The Bank of Canada (BoC) left its overnight rate unchanged last week, as most market watchers expected. The Bank also released its latest quarterly Monetary Policy Report (MPR), which provides us with the Bank’s assessment of the current economic conditions at home and abroad and includes forecasts for key economic data. The overall tone of the BoC’s latest MPR sounded cautiously optimistic – cautious over the short term but more optimistic over the longer term. Bluntly put, I think the Bank’s latest assessment makes it less likely to raise rates in the near term, but also reconfirms its belief that a rate hike will eventually be its next move. In last week’s post I outlined five key questions for the BoC’s latest meeting and in this week’s post, […]

The Bank of Canada (BoC) meets this Wednesday, and while most market watchers aren’t expecting the Bank to raise its overnight rate at this meeting there is still the possibility that its accompanying commentary could push Government of Canada (GoC) bond yields higher, along with the fixed mortgage rates that are priced on them. The BoC will also release its latest quarterly Monetary Policy Report (MPR). The MPR provides us with the Bank’s latest assessment of the current economic conditions at home and abroad and includes forecasts for key economic data. Simply put, if you’re trying to figure out where fixed and variable mortgage rates may be headed, Wednesday will be an important day. With that in mind, here are five key questions that I’ll be looking for […]

Last Friday Statistics Canada released our latest employment report, for March. It estimated that our economy added 32,300 new jobs last month, which was well above the consensus estimate of 20,000. While the headline result came as a surprise, the much bigger surprise, at least to me, was the bond market’s reaction. Over the past year, bond-market investors have become increasingly confident that our job market’s momentum will compel the Bank of Canada (BoC) to raise its overnight rate. This view was maintained even after our economy lost 88,000 jobs in January, reversing much of the late surge that we saw at the end of 2017. Only two weeks ago our bond futures market was assigning an 80% probability that the BoC would raise its policy rate in […]

Last week, Statistics Canada confirmed that our economic momentum slowed sharply in January as our GDP fell by 0.1% over the month. The drop was primarily attributed to sharp decreases in oil production and real-estate activity. While our January result came in below the consensus forecast of 0.1% increase, some loss in momentum was largely expected. Our policy makers are trying to slow our economy’s rate of household debt accumulation and as that happens, consumer spending, which comprises about 58% of our overall GDP, is bound to decrease. Their hope is that business investment, which accounts for about 20% of our GDP, and exports, which account for about 27% of our GDP, will take up the slack. On that note, our manufacturing output surged higher by 0.7% in […]

Last week Statistics Canada confirmed that year-over-year overall inflation spiked from 1.7% in January to 2.2% in February. At the same time, two of the three gauges that the Bank of Canada (BoC) uses to measure core inflation also breached the Bank’s 2% target threshold last month. Bond-market investors reacted quickly to the higher-than-expected inflation readings and increased the odds that the BoC would raise its policy rate from 67% to 80% when it meets in May. There is no arguing that Canada’s inflation measures are running hot at the moment, but I think this was an over-reaction. I continue to believe that the BoC will prove to be much more cautious than bond-market investors, and many mainstream economists currently expect. When the BoC met earlier this month, […]

The only real question leading up to this meeting centred on the tone of the Bank’s accompanying statement. Would the BoC convey a hawkish bias out of concern for rising inflationary pressures and tightening labour market conditions, or would it sound more cautious in deference to increased trade uncertainty and the lagging effects of the three rate hikes it had recently made?

Last Thursday, seemingly out of the blue, President Trump announced that the U.S. would impose a 25% tariff on imported steel and a 10% tariff on imported aluminum, adding that these new taxes may be applied as early as this week. The U.S. President has a surprising amount of latitude on trade policy. In this case, Trump is arguing that the U.S. steel and aluminum industries are strategically important to the U.S. military. In theory, if foreign competition is allowed to starve out domestic production by dumping cheap steel and aluminum into U.S. markets, the U.S. industrial base may be degraded to the point where it cannot adequately supply the U.S. military in times of war. Interestingly, the U.S. Department of Defense (DoD) quickly responded to Trump’s announcement […]

The consensus read of the latest inflation data, which showed only a modest uptick of one of the Bank of Canada’s key sub-measures of inflation (more on that in the post), was that this slight change is not likely to alter the Bank’s plan to raise its overnight rate at some point this summer. I continue to disagree with this view and believe that the Bank will once again prove more cautious than our mainstream economists are forecasting.