In this week’s The Seven…

• U.S. Fed - Fall comes early
• Canada inflation - Right on target
• Alberta population projection: from 5 to 7 million
• Hot streak - Alberta home builders step up to the plate
• Bouncing around a flattish trend - Retail spending in July
• Interesting Fact: Close call - Interest rate cuts and elections in the U.S.
• Chart of the Week: Moving downstream

“The first cut is the deepest

Baby, I know, the first cut is the deepest

When it come to being lucky, she's cursed

When it come to loving me, she's worst”

—Cat Stevens, The First Cut is the Deepest

The U.S. Federal Reserve joined the rate cutting party and did they ever make a splash. A 50-basis point whopper, surprising markets and economists alike.

Canada’s inflation rate was right on the 2% target this week. With the Fed super cutting out of the gate, the Canadian economy struggling and inflation falling, we think the door is now open for a 50 basis-point cut by the Bank of Canada in October. As always, it will depend on the next labour and inflation reports. But if we get more of the same (weakness on both scores) we feel it would be hard for the Bank to justify not moving faster. It’s almost a coin toss now, but the coin is now weighted towards landing on 50 in our view.

Lower interest rates will be welcome by borrowers. But as we’ve highlighted, Canada’s economic challenges won’t disappear when interest rates normalize and inflation is sustainably at the 2% target. Productivity and investment are struggling—monetary policy is a blunt instrument and can only do so much.

On that note, I attended the ATB Capital Markets Energy Investor Conference in New York, where companies and investors discussed opportunities in the Canadian energy sector. Then on Thursday, I presented at the Industrial Heartland Conference. My takeaway from these meetings is Canada has a massive opportunity to build on its energy strengths. The world wants what Canada has. As a bonus, the energy sector has very high levels of labour productivity, and Canada could use more of that right now. In Alberta's Industrial Heartland, energy is moving downstream with large investments in net zero petrochemicals, hydrogen, carbon capture and biofuel projects (see the Chart of the Week). Also this week, ATB Capital Markets released its Fall Energy Sector Survey with respondents saying West Coast LNG is the top opportunity for the sector.

Going big - Fed doesn’t want to be behind the curve

The Fed doesn’t want to be in a position where it’s too late. They like what they see on inflation and think they are winning the battle. Like the Bank of Canada, they are getting concerned that the labour market will weaken more than necessary to keep inflation at 2%. And more explicitly, the Fed has a dual mandate of maximum employment and stable inflation.  Is this a sign of panic that the U.S. is going into a recession? Not according to the latest Fed projections, which call for 2% real GDP growth and a 4.4% unemployment rate next year (median forecasts). 

As summarized by the interest rate desk at ATB Capital markets:

“They (the Fed) are moving to support the labour market and growth as they have become confident on inflation falling to 2%. They appear to believe that they can be measured in the cutting as they have acted aggressively and quickly. They do not believe that they are “behind the curve” and plan to ease towards 3.25% in the next 12 months or so.”

Canada - 25 or 50?

After the inflation reading came in at 2% on Tuesday—the lowest since February 2021—our thought was “wow the Bank may just cut 50 basis points at the next meeting.” Then the Fed did just that on Wednesday (though it’s their first move after the Bank of Canada has already cut 75 basis points).

Our view is that the market, the state of the economy and the Fed have paved the way for a larger cut by the Bank of Canada. Why not take it? If inflation flares up again, the Bank can pause longer.

Some factors in favour of a more aggressive 50-basis point cut in October: 

• Inflation at target
• Inflation ex shelter (the main problem area) at 0.5% and ex mortgage interest costs at 1.2%
• Unemployment rising to 6.6%
• Expected slowdown in third quarter GDP growth
• U.S. Fed moved faster than expected

Factors in favour of a 25-point cut:

• Upside risks to inflation - sticky wages, tariffs and supply chain risks
• A resurging housing market

Factors in favour of holding:

• Can’t think of a reason

7 million Albertans

That’s the projection coming out of the demography team at Alberta Treasury Board and Finance for the year 2048 under the medium scenario. We’re at about 4.9 million now.

No one has a crystal ball, but I’d take the reliability of a long-term demography forecast over an economic forecast any day. With demographic projections, you know with great detail who’s here now, and you can age people going forward (and apply age-specific mortality and fertility rates).

The demographics team has stepped up their game, with new details by specific geographies including school and health zones. This information is critical for planning.

A few highlights:

• There will be continued gains from interprovincial migration, averaging 27K over the next three years then 13K per year after that.
• International migration will remain strong, but come down from recent levels as the inflow of non-permanent residents normalizes.
• Natural increase (births less deaths) will be positive every year even as most provinces are now experiencing natural decrease.
• The population will continue to age, with one in five Albertans projected to be aged 65 and older by 2051.
• Urbanization continues, with 81% expected to live in the urban census divisions of Calgary, Red Deer, and Edmonton in 2051 (up from 77% in 2022).

How many years to the next million? Based on the medium projection:

• 5 million in 2025 (next July!)
• 6 million in 2036
• 7 million in 2048

Bottom line: Population growth will go from hot to very warm, creating ongoing demand for housing and infrastructure, and pushing up consumer spending. In the labour market, matching skills to available jobs will remain critical with overall unemployment elevated but shortages in some pockets like construction.

Housing starts - Hot streak continues

How is it possible? Alberta had yet another strong month of housing starts in August, recording an annualized 47K. That’s the thirteenth straight month of 40K+, the longest streak since 2005-2007.

All this in the face of construction labour shortages and higher interest rates.

Edmonton was the big story last month, with 21.2K annualized starts surpassing Calgary’s 19.9K for the first time since last December. This coincides with the pickup we’ve observed in Edmonton’s resale market.

Alberta has completely diverged from the Rest of Canada with housing starts up 44% this year compared to 2% decline outside Alberta. This is a big reason (along with surging oil production) why we expect Alberta’s economy to grow faster than the national economy this year.

Interesting Fact…Cutting it close

The state of the economy can have a huge impact on the outcome of democratic elections. As such, it is notable that the U.S. Federal Reserve elected to cut its trendsetting interest rate by 50-basis points less than two months before a presidential election. A rate cut this close to a national election has not happened in nearly 50 years. As noted by the news agency Reuters, changes to the policy rate during an election year are not unusual, but “[i]n most cases those changes were part of cycles that had been set in motion a year or more before an election year.” To allay concerns that a shift in monetary policy might be politically-motivated, Fed Chair Jerome Powell said in July that “anything that we do before, during, or after the election will be based on the data, the outlook, and the balance of risks and not on anything else."

Chart of the Week: Moving downstream

Investment in oil and gas extraction (the upstream side of the business) in Alberta is at about half of its 2014 peak. But more investment has moved downstream—that is in value-added energy like petrochemicals. Much of this taking place in the Industrial Heartland region of Alberta. The largest project, value wise, is Dow’s Path2Zero facility. There are other projects under construction, including Imperial’s renewable diesel plant and Air Product’s net-zero hydrogen energy complex. More recently, carbon capture projects have been announced, with some like Shell’s Polaris reaching final investment decision (see the July 26 edition of The Seven).

Recent projects are focused on producing value-added energy products with a lower emissions footprint.  This will also help out with Canada’s investment and productivity challenge, given these industries have high capital intensity and high rates of labour productivity.

On a related note, ATB’s Capital Markets Energy Sector Survey ranked West Coast LNG as the top opportunity for the sector. This comes after recent progress with LNG Canada near completion, Woodfibre LNG in construction, and Cedar LNG recently reaching a final investment decision.

Answer to the previous trivia question: U.S. LNG export capacity increased from about 1 billion cubic feet per day in 2016 to about 11.44 billion cubic feet per day at the end of 2023.

Today’s trivia question: The fall season (a.k.a. autumn) in the Northern Hemisphere is generally considered to start on the same day as what celestial event?