A review of this week’s BoC rate announcement
When it rains it pours and it feels like we have been getting all of the rain from our friends in the Vancouver office the last two weeks. Speaking of which, readers might be wondering, “where was the commentary the last two weeks?” Well, typically, I would say absence makes the heart grow fonder and make some sort of joke, but I already led off with talking about the weather so that gives you an idea of my literary fortitude this afternoon. Don’t you worry though, what follows will be as hard-hitting as Vladdy Jr.’s debut tonight.
Bank of Canada
As all of you know by now, the Bank of Canada decided to keep rates unchanged on Wednesday. Overall, the statement by Poloz and co. read as dovish and took out any last hope of a rate hike in the forward looking part of the statement. If you want to see how small changes can make big impacts, remove the phrase “the timing of future rate increases”. Market observers can take that to say that they no longer have a hiking bias, meaning, traders in swap markets feel good about the chances of there no longer being any hikes by the BOC at all in 2019. The next highest probability move by the Bank of Canada? Well that would be a decrease in the overnight rate in Q1 2020.
Diving into the statement a bit, the Bank noted that since January’s Monetary Policy Report, the overall outlook for the economy has softened ( read: got weaker) and trade tensions still remain a very real threat. As an example of recent trade tensions, China’s punitive canola import penalties have caused 2019 Canadian canola plantings to decrease 7% and the industry could face a decrease of $2.7 billion in exports. Why am I mentioning canola seed in an interest rate focused commentary? Well, it’s important to keep the broader economy in mind as the Bank of Canada will use all available Statistics Canada data to make their forecasts and policy decisions. So although canola exports may not be the top of your mind when it comes to interest rates, it’s important to keep a tab on what happens globally, as you never know which straw will break the camel’s back.
The biggest take away is that the big picture for the Bank of Canada did not change much. They are still going to proceed as a ‘data dependent’ outfit, with a focus on: household spending, oil markets and global trade policy. Many of which have remained the same since last meeting in March, hence the no change in the overnight rate. Looking forward to the May 29th meeting, there is a 0% -ish chance of a hike and a 1.8% chance of a drop. If you’re still awake, Stephen Poloz did also speak late Thursday night and downplayed some of the fears in the Canadian economy. Poloz said he believed the Canadian economy would have a temporary slowdown, lasting “a couple of quarters” and there is not a looming a recession for Canada.
Rates went up, down and sideways and I won’t recap it all, but know when a central bank comes off as ‘dovish’, rates will typically follow suit by trading lower ( bond prices higher). The 5 year Government of Canada is currently yielding 1.52%, which is 10 bps lower than last week. The 10 year is similar, currently yielding 1.69% vs. 1.77% the same time last week. Overall, bonds yields are still higher than late March 2019 lows, but compared to this time last year, we are about 60bps lower for both the 5 and 10 year.
On the credit side, CMB’s have proceeded similarly with the 5 and 10 year CMB’s trading at lower yields this week. The 5 year is currently yielding 1.86% and the 10 year is yielding 2.14%. Overall, credit spreads have come in quite a bit recently. The Markit CDX Investment Grade Index is now well below levels that we saw in October 2018, which if you recall, was when the market was last at the tights. Meaning, market conditions are favourable for issuances and sentiment about risk is positive.
Which is a perfect segue onto the major news of the past week: a syndicated NHA MBS deal by Scotia Capital Inc. Scotia priced $576 million 2.05% NHA MBS due February 1, 2024, which has a weighted average life of 3.62 Years. The deal was priced at +53 bps over the GoC 09/01/2022 bond. Per market sources, the deal was very well received and priced at the tight end of the guidance. It’s always good to see the NHA MBS market alive and thriving, it’s a thankless job issuing jumbo pools, but someone’s got to do it.
That’s all I have for this week so in closing, quoting the words of the future futurist Ryan Foster, “until next week…….maybe”.
Have a good weekend,