Falling inflation provides runway for rate cuts
Canadians fearing mortgage renewals in the spring and summer got some good news this week as Canada’s annual inflation rate fell to 2.8 per cent.
Statistics Canada reports that the Consumer Price Index (CPI) reading was significantly lower than the 3.1% reported by economists, mainly due to slower growth in mobile phone service charges, groceries and internet charges. It states that.
Here are the key takeaways from Tuesday’s StatCan report:
- Rent and mortgage costs remain the main drivers of inflation. Excluding shelter costs, CPI rose just 1.3% year over year.
- Gasoline prices rose 4% in February compared to January, the main reason economists expected inflation to be 3.1%. If prices return to decline (as has been the trend), disinflation will continue.
- Notably, mobile phone plans have fallen by an astonishing 26.5% since February last year.
- Food prices have increased 22% over the past three years, but appear to be finally reaching equilibrium. February was the first time in two years that the grocery CPI was below the headline overall CPI.
- Restaurant meals, property taxes and electricity bills were outliers above the 3% CPI mark.
- The core inflation indicator recommended by the Bank of Canada (BoC) has also subsided, falling to an annual rate of 2.2% over the past three months.
Using interest rate swaps to determine the likelihood of a rate cut, the chance of the BoC cutting rates in June is around 80% (up from 50% before the CPI data release). (Interest rate swaps are essentially a way for the free market to speculate or bet on interest rates at a particular point in time.)
In this context, the value of the Canadian dollar will decline as the likelihood of a rate cut increases. The Canadian dollar hit a three-month low on Tuesday. Overall, this is good news for mortgage holders, but bad news for snowbirds who pay in USD.
By comparison, Japan this week raised interest rates for the first time in 17 years, ending the world’s last negative interest rate policy. The eurozone also released its inflation data this week, and it too was surprised by the decline, with inflation falling from 3.1% to 2.8%, in a pattern very similar to Canada.
This week, both the US Federal Reserve and the Bank of Canada reiterated their plans to cut interest rates by the end of the year. Here’s how mortgage interest rates will react:
Power Corp and Alimentation Couche-Tard’s earnings are weak
It hasn’t exactly been a great week for Canadian powerhouses Power Corps and Alimentation Couche-Tard.
This week’s Canadian earnings highlights
Power Corp reports in Canadian dollars, while Couche-Tard reports in US dollars.
- Power Canada (POW/TSX): Earnings per share were $0.89 (vs. $1.08). Earnings for this quarter were not provided by Power Corp at the time of writing.
- Nutrition Couche-Tard (ATD/TSX): Earnings per share were US$0.65 (estimated at US$0.84). Revenues were $19.62 billion (versus estimates of $20.85).
Couche-Tard shares fell 4.2% on Thursday after the results were announced. ATD President and CEO Brian Hannasch said the lower-than-expected profit was primarily due to lower customer traffic in the U.S. and lower gross fuel margin. He went on to talk about how well the integration of the TotalEnergies acquisition is progressing and is excited that the company will be adding four new countries and 2,175 stores to Couche-Tard’s convenience store network.
Power Corp shares did not suffer quite the same fate as Couche-Tard shares, rising 1.4% on Thursday despite the sharp drop in results. The 7.1% increase in dividends appears to have been enough to allay concerns that the company’s current valuation is lower than its current valuation.