Smouldering

The posties were out in force for an hour or two during my morning walk. Then they decided to SFH (strike-from-home). Why not? Getting cold.

Canada Post is offering 12% over four years. The union wants 22%, plus other stuff. Odds are the workers will get it, given what’s happened lately with railroad, auto and ports employees.

Of course, higher wages get baked into all costs and help fuel inflation’s potential return. (It’s now officially at 1.6%. Wages gains are 4.5% on average.) Prices may moderate or decline, but wages never do. Economists worry about the impact of this input cost on the CPI and national productivity.

But workers don’t give a fig. Everybody is pissed at The Man – whomever that happens to be on a particular day. It’s how we got Trump to deal with. PP is next. And still income demands will lead to higher pricing and, alas, more inflation. This wage-price spiral is classic, oft-repeated and never ends well.

Tomorrow we get the latest CPI – the last inflation stat before the CB sets rates again two weeks before Santa (he works for free). Our fav cowboy econ, Derek Holt (chief guy at Scotia Economics) figures the StatsCan rate will float back up to 2% for October, which he calls “quite the upside.”

Why?

Wage hikes are not counted in their own right – just the impact they have on goods and services purchased. But there is enough upward pressure from a host of other things to boost the number (including rent, property taxes, your cell bill, builder input costs and new home prices). Holt also makes this comment: “Prices are rising as the rent-versus-own dynamic is shifting in favour of owning given surging rent, while tight supply in new and resale markets, rising input costs including so far only limited relief in financing costs, and an embarrassment of riches being thrown at builders are also supportive of pricing power.”

As we know, new house prices have not dropped, but the pace of construction has slowed dramatically. In Ontario, for example, building has plunged 17% below year-ago levels. In fact, it’s claimed we’re at a 69-year low for the construction of new single-family homes. All those political promises about three million new units nationally within seven years are empty. The reason is simple – buyers are not buying. They may be waiting for new, more lenient financing rules to come along (December 15th) or for mortgage rates to plunge (which is now more uncertain).

As we detailed yesterday, the US central bank may not reduce rates much more – if anything – because of the inflationary tax and stimulus policies of the incoming Trump team. That’s a problem for Tiff, since more cutting here will stretch the already-wide gap between our rates and theirs. Moreover, the surging greenback has tanked the loonie, and our guys need to shore it up as best as possible. Lower rates would make that worse.

If inflation is ticking higher again, it’s yet another reason the Bank of Canada will think hard about how many cuts it should make – and when. Plus the posties, of course. If those 55,000 folks get their 22% hike – despite the fact the employer is hemorrhaging losses and may crash – it’s a powerful sign in the world of labour that the wage escalation can continue.

But it can’t. Not without consequences, which probably includes a rate floor coming much faster than anticipated. Sorry, kids.

Short-term, variable interest rates might still be nipped once or twice, but things are looking different for fixed mortgage costs. Some have even been increasing of late along with bond yields (Mr. Market thinks Mr. Trump is going to blow stuff up). Recently this pathetic blog suggested if you could score a fiver at just over 4%, doing so might be wise.

This week five-year money can be had from TN@TB, if you butter her up, for 4.2%. A variable-rate five year loan is a full 1% above that. Clearly four quarter-point central bank cuts have to materialize before a VRM borrower breaks even – and meanwhile she’s been paying a premium.

So will Canadian rates drop more than 1%, given the US election, the Fed, the rate gap, the dollar and the posties?

It’s a gamble. Not worth it.

About the picture: “Here’s an bligatory dog picture,” writes Nathan, “of Pancake’s first snow experience as a puppy.”

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Source: https://www.greaterfool.ca/2024/11/18/smouldering/