I swear, if I hear the words “Trump tariffs” again, I’m going to throw something.
Call me naive or tell me my head is in the sand, but is it really that newsworthy? Do we really need to see this atop every single news feed, every day, in perpetuity?
“David, of course it is! The world is sitting on a knife’s edge!”
Alright, I will admit, we’re certainly entering into a very interesting time.
The United States has a new(ish) president who is doing a complete 180 on the policies enacted by the previous administration
Canada has no prime minister and no leader at the moment and will be entering into an election.
Ontario will more than likely also be entering into an election this year, despite objections from the Green Party.
That’s a lot.
Yup. It certainly is.
But what are we supposed to do? Just put the world on pause until the proverbial “dust settles?”
I was chatting with a client last week who said that after Trump takes office there will be “more certainty.”
I responded that I respectfully disagree. There won’t be any certainty, in fact, there will be nothing but uncertainty for the next four years.
Abnormal becomes normal.
On Trump’s first day in office – will he enact 25% tariffs?
Maybe. Maybe not. But either way, what clarity does that bring?
Trump did not enact tariffs.
So is that it? Time to celebrate?
As I told my client the other day, “Trump will come in, probably not enact tariffs, but will continue to talk about it, even if just to create a buzz and/or to hear his own voice. That will not provide any certainty. But regardless of what happens in the United States, we have no prime minister! We have a two-month leadership convention ahead, then an election – maybe, then a new prime minister – eventually, and then an election at the provincial level as well.”
How in the world are things about to get more certain?
Fast forward to the end of 2025:
-We have a new prime minister
-We have a new mandate for the government of the province of Ontario
-We have twelve months of the US President under our belts, come hell or high water
Maybe then we can say that we have certainty?
If you think back to the COVID-19 pandemic, one of the most over-used and eventually overly-annoying catch phrases was the words, “….in these uncertain times.”
It was tacked on to the end of everything.
You could go out to dinner, pause while looking at the menu, and say, “I’m finding it very hard to decide between the branzino and the filet mignon……in these uncertain times.”
So aren’t we used to uncertainty by now?
I certainly am. Pardon the pun…
December’s inflation data was released this week and the rate fell to 1.8% from the 1.9% figure posted in November.
Of course, the GST Holiday was said to have contributed significantly to the decline:
With food excluded, December’s inflation rate came in at 2.1%.
Call this a caveat, an asterisk, or a reason to explain away the fifth straight month that inflation has been at or below the 2.0% target set by the Bank of Canada if you want to, but it likely increases the odds of a cut to the lending rate on January 29th.
Earlier this week, some friends of Bosley Real Estate came in to present their economic update.
Thanks to Outline Financial for allowing us to use their slides!
Looking at the year ahead, and into 2026, this is what the major lenders believe is going to happen with the Bank of Canada’s lending rate:
Again, consider that this was drawn up before the inflation data was released, but the banks have not revised their estimates since.
With the Bank of Canada rate currently sitting at 3.25%, only one of the six lenders profiled (the ‘big five’ plus NBC) believes that the rate won’t go below 3.0% this year: Scotia.
Scotia’s prediction is a rate of 3.0% through 2025 and 2026, although I don’t know how much these lenders can glean into 2026 at this point.
On the opposite side of the spectrum, one lender believes that the rate will drop from 3.25% all the way down to 2.00% by the end of 2025: RBC.
For the remainder of the lenders, predictions for the rate by the end of 2025 are:
BMO: 2.50%
TD: 2.25%
CIBC: 2.25%
NBC: 2.25%
Whether you want to take an average of these rates or simply pick your favourite lender, remains your call.
But the consensus seems to be around 2.25% – 2.50%.
That will have an impact on the financial market, real estate markets, the exchange rate with the USD, and of course, the overall economy.
Looking back at the predictions from the start of 2024 is a very interesting exercise!
Outline Financial was able to pull this from their archives:
This may cause you to ask, “What good are predictions if they can simply be revised?”
Let’s look at the predictions for the end of 2024:
BMO: 4.00%
Scotia: 4.00%
RBC: 4.00%
CIBC: 3.50%
TD: 3.50%
NBC: 3.25%
As we know, the BOC rate at the end of 2024 was 3.25%.
Who would have figured?
National Bank for the win!
If only these folks had entered the TRB Interest Rate Game from last January! That reminds me, we still need to define our 2025 game, but I digress…
Now, what if we compared the 2025 predictions for 2025 versus the 2024 predictions for 2025?
It would look like this:
Scotia: 3.25% (2024) vs. 3.00% (2025)
BMO: 3.00% (2024) vs. 2.50% (2025)
RBC: 3.00% (2024) vs. 2.00% (2025)
NBC: 2.75% (2024) vs. 2.25% (2025)
CIBC: 2.50% (2024) vs. 2.25% (2025)
TD: 2.25% (2024) vs. 2.25% (2025)
Note that TD Bank is the only one of the six lenders who offered the same prediction for the BOC rate at the end of 2025, both at the start of 2024 and the start of 2025.
Alright, so where are interest rates going?
As of January 17th, the probability of a rate cut at the next scheduled announcement by the Bank of Canada on January 29th:
Of course, that was last week.
This week, it’s a whole different ball game, right? The world is changing daily!
Well, perhaps I’m being dramatic. But after the inflation data for December was released on Tuesday, the markets were pricing the odds of a rate cut at 82.0%.
Is the same thing happening in the United States?
Nope…
The United States Federal Reserve is also meeting on January 29th, and the market-implied odds of a rate cut were a paltry 1.0%!
I’d like to know which economists made up that 1%.
It’s not quite as bad as the one voter, out of 394, who did not vote for Ichiro Suzuki‘s entrance into the Baseball Hall of Fame this week (sidenote: all ballots need to be made public, starting next year….) but it still feels like 1% of those surveyed are trying to be the outlier.
It’s worth noting, as the folks at Outline Financial did, that the policy rate of the US Federal Reserve usually declines ahead of the policy rate of the Bank of Canada, but that hasn’t happened during this cycle of rate cuts:
Lastly, what’s happening in the market with fixed and variable-rate mortgages?
Fixed rates, which are determined by the bond market, have been declining steadily since the summer of 2023 when the 5-year government of Canada bond hit a high of 6.14%.
In January, the bond yield remained unchanged from December at 4.44%. This means that even if and when the Bank of Canada cuts the key lending rate, while the variable rate will decline, the fixed rate likely will not:
Lastly, the percentage of borrowers taking a variable-rate mortgage continues to climb substantially, now up over one-quarter of all loans.
Meanwhile, the percentage of borrowers taking the time-tested, almost-by-default fixed-rate mortgage is currently bottoming out at only 10.3%:
Phew!
That was a lot of data!
And I hope it made sense to you, not only because it might be boring to many, but also because I’m coming down with a serious cold and I’m not all there.
Man, I worked hard in December to avoid getting the same strep throat that my wife, son, and daughter all had. I slept in the damn basement for a week!
But who among us doesn’t get sick in January? This cold is an annual event for me. One that you could most certainly predict.
See you on Monday, folks!
