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 discussed the argument that interest rates aren’t working to slow inflation (he disagrees),

“Focusing on recent growth rates, it’s easy to come to the conclusion that rate hikes haven’t bitten into consumer spending plans yet. Indeed, inflation-adjusted spending on items that are usually considered most sensitive to interest rates has risen by almost 15 per cent since the first hike was delivered last year … However, looking at the level relative to 2019 tells a very different story, with the volume of spending in these interest rate sensitive areas still 1 per cent below Q4 ‘19 levels. That would obviously be even worse in per-capita terms, given the strong population growth seen recently, and represents a roughly 10-15-per-cent shortfall relative to its pre-pandemic trend … While supply issues are certainly still hampering spending to some extent, with airlines, restaurants and other service providers still trying to recruit staff, and car dealers still working through unfilled orders, these issues are improving and may no longer entirely account for the shortfall in spending in such areas relative to their pre-pandemic trend. In other words, rate hikes may already be working to slow demand, and the true test in terms of growth rates is still to come. If rate hikes have already been working to cool demand more than is apparent by simply looking at growth rates, history could show that the recent Bank of Canada rate hike (and any subsequent moves) was at best unnecessary, and at worst a mistake.”

“Are rate hikes really not working?” – CIBC Economics

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Citi U.S. strategist Scott Chronert is not concerned about the S&P 500 forward price to earnings ratio climbing above 20 times,

“The PULSE framework is negative on Price and Unanticipated, neutral on Sentiment and Liquidity, and positive Earnings. The S&P 500 P/E breaking above 20 this week may turn some investors and market prognosticators more bearish. However, valuation alone has not been a good indicator of medium-term market direction. For context, weekly data since 1949 shows that the S&P 500 P/E tends to de-rate by less than -1x on average in the next six months when multiples break above 20times. Furthermore, 40 per cent of the time index P/E moves higher from a 20 times starting point. To us, valuation alone is not enough to make a near-term bearish call. While we expect backing-and-filling after significant gains, our views are more driven by more elevated implicit earnings expectations near-term and potential EPS softness in 1H 2024″

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

“Conventional wisdom holds that high debt loads should make Canadian households relatively more sensitive to changes in interest rates, but they’ve so far shown remarkable tenacity as monetary policy has tightened … Although monetary tightening has not yet achieved the desired effect on consumer demand and inflation, it has clearly taken the steam out of household borrowing. The pace of household credit growth has roughly halved from an average of 7.0% per year in 2021 and 2022 to 3.2 per cent annualized in 2023 year-to-date … In the early days of the pandemic, with consumers locked inside and government funds flowing, the personal saving rate jumped from the low single-digits to more than 25 per cent … Excess savings were directed partly into equities and real estate, driving earlier booms in those markets, but households also stockpiled large holdings of liquid deposits, suggesting an intention to spend. Between the end of 2019 and 2022, total household deposits held at chartered banks increased by $333 billion (or 30 per cent) … Deposit balances have continued to grow on both year-over-year and monthly bases. This is in contrast to the situation in the United States, where consumers are indeed tapping their earlier savings… It turns out that rather than using their deposits to finance consumption, Canadian households have been reallocating funds into interest-bearing products”

“Flush with Cash: What Do Household Finances Mean for the BoC?” – BMO economics

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Diversion: “You Up? Mars Helicopter Finally Makes Contact After Two Months of Silence” – Gizmodo

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