08:26 AM EDT, 05/21/2024 (MT Newswires) -- Probably the most significant development for Canadian financial markets last week flowed from the United States, said TD.

Weaker-than-expected data sent US bond yields lower, with Canadian yields following suit. Indeed, the benchmark Canadian 10-year yield was down around 10 bps on the week (-- at the time of writing the bank's note. Otherwise, housing was the name of the economic game lasy week, with April pulse-checks on new home construction and the state of Canada's resale market.

Housing starts dipped a tad last month, but the underlying trend remained healthy, stated TD. There are a few things to note here. First, the trend in starts was about 15% above the pre-pandemic run rate. Second, this trend has been supported by condo units and purpose-built rental housing. Current condo starts reflect gains in pre-sales several years ago when borrowing costs were lower, while purpose-built rental construction is being supported by steep increases in rents and government programs. Meanwhile, construction of other units, like detached housing, remains at low levels.

Third, even though the trend in starts is healthy, it's clearly on the decline. This is consistent with the bank's view that starts will fall in 2024, as borrowing and construction costs remain high, and demand for new homes has been notably weak in markets like Toronto recently. Fourth, even this robust pace of homebuilding comes nowhere near levels required to hit the federal government's target under its new housing plan, or to restore affordability to solid levels, per CMHC's analysis.

As for the resale market, April was a subdued month. Home sales declined month-on-month while benchmark prices were flat. TD was expecting a soft spring market to unfold given stretched affordability conditions and our view that buyers and sellers would wait for more clarity on rates from the Bank of Canada (BoC). However, home sales are on track to disappoint even the bank's "modest" expectations in Q2. The upshot of this weaker performance is that pent-up demand continues to build, waiting to be unleashed in H2 of this year and 2025 when rates should be moving lower.

This anticipated rise in home sales will push home prices higher, although strained affordability in key markets will limit the gain. Rising home prices would imply upward pressure on consumer inflation via the shelter component, although this will likely be more of a second-half story. In the here and now, TD added it "eagerly" awaits Tuesday's consumer price index (CPI) report for April.

The consensus expects that the average of the BoC's preferred core inflation measures (CPI-trim and CPI-median) decelerated from March, continuing the improvements we've seen since the beginning of the year. Both TD and the markets anticipate that July will be the start of the BoC's rate-cutting campaign.

After all, waiting until July will give the BoC an opportunity to see two more inflation and jobs reports, along with a Business Outlook Survey (BOS). However, a significant downside surprise in Tuesday's CPI report could revive expectations for a June move, according to TD.