Slower Growth, Higher Inflation In The US And  Growing Canadian Household Debt

Back to things economic as we wait for next Wednesday's FOMC interest rate decision: 

Thursday was a day of significant data releases (otherwise referred to as a "data dump") in the US which showed slowing retail sales and industrial production (more than had been anticipated) and enough for the Q3 GDP Now forecast (that we show each week on our weekly client webinar) to be lowered from 3.3% to 3%, largely because the consumer has decided to put off purchases ahead of a highly uncertain presidential election.

Meanwhile, this morning, the latest Consumer Price data showed that the "core index" grew at an (higher than expected) annualized 2.3%, with medical care and shelter (among other items) leading the way. 

The Federal Reserve's dual mandate includes price stability (low inflation) and full employment and if they focus solely on these two items, some may argue that it is enough to raise interest rates.

The other camp will argue that there is also "behind the scenes" data (like consumer activity and business investing) that auger for future economic growth to slow (putting pressure on employment / unemployment data down the road) and that this should inspire caution among Fed decision makers.

Here at High Rock, we will argue that a Fed rate increase will only put the US economy closer to recession.

It will also create significantly more volatile financial markets.

The odds-makers will suggest that it is unlikely for a rate increase at next Wednesday's 2pm announcement, but the odds-makers were wrong about Brexit as well.

Whatever the case, higher interest rates south of the border will put upward pressure on 5 year mortgage rates in Canada because Canadian and US bond markets tend to trade fairly close together. This in turn, can tend to put upward pressure on mortgage rates, but likely nothing too significant at this particular moment in time (but longer-term it is something to consider).

The problem, in Canada, is that Household Debt to Income ratios have reached another record:

 Higher debt servicing costs  (that would come with higher interest rates) could make the housing market tremble.

In Canada, the Bank of Canada only has one mandate: price stability. If we should see inflation rise (forcing higher interest rates) without correspondingly stronger economic growth (and household income), that could certainly spell trouble.

Something (another risk, albeit not a near-term one) to think about.

Feedback....

scott@highrockcapital.ca

If you would like to receive this blog directly to your inbox...

bianca@highrockcapital.ca