Juggling Dynamite

Market consensus pegs a 58% probability that the Bank of Canada will hold its overnight rate at 2.75% tomorrow, with a 42% chance of a 25-bp cut to 2.50%.

This morning’s milder-than-expected Canadian inflation news, CPI of 2.3% year-over-year in March, was welcome. Canada’s consumer carbon tax ends in April, and oil (WTIC) around $61 is the lowest since March 2021, but that’s about where the disinflationary news ends. Tariffs are set to increase the price of goods and accelerate unemployment.

Adding insult to injury, financial conditions have tightened over the past month as the Canadian dollar rose 3% against our largest trading partner, alongside rebounding interest rates and falling equity markets.

So far, the Canadian treasury yield rebound from April 3 through 10 is mild and well within a downtrend that’s persisted since October 2023 (see red lines around the Canadian 10-year yield below, courtesy of my partner Cory Venable).The difficulty is that interest rates have fallen much slower than many had imagined, and 60% of all Canadian mortgages are up for renewal this year and next (Bank of Canada); the majority are facing a 2x rate increase from the loan inception in 2020-21.

Unsurprisingly, the much-hoped-for housing rebound continues to disappoint.

The Canadian Real Estate Association (CREA) reported today that home sales fell 9.3% year-over-year in March and are down 20% nationally compared with November 2024.

The national average home price in Canada was $678,331 in March 2025, down 3.7%  from March 2024 and 17% since February 2022.

CREA now expects 482,673 homes to be sold in 2025, a decline of 0.2% from 2024, and much weaker than the 8.6% increase in sales it had previously projected. See: Tariff Turmoil means Canada’s housing market is ‘treading water at best’:

“Up until this point, declining home sales have mostly been about tariff uncertainty. Going forward, the Canadian housing space will also have to contend with the actual economic fallout,” CREA senior economist Shaun Cathcart said.

The last time Canada experienced a national home price decline lasting more than two years was during the early 1990s housing correction, which spanned approximately from 1990 to 1996. During that period, average home prices in many regions, particularly Ontario and British Columbia, declined or stagnated amid higher interest rates, economic recession, and an overhang of overinvestment from the late 1980s.

From 1990 to 1995, Canada’s 5-year fixed mortgage rate fell from around 13% to 9%, yet home prices continued to mean-revert from the mania of the 1980s.

Today, interest rates are about half as high as in the early 1990s. But the rate of change—a doubling of rates over the last five years—is a major shock, coming on top of the irrational price appreciation and over-investment of 2017-2024.

Bubbles always end in painful give-back periods, but this one is particularly inopportune for Canada.

Preliminary estimates show that the University of Michigan’s consumer sentiment for the US plunged to 50.8 in April—below forecasts of 54.5—and the lowest level since June 2022. Consumer sentiment has fallen 40% since November 2024 (below since 1970, courtesy of The Financial Times).At the same time, tariff announcements drove year-ahead inflation expectations to 6.7% (from 5%), the highest reading since 1981. See Consumer sentiment tanks in April on recession fears, and it’s not only consumers who are expressing angst about the outlook:

According to the Bank of Canada’s Q1 Business Outlook Survey, business investment and hiring intentions have weakened considerably, with employment plans falling below pandemic-era lows. Thirty-two percent of firms surveyed expect a recession in the next 12 months, up from 15% in the previous quarter. March employment data reinforced these concerns with the job count falling and unemployment rising.

While most are banking on lower interest rates this year, a recent backup in Treasury yields has increased financing costs for the public and private sectors. The US 10-year Treasury yield leapt 63 basis points (bps) from 3.86% on April 4 to 4.497% on April 11.

Companies borrow at a premium or spread rate above similar-dated Treasury bonds. Last week, high-yield spreads (companies with BB+ and worse credit ratings) rose to 461 bps, the highest since the March 2023 regional banking crisis (below since 2015).

So far, the Treasury market has been more attentive than the equity market. The last time corporate borrowing costs were this high, the S&P 500 was at 3800, some 29% lower than last week’s close.

With the US economy in decline, the Fed is expected to cut interest rates more in 2025, and both of those factors tend to weaken the greenback. Year to date, the US dollar has weakened sharply against major trading partners.

At the same time, as the US buys fewer goods from foreign countries, those countries receive fewer greenbacks and need to raise cash from other places to pay their bills. They have less to recycle into longer-duration financial assets, like stocks, corporate debt, precious metals, cryptocurrencies and treasuries. See The Dollar and the Bond Market’s Ominous Message for Donald Trump.

This is where liquidity needs can accelerate into a financial crisis. Some aggressively levered funds were forced to liquidate holdings after their positions went against them last week. And there will likely be more of that to come.

As asset prices fall, credit conditions tighten, just as fears about tariff inflation could dampen central banks’ reaction functions.

New Treasury Secretary Scott Bessent has said his office is focused on extending the term of the Federal debt to lower interest costs and extend payback periods. For that to happen, America needs the bond market to believe that inflation is under control and that lower interest rates are sufficient compensation for lenders.

As yields leapt into last Wednesday, President Trump announced a 90-day pause on additional tariffs, explaining that “People were getting a little queasy.”  Queasy is an understatement.

Once entrenched, history warns that such negative financial momentum is difficult to reverse.

Yesterday afternoon, news of a 90-day US trade tariff pause sparked jubilation in stock markets. The 9.5% bounce in the S&P 500 was the third-best day since 1950, and other indices followed suit.

Lest we lack perspective, the other two best S&P 500 days were +12% on October 13, 2008, and +11% on October 28, 2008. Both were short-lived: the stock market tumbled for another five months to March 2009, as the S&P 500 halved.

A similar pattern repeated through 2001 (shown below via the Nasdaq 100, courtesy of my partner Cory Venable). The bear market began in March 2000, and included five vigorous counter-trend bounces (marked with red arrows from the left), each lasting for several days to a couple of months, before gravity reasserted itself. By the ultimate bottom in October 2002, the Nasdaq had lost 78% from March 2000 and 62% from the January 2001 rebound top (noted below on far right).

Traditionally, bear markets last 12 to 24 months and do not recover prior highs for years. Individuals should include the potential for such an outcome in their investment strategy and financial plans today. See more food for thought in The Stock Market’s Fear Gauges Point to a Bounce, Not a Bottom:

Even those disciplined enough to sit still will wonder how far this goes and when it ends. The Covid-19 bear market, the shortest in history, probably provides a misleading guide. The government throwing everything but the kitchen sink at it turned sentiment around. This time around, to use the horror-film trope, the call is coming from inside the house.

If this becomes a severe bear market then the bottom will come at the point of capitulation when investors are disgusted with stocks. We are just too recently removed from a positive peak in sentiment and AI optimism.

As we will probably soon relearn, markets don’t go down in a straight line. But they go down a lot more than we might imagine.

Those interested in deep and flexible thinking about tariffs and the many moving parts will find the discussion below with economist Anna Wong worthwhile.

Anna Wong is the Chief US Economist at Bloomberg and previously worked at the Federal Reserve, White House Council of Economic Advisors, and US Treasury Department. I can imagine few people in the world better suited to analyze and forecast the impact of the tariffs.

Yesterday, on news of a US tariff increase for China, Anna and her team updated their impact projections and determined that the hit to US consumption will be more significant than previously estimated.

We calculated that post Trump “put” today, the tariff mix is actually worse —China exports more consumer goods to US than other countries, so boosting that (to 125%) relative to others will boost the hit to consumption goods. pic.twitter.com/Yw9QIgcXqG

— Anna Wong (@AnnaEconomist) April 9, 2025