Canada

Canadians Held Onto More Cash In June, But It Looks Temporary

One of Canada’s broad measure of money showed a mild improvement. Bank of Canada (BoC) numbers show the M1+, the most liquid form of cash, saw a mild uptick in growth for June. The increase is a positive, and could mean Canadians are taking the interest rate hike well. Though a single month uptick is far from a break in trend, with short-term indicators still pointing to further deceleration.

What’s The M1+?

The M1+ is the BoC’s measure of the most liquid form of money. Currency outside of banks, chequable deposits at chartered banks, trust and mortgage loan companies and credit unions are included. To be blunt, it’s anything you can spend with little to no notice. It’s one of the most important indicators for the economy, but is largely ignored. Totes boring, but if you’re watching interest rates, it gives you a good sense of context.

The BoC manages the rate of money growth indirectly. They do this primarily by influencing short-term interest rates. When interest rates rise, people and businesses borrow less and pay down debt. The result is slowing growth of M1+, which usually accompanies slowing economic growth. That’s bad for rising rates, and employment – two fundamentals for real estate.

The central bank also considers the M1+ to be a leading indicator of inflation. When growth accelerates, inflation is generally on the way up. When growth decelerates, inflation soon follows. Interest rates are used to assist in the control of inflation, rising with inflation to taper growth, and getting cut when inflation drops. Those rates also happen to influence the rates used for mortgages, reducing and increasing servicing costs. It’s a serious real estate indicator, that’s seriously under used.

Canada’s M1+ Moves Higher In June

The Canadian M1+ showed some signs of life, moving slightly higher. The annual rate of growth for the M1+ increased to 4.2% in June, up from 4% the month before. Before you get too excited, the month before was the slowest pace of growth since 2003. That was the year Statistics Canada said Canadians ran down their savings, and borrowed to “finance their outlays.” Basically, they borrowed and relied on savings to make up the lack of wage increases. Beating last month was a low bar to clear.

12 Month Change of Canadian M1+

The annual percent change in M1+.

Source: Bank of Canada, Better Dwelling.

Short-term Trend Is Still Falling

The short-term pace of growth continued to go lower, indicating the annual rise may just be a blip. The 3-month annualized growth decreased to 2.7% in June, from 3.1% the month before. That means if the whole year was like the past 3 months, annual growth would fall to 2.7%, a level last seen in the 1990s. It’s unlikely to fall that low with what we’re seeing with the economy today, but the trend is still on target to move lower.

The growth is encouraging, but wasn’t enough to change the direction of the trend. Currently, all signs still point to the end of the business cycle, which the real estate cycle trails. A single month improvement is just a hiccup in the trend, not a change in direction. It’s still worth watching this number to see how it responds to the most recent interest rate hike though. The full impact of the last hike won’t be seen until December.

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12 Comments

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  • Sammy 2 months ago

    Not a huge surprise, people use their credit cards so cash deposits are low.

    • Ismael K 2 months ago

      If you use your credit card, the money gets transferred from your bank’s chequable account to the merchant account. The “cash” is still there regardless of whether you have a deposit note or stock you need to sell, in order to pay back the debt.

      • Trader Jim 2 months ago

        This. Only other thing worth adding is knowing that money is created when debt is created as well. So if consumer spending perked up in June, it could show up as the M1+ getting a bump. Consumer spending was a little higher, so my guess is a massive debt binge was digested (compared to last year). Though to believe it’ll happen again.

  • Ian 2 months ago

    I’d love to see them hike rates in December. I don’t think Poloz can possibly be that stupid, right now looks like we need a cut other than seasonally adjusted CPI.

    • Mica 2 months ago

      We’re getting hit with trade wars from all angles, which is going to deteriorate housing fundamentals as well. Starting a fight with Saudi’s to distract from the abysmal NAFTA negotiations. Are we even invited to negotiate?

      • bob 2 months ago

        Mica,

        I agree, the trade wars and currency wars will be a huge factor that can change a lot of things in the future. Particularly Ontario’s Economy is most vulnerable due to a lot of it depending on US exports.

        On one end it could really hurt alot of peoples jobs. On the other end, If we see lower canadian dollar. it will be good for jobs because of cheap labor, but the only additional factor in that scenario is that cost of goods will rise dramatically (gas, food etc). Assuming theres people are already a couple hundred $ away from not meeting the mortgage payments, I rise in food and gas costs can put them under………regardless if the interest rate goes up or stays the same.

        • Justin Thyme 2 months ago

          You are still hung up on the theory that those with the highest mortgages are the most vulnerable to interest rat hikes.

          Maybe some are, but not enough to jeopardize the economy. And with the minimum wage going up some 20%, there are a lot of second incomes that have gone up enough to cushion the blow.

          I am less worried about the Canada-US trade than I am about what happens between China and the US. The last few rounds of employment increases in the US have all been due to repairing storm and environmental damage, not any signs of a healthy US economy. ‘Replacing’ is not the same as ‘growth’. The trade imbalance with China and the US is actually getting worse, not better.

    • Bluetheimpala 2 months ago

      You’ll love it when thy do it in September as well. Tick tock. BD4L.

  • Justin Thyme 2 months ago

    ‘Currently, all signs still point to the end of the business cycle…’

    Yeah, but what about reading tea leaves? What does THAT show?

    Just about as effective as using M1+. Take a lose look at 2008. M1+ went ballistic just before the recession hit.

    A rise in M1+ could indicate nothing more than the average consumer is moving money around – into regular savings accounts that are now paying relatively decent returns of 3% or so. A far cry from the ‘0.004%’ that was being paid last year.

    There is nothing in just this one statistic that indicates Canadians are saving more, or paying down debt. They are just saving differently.

  • Justin Thyme 2 months ago

    April 1995
    Jan. 1999
    June 2003
    May 2011

    All very low points in M1+

    But no recession.

    Jan 2008 peak M1+

    Recession

    M1+ is no longer a useful indicator of anything. Get over it. Refocus on the new economy, not the old. Concentrate on the vanishing lower middle class. That is where the answers lie.

    • Ex Banker 2 months ago

      Canada rarely has recessions because they routinely adopt negative real rates to hide it statistically. Try adjusting those GDP numbers for rates, and they tell a different story. The US had recessions or extremely low growth at all of those points.

      Please don’t comment with such authority. Someone that doesn’t work in finance might mistake you for someone that actually knows something. M1 analysis is used by large funds and the central bank. I don’t know who you are, but I’m 99% confident you’ve never worked in finance.

      • Justin Thyme 2 months ago

        I am 100% confident that you have never worked in finance. Nothing you post makes any sense. All hyperbole.

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