This week, Cut the Crap Investing founder Dale Roberts reviews major financial headlines and provides context for Canadian investors.
The Bank of Canada hikes the rate by 0.50%
This past Wednesday the Bank of Canada (BoC) raised its policy interest rate by 50 basis points (0.50%). That move pushed the policy rate to its highest level since 2008 and reinforced the BoC’s determination to bring inflation back toward target. For Canadian investors and households, the increase has immediate consequences for borrowing costs, mortgages, and the housing market.
Here is the Bank of Canada’s rate-hike history for 2022:
- 1.0%: up 50 bps on April 13
- 1.5%: up 50 bps on June 1
- 2.5%: up 100 bps on July 13
- 3.25%: up 75 bps on September 7
- 3.75%: up 50 bps on October 26
- 4.25%: up 50 bps on December 7
“Looking ahead, the Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”
That statement leaves the door open to a possible pause in hikes, a shift from earlier language that suggested further increases were nearly certain. Markets and commentators interpreted the wording as a hint that the BoC might now consider holding rates steady after this latest move, or at most add a smaller hike in the near term.
Market observers debated the likely terminal rate for Canada. Some forecasts remain in the 5% range, while a few more aggressive views push toward 6% before a pause. Recent stronger-than-expected third-quarter GDP growth reduced the probability of a smaller 25 bps increase this week and helped justify the larger move. At the same time, cracks are appearing in the housing market and elevated rates are starting to bite into consumer spending.
Forty percent to half of variable-rate mortgages with fixed monthly payments have already reached trigger rates that typically force borrowers to increase their monthly payments; more households will face higher payments after the recent hike.
Many recent buyers who were stress-tested at lower rates in 2021 are now confronting much higher monthly costs. Owners of preconstruction homes and condos face particular risk: when it comes time to close, some may no longer qualify for financing. While Canadians are rate-sensitive, which makes rate policy effective over time, that sensitivity also means higher rates can create significant near-term financial strain for borrowers.
The BoC itself foresees near-zero growth in the coming quarters, placing the economy very close to a recession. Whether the bank will pause or continue to raise rates depends on upcoming economic readings and labour market resiliency.
Good news—and bad news—drive U.S. stocks lower
In recent weeks, strong economic data—normally thought of as “good news”—has been interpreted as negative for stock markets because it raises the odds of more aggressive interest-rate action by the U.S. Federal Reserve. Conversely, weaker data can signal a slower policy path but also heighten recession concerns. This week, markets reacted to a mix of strong and weakening signals, with equities moving lower as investors weighed the odds of a deeper economic slowdown versus continued rate hikes.
Corporate leaders and strategists have increasingly discussed recession risks, and some market professionals are warning that this economic cycle is atypical. Instead of a single, sharp downturn, the path forward may involve softer, rolling slowdowns across sectors and regions rather than a synchronized drop. Inverted yield curves in both Canada and the U.S. remain a warning sign historically associated with recessions, though they do not guarantee one will occur.
Seasonal and behavioural indicators have also been cited by analysts and commentators as additional, though less conventional, signals of economic weakening.
The crude reality
Oil prices fell this week amid recession worries and renewed COVID restrictions in parts of China, both of which reduce short-term demand. U.S. crude retreated to levels not seen since late 2021, and oil is down significantly from its March highs tied to the conflict in Ukraine.
Despite the recent drop in spot oil prices, producers and the oil sector have not mirrored the same declines. Energy stocks have held up comparatively well throughout the year and remain a strong-performing sub-sector. OPEC has opted to maintain supply discipline, preferring to keep prices in a profitable range rather than flood markets with additional barrels.
Lower energy prices are generally welcome for consumers and for the inflation fight, since declines at the pump help reduce headline inflation. Over the long term, many industry forecasts still contemplate higher equilibrium prices, but near-term volatility remains driven by demand fears, geopolitical developments, and policy decisions from producers and consuming nations.
Bonds are back as a sensible investment
After years of very low yields, fixed income is once again an attractive allocation for many investors. Bond yields have risen into the mid-single digits for some bond ETFs and fixed-income instruments, providing decent income and restoring bonds’ traditional role as a portfolio ballast.
Higher yields make short-duration bond funds and ultra-short instruments appealing for investors who want to limit price volatility while earning a reasonable return. Longer-duration bond funds remain more sensitive to rate moves but offer greater potential price gains if rates fall in response to a recession.
Guaranteed Investment Certificate (GIC) rates have also improved and now merit consideration as part of a diversified fixed-income allocation, especially for capital preservation. For investors who favour balanced or “all-weather” portfolios, the recent bond yield environment strengthens the case for diversified, low-cost ETF allocations that blend stocks, bonds, and alternative exposures.
If you are in the accumulation phase, continue to invest regularly and stick to your plan. If you are managing risk in retirement or nearing retirement, consider a mix of shorter-duration bonds, high-quality fixed income, and select dividend-producing equities to balance income needs with volatility control.
Dale Roberts advocates low-fee investing and writes at cutthecrapinvesting.com. Find his market commentary and regular updates on Twitter under the handle @67Dodge.