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Andrew Masliwec reviews this week’s economic releases

  • Andrew Masliwec, Analyst, Capital Markets

Good Morning, Evening, or Night,

I never know where or when our loyal readers may be furthering their interest in the things that makes interest rates change. One thing is true at any time though, it’s my job to keep you awake and engaged, so buckle up for a wild ride.

Interest Rates and the Like

It’s been two weeks since the last commentary and by now you know the Bank of Canada increased the overnight rate, so let’s have a little refresher:

  1. Interest rates - Bond yields are higher since last Wednesday’s interest rate hike. The overnight rate now sits at 1.75%. For historical context, my fancy terminal is telling me that the 1.75% target rate has never been set, which is meaningless but interesting.It’s about where we were at in the financial crisis, when the O/N target went from 2.25% in October to 1.5% in December. Those were exciting times I would imagine but I wouldn’t know, Selena Gomez didn’t cover it in the Big Short. Our benchmark bonds have sold off pretty much ever since the Wednesday meeting. The 5 year is currently yielding 2.43% and the 10 year is yielding 2.50%. That’s about 9bps and 11bps higher than last Friday’s close. Benchmark CMB’s fared similarly, as the 5 year CMB is yielding 2.7% and the 10 year is yielding 2.89%, which are 6bps and 9bps higher than last Friday respectively. Who knows what next week will bring. We don’t forecast rates, so don’t hesitate and lock your rate!
  2. Equities - As you are well aware, the equity markets have taken a bit of a turbulent turn over the last two weeks.The TSX sold off to a year low last Friday and the blood bath continued into Monday and Tuesday. We have had a modest recovery to finish the week however. The market moves in mysterious ways they say, so the reasoning behind the volatility can be anything from high yields, trade wars or people getting assassinating in Saudi Arabian Consulates, but when in doubt I’ve learned you blame the algorithmic traders. Savages.
  3. Bitcoin – I am just pulling your leg, no one cares about bitcoin anymore. The CBOE bitcoin futures market trades 9,000 contracts a day on average, which is peanuts, and I’ve already spent too much time writing about this.

Economic releases and Poloz & Co.

This week brought both GDP and employment numbers. The 31st had August GDP numbers which came in at 0.1% and beat the expected 0% change (month over month). The year change was also higher than expected, coming in at 2.5% vs the 2.4% surveyed. Overall, this wasn’t a needle mover.  Today we saw unemployment numbers which beat expectations and matched an all-time low of 5.8%. This typically would be a positive result for the markets but the rest of the news wasn’t as glossy.

Wages for permanent workers dipped from 2.2% from 1.9% in September and is much lower than the peak in May 2018 of 3.9%. Workers both permanent and part-time saw their earnings fall from 2.4% to 2.2%. Higher wages support higher prices, which would help support the increasing of interest rates. Further, net change in employment came in at +11.2k vs the expected +15.0k.

Aside from the hard economic data released, the markets closely followed speeches by Bank of Canada Governors. Poloz and Willkins both spoke this week which shaped the rates markets recently.  In a speech earlier this week, they identified that the policy rates are actually still negative in real terms (inflation is higher than 1.75%).  More importantly, they said the estimated neutral range for interest rates should be anywhere between 2.5%- 3.5%, a.k.a. going higher from here. This furthered the sell-off in bonds as that became the new status quo for where the Bank of Canada sees rates being to achieve their inflation target.  A lot of talk was also focused around the word ‘gradual’ in their policy statements, as market participants were clinging onto it as a gauge of the pace of hikes. Seeing this, the BoC removed the word altogether to ensure each BoC meeting is a sole assessment of the balance and risks of further hikes. Poloz also identified that trade actions still keep him up at night and he wants us to understand that 3% policy rates are a normal thing.

All this means is that the current odds of a hike next month is about 25% but that could all change, when Poloz speaks in the UK on Monday.

Finally, some of you have been clamouring for the Treasury Guy to make a return. What – am I not good enough? Are you not entertained? Don’t fret. Jason ensured me he will be back, even if you saw that he’s the “COO guy” now. He’s just very busy celebrating First National’s stellar Q3 results which came out this week and working very hard to continue that trend.  Revenues are up 13% from a year ago and assets under management are now at a staggering $105 Billion. Wow, I can’t even count that high.

Good night and good luck,

Andrew