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Bank of Canada’s decision to hold its policy interest rate at 2.25 percent in January underscored a widening gap between Canadian and U.S. monetary policy that has rarely been so clear in recent memory. Governor Tiff Macklem acknowledged elevated uncertainty about growth, trade, and inflation while keeping rates unchanged, leaving the door open to cuts or hikes depending on how economic conditions evolve. The BoC’s cautious stance reflects slower GDP growth in Canada, trade disruptions from tariffs and a softening labour market that have prompted economists to forecast a steady rate through 2026.

The Bank’s guidance contrasts sharply with how markets have been pricing U.S. Federal Reserve policy. Due to President Trump's insistence on lowering rates and his attacks on Fed board members, traders have increasingly bet that the Fed will begin trimming rates earlier than previously expected. That pricing behavior has shown up in futures markets and in the relative trajectory of Treasury yields, where the implied probability of Fed rate cuts has climbed even as the BoC signals restraint. The result is a growing interest-rate differential between Canada and the U.S. that has animated currency markets, with the Canadian dollar gaining ground against the U.S. dollar as investors price in slower relative tightening in Canada.

Part of what’s shaping this divergence is how each central bank views its economic backdrop. The BoC’s inflation outlook remains near its 2 percent target, and recent surveys of economists suggest most do not expect a rate change in 2026 unless trade policy shocks intensify or growth weakens materially. Some models even show the next BoC move could be a hike in late 2026 or early 2027, a scenario driven by inflation and output conditions rather than U.S. financial cycles. Canadian policymakers are also more attentive to external risks, including renegotiations of the Canada-U.S.-Mexico Agreement, which they flag as a key downside risk to exports and business investment.

By contrast, the Federal Reserve’s rate path is being shaped by a different set of pressures, including persistent slack in some sectors and stronger signs of easing in inflation measures. Markets have priced multiple potential rate cuts for the U.S. in 2026 as underlying economic data and softening labour market indicators have shifted sentiment on how long high policy rates will be needed. That has introduced the possibility that U.S. interest rates could fall well below Canada’s—a scenario that would be historically noteworthy. Academic and central bank research shows that monetary policy divergences between Canada and the U.S. are common, but they typically emerge during tightening cycles and do not persist for long. If the U.S. moves into a cutting phase while Canada stays on hold or tightens slightly, this divergence could become one of the longest of its kind in recent decades.

If U.S. rates did drop significantly below Canadian rates, the implications would ripple through real estate and financial markets north and south of the border. Canadian borrowers would face relatively higher financing costs, potentially slowing household and business borrowing and amplifying the drag on sectors like housing and commercial property. A persistent rate gap could also strengthen the Canadian dollar further, making exports less competitive and complicating inflation dynamics. On the U.S. side, lower rates could ease mortgage costs and support investment in property markets that remain sensitive to financing conditions. Capital flows might tilt back toward U.S. assets if yield spreads compress, but those moves would also depend on relative growth prospects and currency expectations.

What’s shaping up is a monetary policy dance in which both central banks are responding to domestic signs of inflation and growth rather than simply following the other’s lead. Canada’s slower pace, anchored by its own neutral rate estimates and trade-driven uncertainty, could keep its policy curve flatter for longer. The U.S., with markets betting on rate cuts, could see a steeper downward shift. That divergence, once merely a technical point of economics research, is now becoming a live policy experiment with real implications for cross-border capital allocation, exchange rates, and financing conditions across property markets on both sides of the border.

Assembly Bill 1642, known as the Wildfire Environmental Safety and Testing Act, was introduced in the California Legislature to establish statewide scientific standards for evaluating and cleaning homes, schools, and businesses after wildfire smoke and contamination. The bill would direct the California Department of Toxic Substances Control to issue emergency regulations by mid-2027 that define how buildings exposed to wildfire residues should be tested and what constitutes a safe environment for re-occupancy. The move comes after reporting that some insurance-approved testing protocols have at times downplayed chemical hazards such as lead, asbestos, and other toxins, leaving survivors unsure when it is truly safe to return.

The intent of AB 1642 is to remove ambiguity and put public health experts and scientists at the center of post-fire recovery decisions, rather than deferring to insurance carriers or disparate local practices. Proponents argue that consistent, science-based benchmarks could reduce conflict over cleanup standards and give families clarity about whether a fire-affected structure is safe to inhabit again. Without statewide rules, testing and remediation approaches have varied widely, creating uncertainty about exposure to persistent contaminants and complicating both recovery and insurance claims.

While the bill is still moving through the legislative process, its introduction reflects broader concern about wildfire impacts on housing and public safety as catastrophic fires have become more frequent and severe in California and other western states. Fire seasons are intensifying and insured losses are massive, with recent California wildfires contributing tens of billions in payouts and claims activity that stretches insurance and recovery systems.

If enacted, AB 1642 would signal a shift toward embedding environmental health expertise directly into post-disaster housing policy, potentially reducing disputes between homeowners, insurers, and public agencies about contamination and cleanup. The emphasis on science-based safety standards may also influence adjacent policy areas such as building codes, insurer obligations, and mitigation incentives, especially as climate-linked disasters continue to shape housing risk and recovery strategies.

Apollo Commercial Real Estate Finance, the mortgage-focused REIT managed by Apollo Global Management, has agreed to sell its approximately $9 billion commercial real estate loan portfolio to Athene Holding Ltd., an affiliate of its own insurance platform. The transaction, valued at about 99.7 percent of total loan commitments, should leave the REIT with roughly $1.4 billion in net cash and about $1.7 billion in shareholders’ equity once existing debt and liabilities are repaid. The sale price represents a meaningful premium over recent trading levels and helps validate long-held book values on a public vehicle that has historically traded at a discount to its net asset base.

Apollo's portfolio before the announcement was largely composed of commercial real estate debt, primarily first mortgages on office, retail, multifamily, and mixed-use assets, and had been steadily grown over recent quarters amid strong origination activity. In 2024 alone, ARI originated about $1.9 billion of loans, benefiting from robust deal flow and the backing of Apollo’s real estate credit platform. Despite that depth, public market valuations lagged underlying asset values for much of its post-pandemic life, prompting management to pursue this sale as a way to crystallize value and simplify the balance sheet. The deal excludes a couple of loans expected to be repaid prior to closing, and ARI will retain net equity interests in underlying properties rather than the debt itself.

With the loan sale behind it, Apollo Commercial REIT enters a new phase. Management has signaled that it will use its strengthened liquidity position to evaluate a range of potential strategies, including new commercial real estate businesses, mergers and acquisitions, or other portfolio repositioning moves, all while maintaining a dividend near an 8 percent annualized yield on post-transaction book value. In essence, the transaction gives ARI both the cash and flexibility to reimagine its role in the CRE finance ecosystem, shifting away from a concentrated loan portfolio toward possibly broader or more opportunistic real estate exposures. For markets watching commercial mortgage REITs, this underscores the ongoing evolution of finance vehicles as they adapt to post-rate-hike conditions and seek ways to deliver value when traditional yield curves and credit spreads compress.

Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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