There is a sense you could hear a pin drop in most offices around the country this week. This past week started off with the Canada Day Holiday, which is one of the best holidays, followed by the American July 4th holiday, in which everyone in the Great White North was glued to their TV’s watching Joey Chestnut devour 74 hot dogs. A world record. Surprisingly, his favourite condiment is water. I am more of ketchup and mustard guy myself. Needless to say, when marketing came knocking for commentary, I said, of course I’ll write it. It’s because I care. A lot.
It’s been two weeks since the last commentary so it would be good to recap the major benchmark bond yields. The 5 year Government of Canada benchmark bond is currently yielding 2.06% which is only about 1 bp tighter from its yield of a week ago. The 10 year is yielding 2.13% and was about 2.16% about a week ago. For context, a year ago the 5 year was yielding 1.47% and the 10 year was yielding 1.88%, while there have been 3 overnight rate hikes totaling 0.75% by the Bank of Canada in the interim. Clearly, there is nothing game breaking in the moves in the interest rates in the last week, although it is worth reiterating that 5 and 10 year yields are not perfectly correlated to increases in the overnight rate. The last year had an increase of 0.75% in the short-term overnight rate, while the 5 year only increased +0.59% and the 10 year +0.26%. That’s worth keeping in mind if you are currently looking at borrowing money over GoC’s or CMB’s.
Bank of Canada Meeting Next Week
I’ve never taken a journalism course, but I do have twitter so I know how important it is not to bury a lead. So I won’t. Most market participants are pricing in and anticipating for, an interest rate hike by the Bank Of Canada of 0.25% next Wednesday. Currently, the market (using overnight interest rate swaps) has the probability at 87.5% for a hike next week, which seems all but certain. Mid-last week however there was still some uncertainty on what the Bank would do but some economic data came out that cleared the air.
Stephen Poloz, the Bank of Canada Governor, gave a speech last Wednesday on the topic, “Let me be clear: From Transparency to Trust and Understanding”. For something titled let me be clear, the market took it as anything but and everyone was notably frustrated about it. His speech gave rationale on why heavy-handed forward guidance (by the BoC) could dampen the information in financial markets if data surprises occur, although the title of the speech seemed like a bit of a misnomer.
What was clear came out last Friday in GDP numbers and the 2nd quarter Business Outlook Survey (BOS), which both moved the interest rate hike to a near certainty. We had GDP beat Month-over-Month consensus growth by 0.1%, which kept the year-over-year GDP growth number in line with the BoC’s estimates of 2.5%. The Q2 Business Outlook Survey further cemented that the economy is doing well enough in the BoC’s eyes to warrant further interest rate increases. Firms surveyed were reporting robust sales outlooks which was supported by both foreign and domestic demand, which was shocking to me until I read that this survey was conducted before the May 31st U.S steel tariffs. Also notably in the report, input prices are expected to increase while inflation expectations are also expected to increase. This all pushed the BOS Index to near-record levels, which shows strong business optimism.
Finally, this morning brought the last major piece of economic data before the rate hike next Wednesday. Employment numbers were released which I saw summed up as ‘fine’. They weren’t the best, but they aren’t that bad either. Kind of like England’s current World Cup campaign - they may just get the job done next week. Net change in employment grew by 31.8K compared to the 20.0K surveyed. On the flipside, unemployment was 0.2% higher than expected at 6% vs 5.8%. How that happens is there was a surge in the labour force participants which buoyed the unemployment rate higher. Initial reaction to the job numbers looked to be shrugged off and there was nothing in the numbers to change the course next week.
All this being said, I am not a mind reader so if the Bank of Canada doesn’t raise interest rates next week and you have a large basket of interest rate derivatives pricing in a hike, why are you reading this and you can send your complaints to:
Bank of Canada
234 Wellington Street
Ottawa, Ontario, Canada
It’s coming home? Have a good weekend.