collateral impact, obviously, with all of this.

Well, at some point you will get collateral damage on the economy. It's exactly what we're seeing right now. Global manufacturing sector actually showing contraction for the first time in three years. Not all regions are in contraction, Martin. North America is still expanding. But, other parts of the world, many emerging markets, as well as Europe are in contraction mode. So, more uncertainty for the earnings outlook for global corporations.

And we're seeing quite a disparity in the stock market performance and, especially, on the emerging market side.

Oh, yeah. And, and this, this uncertainty about, uh, the outlook for profits is taking its toll on some markets. Emerging markets are now down 32% from their previous peak. Um, you can see that the U.S. is at a new cyclical low. Europe now in bear market territory. So, most important benchmarks, equity benchmarks, are now in bear market territory. The good news, for now, is that Canada continues to resist, Martin. We are, we're not, we haven't touched a bear market territory so far this cycle. And let's look at this.

We've talked about this before... a bit of a safe haven in Canada, right?

Well, at this juncture, we're down 12%. Everyone's down, Martin. We're down less than other markets just because if you look at the composition of the S&P/TSX, we have more energy, we have more commodities, more agricultural products that are produced in this country. So, that brings more resilience to the Canadian economy. So, even though we're down, we're down significantly less than others. Why? Because we benefit from this current environment of geopolitical stress and high commodity prices.

So, Stéfane, the #1 question we're receiving is the following: Will the central banks create a recession in their fight for inflation? How do we look at this?

That's a risk, Martin. And, clearly, when you look at financial markets, people tend to look at the yield curve as the primary signal of an incoming recession. I will say if you look at the 10-year minus three-month tenure in the U.S., this is how the U.S. Federal Reserve looks at the shape of the yield curve, it's very flat, Martin, but it's not inverted. So, that's good news. So, I would say that, at this juncture, the risks of recessions are clearly increasing with the Federal Reserve maintaining a very, very harsh word relative to interest rates and inflation. But, the yield curve has yet to invert, Martin. So, what happens on inflation in the coming weeks will be the key determinant as to whether or not the Federal Reserve decides to invert the yield curve, which would then, be leaning indicator of an incoming recession.

So, Stéfane, we don't often talk about money supply, and we actually ignored it during the pandemic, but it's important to go back to our economics classes and take a look at this to have a sign of what inflation is doing.

So, it remains to be seen if the Fed inverts the yield curve, Martin. All will depend on inflation. I think the good news that we have right now with respect to the outlook for inflation is that money supply, which was completely ignored during the pandemic, the central banks were under the, were working, under the impression that you can lower interest rates, inject liquidity in the markets, leading to a surge in money supply with no impact on inflation. Well, history proved them wrong. And now the good news, however, Martin, is with the recent tightening in financial conditions, money supply is decelerating quite significantly. And, if you look at this slide historically, when money supply grows at 3% only, you don't get much inflation. Actually, you get good news on inflation. So, I think that is a very important signal that inflation could slow down quite significantly in the coming weeks, coming months.

And, actually we're going to get some readings this week. Stéfane, what do you expect?

I think we're in the window now, Martin, where this money supply signal should lead to better readings on inflation. If we don't get them, Martin, you'll get more hawkish central banks, yield curve inversion, much more difficult financial market conditions. So, I'm hoping that this week we get better news on inflation due to this drop in money supply, but also all the other things that we spoke to in recent weeks as you know supply chains starting to improve in the manufacturing sector, etc., etc. So, I am expecting better news on inflation.

Excellent. Let's end by talking about Canada. It's a bit of a sluggish economic environment. At least, we're in a down, but what's your read?

Well, again, when we compare ourselves to others, uh, we might be stagnating, not much in terms of growth. If you look at what's circled, month-to-month readings on GDP are not very impressive. So, but we're stagnating. As you said, it's better than a contraction unlike other parts of the world. So, I think that is key how to slow inflation down in Canada. And, this is what the Bank of Canada said, if they, if we can get another few good readings on inflation, we will see a top on interest rates. So, expect another increase in interest rates in Canada. But, the good news is that with slowing growth, inflation should decelerate more significantly in Canada in the coming months.

And, we're seeing quite an impact on the real estate market?

Yeah, and, Martin, the reason why we're seeing more of this situation in Canada is, clearly, one of the sectors that was doing very, very well throughout the pandemic is now cooling significantly and contributing to the slowdown in Canadian GDP growth. So, home resell activity with the higher mortgage rates have clearly, clearly seen a significant deterioration. The good news, Martin, is that we might soon see a bottom on home resell activity just because immigration is so strong in Canada right now. The population is growing at the fastest pace in many years. So, that provides some support for the residential market. But, yes, Martin, we're seeing this big drop in, in resale activity across the country.

And what about prices?

Well, that's good news, Martin. Look, we can't have it all. We're looking, the central banks are looking for lower prices and they're seeing lowering prices. So, home prices are down 4% since the recent peak in Canada. With the higher mortgage rates, Martin, we expect more downside. So, in total we would go back 15% below the previous peak. Uh, some people will be discouraged when I say this, Martin, but if you keep things in perspective, that would bring us back to where home prices were at the start of 2021, which is "a lesser bad" under these circumstances.

So, in conclusion, Stéfane, let's be really on top of inflation news coming out in the coming weeks. We do expect a significant increase in October, but we're sticking to a pause after that. Well, Martin, the central banks are not saying they're going to pause. But, if we're hoping for them to pause after October, we need to see better news on inflation. So, again, the central banks are data dependent. We need that better news on inflation. If not, the markets will remain significantly volatile in the coming weeks. So, this inflation reading becomes extremely important going forward.

And there's been a good pullback in rates. Is it tempting?

Well, you look at the fixed-income markets, Martin, rates have increased significantly. I think, it's if we see a top, if you think about the top, a potential top on interest rates, I think we're closer to a peak now. I think it becomes a more a more interesting entry point to start looking at the fixed- income component of the portfolio again. If that inflation slows, it becomes more interesting.

Excellent! Thank you very much, Stéfane. Thank you for listening. Keep sending us your questions. Be safe out there and we'll see you in about a month. Thank you.

Hello, everyone, and welcome to this economic impact video. Today is September 15, 2022. As usual, I am with Stéfane Marion, our chief economist.

Hello, Stéfane. Hi, Martin.

Today we're going to break protocol and I'm going to let you, Stéfane, tell the story. There's a lot of content, there's a lot of volatility. It's difficult to make a forecast at this point. I'll let you go for seven or eight minutes, and we'll recap.

Yeah. Thanks for allowing me a monologue, Martin. So I just want to start that yes, it's not easy to make a forecast. I will present our baseline forecast, however, and the challenges that central banks are facing. I know many financial institutions are now calling for policy mistake recession call. We still assume that the central banks do want to actually want to avoid such a policy mistake. But let's speak to this scenario. One thing is clear, central banks are determined to bring inflation down. And the reason for that is that inflation is above 2% pretty much everywhere across the planet. It ranges from 3% in China to 12% in the Netherlands, and that is well above the 2% target normally set by central banks. So, what central banks are doing with inflation is above 2% everywhere. Well, they're all reacting by raising interest rates at the same time. What are the challenges we have if everybody drains the economic pool at the same time? The water level will come down much faster than if you do it on your own. So, the central banks keep arguing that raising interest rates now will only impact inflation 18 well, 12 to 18 months down the road. Well, maybe that's a traditional model when there's only one person doing it or just a few, but if everyone does it? The lead lags might be quite different, so that's why they have to be careful. Slippery slope for central banks right now. Now, the rise in interest rates is actually having a big impact on growth. Growth is decelerating and you can see that manufacturing activity, Martin, it's above 50, it's still growing, but it's a lot less vibrant than it was a few months ago. So clearly there's the impact of higher interest rates on global growth and the other thing from a central bank perspective. Let's not forget that inflation is a lagging indicator. Inflation today reflects the growth that we had last year and now with interest rates rising, we're going to get very slow growth in the coming months and that will translate into inflation that could come down much sooner than a year from now because everyone's doing it at the same time as I said before. And Martin, we spoke to this before, and you've been a proponent for that. The supply constraints are still a big explanatory factor of why inflation is so high at this point in time. Case in point, if you take this study made by the US Federal Reserve, San Francisco, they look at the green portion of that, the green section of that chart, of that bar chart, you can see that roughly half of US inflation right now is due to supply driven inflation. So that's the global supply chain that has yet to normalize. China still has the 0 COVID policy in place, impacting its manufacturing output quite significantly. So yes, there are still structural factors that are at play and that might be receding quite significantly in the coming weeks, coming months. So, the issue for central banks right now is if you do too much straightening, you get too much financial stress. Too much financial stress is normally confirmed with a U.S. dollar that is really strong, too strong normally. And if you go, if you breach a certain level, then it turns into a recession. Recession is a policy mistake. Again Martin, our scenario is that central banks will want to avoid a policy mistake. At some point they need to pause their tightening cycle. Right now, when you look at the performance of the US dollar. Well, it's the highest in the generation. So clearly the US dollar is at a very elevated level that is adding financial stress. So, we don't want to go too much higher than this level at this point in time. At the same time, we can't forget that higher interest rates mean higher mortgage rates, which means a negative wealth effect for many households because home resell activity is coming down quite significantly from a Canadian perspective, we're now back below the 10 year average in terms of home resales. Now, fear not, from a Canadian perspective, demographic factors are still quite supportive. There might be a little bit more downside from current levels, but we don't think it's the same downside as 2008, 2009 or the worst of the pandemic just because the growth of the population growth that we're experiencing right now in Canada is the best since 1993. So that means more household formation. So, there's a limit to the downside on home resale activity for Canada. But of course, interest rates need to pause at some point in time and we hope they pause in October. The reason why we think there's a resilience for the Canadian economy versus others is because real disposable income, that's after adjusting for inflation, is still on the pre COVID trend, which is the red line on this slide. Not the case in the US and certainly not the case in Europe. Both countries are also raising interest rates, so obviously, you're going to get a slowdown that will be more significant in US and in eurozone and that will depress global economic growth and obviously bring down inflation, which is our scenario at this point in time. So, the other thing is central banks are looking at, I say we're going to hike until we see a slowdown in the labor markets. Well, it is true that total employment growth is strong in the US, however it's mostly part time jobs. If you look at full-time employment both in Canada and the US. You can attest on this slide that it has stabilized. It's actually stalling for the past three to four months. So, corporations are saying, well, you know, I'm not going to hoard labor right now, full time jobs, full time employees cost a little bit more and I'm not sure about the outlook. So that slowdown in the pace of hiring is what the central banks are looking for to take a pause on their tightening cycle. So, at this point in time, I think it's really important to look at the dynamics of full-time employment. And again, I stressed the point that central banks are not really interested in seeing massive layoffs. So that's why it's important to take a pause with the tightening cycle. Our view, Martin, for the next few months as we assume that the pace of inflation deceleration will be much faster than what we saw in July. I think it starts in August. If we are right that puts a ceiling on the overnight rate in both Canada and the US. That ceiling in our current forecast is that on under just 4%. But the markets are not sure. That's what brings the volatility, Martin, because they're saying if inflation doesn't come down then they're going to push above 4% and it's even a more slippery slope for the global economy. So, inflation under in the current forecast goes down to 3% about to start next year and that will put inflation in a much more comfortable zone for the central banks. But again, I think that we should start seeing this already in October if commodity prices stay where they are right now. In essence, what it means for the Canadian economy growth next year, still growth, that's good news, but slow growth of 1%. Slow growth of 1% is well below potential growth, which means that inflation will decelerate. But in the meantime, Martin, we have to be careful. We have yet to confirm that inflation is coming down faster and that's why we’ve seen that the second quarter was not good for financial assets. The third quarters turning out to be OK so far, so far so good. We're near the end of the third quarter, it's positive return, the blue bars on this slide are all positive. Year to date, still challenging. The issue that we have, Martin, going into the fourth quarter, we're still uncertain about the banks. This decision process as to whether or not they will take a pause after October. I need to confirm my inflation data for the next few months, which makes it a little bit challenging and therefore maybe for our investor base to be a little bit more prudent under these circumstances.

So, Stéfane, very interesting. We rarely hear about the structural part of inflation. So, what are the central banks dealing with? They're protecting their credibility versus the core part, the structural part of inflation.

I think they're in catch up mode. They've been frustrated that they weren't able to predict the upsurge in inflation. And it's as if they have abandoned the storyline where, you know, a good proportion might be to supply forces. And in a sense, it makes sense because you know, they've been frustrated by the supply chain. And is opening its economy, closing it, opening, closing it. So, to the extent that the Chinese economy stays open a little bit more after October, I think this is where we will see the structural component of the supply side component that will bring inflation down.

And 1% growth is very close to a contraction of the economy and that's why it's a very volatile situation.

Well, you could say it's stall speed. Yeah, 1% is not much. We're coming down from 4%, but it's still positive growth. The point, Martin, is that you don't have to go into economic contraction or recession to get inflation down at 1%. It will come down.

And so more than ever, I think it's important to tell our investors to talk to their advisor. We recommend to be prudent at this point and you know there's a lot of different outcomes in our scenario. We didn't talk about geopolitics, but there's a lot going on.

Yeah, moving the overnight rate about 4% in both Canada and the US will become very challenging for the global economy and for the domestic economy, obviously, Martin. So that's why prudence is probably the name of the game for the next few weeks, next few months, we have to confirm that downtrend on inflation, which has begun, Martin, but it's just not happening fast enough to calm the central banks. They need to pause after October. If not, it gets a bit more challenging.

Thank you very much, Stéfane. Thanks for listening to us. Please send us your comments and we will see you in one month. Take care.

Hello, everyone, and welcome to this Economic Impact video. Today is August 11, 2022. As usual, I am with our Chief Economist Stéfane Marion.

Hello, Stéfane. Hi, Martin.

Stéfane, it's never easy to do economic predictions but, we have to say that this time is particularly hard. There are a lot of many conflicting signs, and it's deep grey.

Yeah, and there's no summer vacation for the economy and financial markets, and we're seeing this again and it brings volatility. We spoke to volatility last time, so not a big surprise. We're seeing a deceleration in the global economy, so it's a slowdown. It's a tangible slowdown. But, Martin, the good news is you can see on this slide is that even though it's a slowdown, it's not yet a contraction. So, it doesn't mean that some regions of the world are not experiencing a contraction, but for the global economy right now, it's still slower growth as opposed to recession.

And, indeed, talking about conflicting signs, we've got Europe versus China, for example.

Yeah, and the complication when you look at these things, these regions, is that Europe is clearly about to enter recession. Their GDP was good, but the summer months are going to be more difficult and that has to do with cyclical factors as well as the geopolitical backdrop is not conducive to strong growth in Europe facing a significant supply shock on the energy front. So, that region of the world is in contraction. However, there's a significant offset with China opening, or partially reopening, its economy. Given the size of the Chinese economy, it can be an offset to a European contraction. So, what we've seen in recent months is that, recent weeks I should say, better growth from China. They had a dismal quarter in Q2, but the third quarter looks a little bit more solid.

Let's talk about the U.S. where this time the conflicting story is around the building up of inventories.

Yeah, people have claimed that the U.S. is in recession because they've experienced 2 consecutive quarters of negative GDP growth. That's too simplistic a definition. It's actually not the one being used by the NBR which is the official agency that calls recessions, Martin. To confirm a recession, you need to see a significant drop in employment revenues, which means less jobs, right, historically. What we've seen in the U.S. is negative GDP, but it was accompanied by a deceleration in inventories at the corporate level because there's a lot of inventories out there, Martin. Corporations were scared about the supply chain and the inventory level is at levels that we have not seen since 1984. So, clearly, as you accumulate less inventories, therefore, your GDP slowdown in Q2. So, it was a technical movement in certain components of GDP that led to this contraction.

And this has all kind of repercussions on companies, earnings and inflation.

I kind of like GDP contracting when it's a move in inventories, because that will mean potentially less inflationary pressures down the road. Let me explain, Martin. As inventories are stop accumulating, supply delivery times are coming down, the backlog of orders is coming down, and input prices are coming down. So, it's actually good news, given where we are in the cycle, because we're all concerned about inflation. And we can see how the CPI relief surprised us in July, surprised markets, with the inflation for goods, consumer goods, coming down from 12% at the start of the year to roughly 8% where we are right now. So, it's a tangible deceleration.

So, it is a deceleration, but it's still high and, therefore, central banks still have to act.

Yeah, 8%, unfortunately. So, well above the 2% that the central banks are targeting, so we're seeing more monetary tightening. Expect more, Martin, in September. And now, the good news is that with the speed at which inflation is decelerating probably means that there's light at the end of the tunnel to stop the central banks later this fall, and that would be good news. Currently, the policy rate on both sides of the border stands at 2.5% and, you saw Canada how aggressive they were, the Bank of Canada back in July, 100 basis points, a full percentage point increase in the overnight rate, something we had not seen since 1998. So, they're moving aggressively. They'll move again in September, but perhaps, with this inflation acceleration, they'll stop at 3, like we have in the forecast instead of going to 4%, which they advertised earlier this year.

Excellent, and actually markets, especially the bond market, is lowering expectations.

Yeah, starting to warm up to a scenario where they stop sooner rather than later, but, Martin, again we have to confirm that there is still deceleration endures for a few more months.

Lots of questions from our viewers on the real estate market, Stéfane, worries about this important part of the economy. What's your take?

Yeah, well the overnight rate has increased quite dramatically, and the mortgage rate is well above the overnight rate. The 5-year mortgage goes to you know above 4% nowadays. So, that's been a significant increase and we've seen the impact on Canada, a significant deceleration in home sales, down below their decade average, coming down in every market. No one has been spared by a slowdown. Consumers are nervous about the outlook for interest rates. So, until we stabilize interest rates, I think activity is going to be on the soft side. And, from a Canadian perspective, the main uncertainty or the main concern is that there's a lot of people that took variable-rate mortgages in recent years. And, they could be impacted quite significantly, and how big a supply shock, and will that lead to big home price declines because people can't afford homes or people are forced to sell their homes.

Martin, our colleagues have made a very interesting analysis in recent days. And, I think it's important to remind people that, yes, there are people that have taken variable rate mortgages --- it's about 1/3 of the overall mortgage market --- but 67% of the variable rate mortgages have fixed payment in Canada, which enables consumers to absorb a certain increase in interest rates. That's really important. This is not the U.S. back in 2005-2008, so I encourage you to have a look at this study. And it's not just the variable rate mortgage versus fixed mortgage that we have to look at. We also have to look at the number of people that actually have a mortgage, right, Martin? And it's 35% of Canadians that have a mortgage. A lot of people are homeowners that don't have, or have very little, or don't have mortgages in Canada. So, we have to take that into account. It's different from the U.S. back in 2005 or 2006, 2007. So, when you combine the two factors as we do in our special report, we have a special, we come to the conclusion that the payment chart, there is one, Martin, but it's between 0.5 to 1% of disposable income. Yes, it's annoying. It's a tax on consumption. But, however, if your labour markets continue to hold the line like they are right now, it's a lesser bad. You are able to absorb that. So, we're going to get deceleration, continued deceleration, but a massive contraction like we saw in the U.S. back then? Unlikely.

So, it gets very technical, but you mentioned it, Stéfane, there is a special report available on our website with much more details. Also going into the demographics supporting the real estate sector in Canada. So, please take a look if you want more details. But, if we conclude, Stéfane, lots of uncertainties, there's still a supply shock, there's still Ukraine, there's still high inflation despite a deceleration. Markets did well recently, but we're not out of the woods yet, and we need to remain prudent.

Yeah, expect volatility to endure over the coming weeks. And, we have yet to see, confirm that the great news on inflation needs to be confirmed again in the coming months to stop the Central bank. So, the good news, Martin, is that the central banks are still normalizing monetary policy. What we want to avoid is for them to move into restrictive territory when it comes to monetary policy and the only way to avoid this is we have to keep inflation on the downtrend that we've seen in recent weeks. It needs to be there with us later this fall. So, we're going the right direction. Now, it's just a matter of keeping that trend going.

Excellent. So, our main thesis is still not for recession, but we have to watch it.

I think it's avoidable if you keep these central banks away from restrictive monetary territory.

Excellent. Thank you very much, Stéfane. Thank you for listening. We'll be back in a couple of weeks. Take care.

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