The firehose of bad personal finance news has slowed to a trickle this summer.
In your investment accounts, stocks have recovered some of their losses and bonds have improved a lot. Day to day, gas prices have fallen sharply from the highs of earlier this year, and there are indications the overall inflation rate has finally peaked.
Bummed about housing? Price declines have slowed, and upward pressure on fixed mortgage rates has eased a lot. Worried about your job? The job market is expected to remain tight through the rest of the year, and unemployment is exceptionally low.
The financial world could lapse back into darkness within 24 hours of you reading this – make that 24 minutes. But we may just be through the worst of the pandemic pandemonium in the economy and the financial world. Take a breath, enjoy the last two weeks of summer and remember that having cash in a high-rate savings account is a defence against economic relapses.
Inflation and high-interest rates remain the biggest threat to household finances right now. But while Canada’s inflation rate was unacceptably high at 7.6 per cent in July on a year-over-year basis, that was down from 8.1 per cent in June. That’s the first deceleration in inflation in 13 months.
A big reason for the decline was the 20-per-cent drop in average gasoline prices since the June peak of about $2.10 a litre, and there’s reason to be optimistic about the broader supply-and-demand aspects of inflation. The unwinding of pandemic-related supply-chain issues will help, as will declines in consumer spending. Yes, consumer demand is helping to drive inflation.
RBC Economics reports that while spending by the bank’s clients using credit and debit cards was 30 per cent above prepandemic levels in July, it edged lower in August. Total restaurant sales were flat in July, and the total number of transactions was down 3.5 per cent.
Inflation is a two-pronged misery: Prices of goods and services go up, and so do interest rates as central banks try to control cost increases. The Bank of Canada is far from done raising its benchmark overnight rate – an increase of half or three-quarters of a percentage point is expected Sept. 7. Expect the cost of variable-rate mortgages, lines of credit and floating rate loans to rise in sync.
But in the bond market, interest rates have lately fallen sharply. The five-year Government of Canada bond, a key element in the setting of fixed five-year mortgage rates, has plunged to about 2.9 per cent from almost 3.6 per cent in mid-June. For now, we can say goodbye to upward pressure on the cost of fixed-rate mortgages.
Falling rates in the bond market are great for your investment portfolio. Bond prices and yields move in opposite directions, which means hard-hit bonds and bond funds have started to recover some of their losses of the past year or two. The benchmark FTSE Canada Universe Bond Index was up 3.9 per cent in July, cutting its losses of the previous 12 months to 9 per cent.
Stocks have also rebounded somewhat from their recent lows. Investment portfolios that looked horrible a few months ago are starting to normalize, as they inevitably would have eventually.
Financially, people seem to have more of an emotional investment in their homes than their portfolios these days. House prices have been falling since the winter, in large part because rising rates have made mortgages a lot more expensive. It’s quite the shock for a real estate market in which buyers justified any cost on the basis that prices would keep rising forever.
July marked the fifth straight monthly decline in home prices, but again there’s a hint of not-so-bad news. According to TD Economics, the pace of decline in July was the smallest of the past five months.
The most important piece of good economic news is the resilience of the job market, even as some tech companies trim their work forces. The historically low 4.9-per-cent unemployment rate has tightened the job market in a way that gives workers improved leverage for raises and new opportunities.
Recruiting company Robert Half recently offered an encouraging view of the rest of the year in the job market: Four in 10 employers anticipate adding staff, and only one in 10 sees hiring freezes or layoffs.
This year has so far been one of worsts and firsts in personal finance – worst inflation in 40 years, first serious decline in home prices for people under 50. Quietly, we may have reached a turning point.
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Rob Carrick