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GDP increase, possible rate hike and CMHC Q2 results

  • Andrew Masliwec, Analyst, Capital Markets

Greetings,

I can’t believe it’s already September or as some like to call it, the “Monday of months”.  Teenagers and Gen Z’ers are headed back to their dreaded schools for another year. For their parents and other young professionals, vacations will be mostly taken and it’s back to reality, filling the public transit system to peak levels.  Having a seat some days has been a treat, but mornings aren’t the same without being shoulder to shoulder on a hot subway car.

On the Canadian economic news front, August went out with a bang yesterday. The major economic headline was GDP, blowing past surveyed economists’ predictions. There’s an applicable economist forecasting joke there but I’m blanking so let me know if you think of one.

Possible Rate Hike Next Week
Annualized 2nd Quarter GDP came in at 4.5% versus the surveyed 3.7%. The Month-over-Month number came in at 0.3% vs the surveyed 0.1%.  This number is a full 1.5% higher than the Bank of Canada set out in their July Monetary Policy Report, where they were outlined 3% growth. The biggest drivers of the GDP numbers were Consumption (rose 4%) and gains in fixed investment (rose 7.15%). The only drag was residential construction at -4.7%.  

On the back of this strong economic news, at least two economists at major financial institutions have predicted the Bank of Canada to rate hike next week, September 6th. This would bring the overnight rate to a full 1%. I applaud their gallantry in going against the consensus. I went against the consensus this past weekend and had McGregor winning by submission in the 3rd inning.

Canadian Overnight Index Swaps currently have a 55% implied probability for a rate hike September 6th.  The implied probability of an October 25th hike now sits at 75%.

Rates
Bonds moved on the strong GDP print. With the possibility of yields going up, bond prices look less attractive so we saw selling off since yesterday. On Monday the 5-year Government of Canada bond was yielding 1.54% and is now yielding 1.60%. The 10 year GOC is now yielding 1.92% from 1.86% on Monday. These moves would have been more profound, but on the 29th we had a bid market for risk free assets, which depressed yields to month lows, as our favorite North Korean Dictator shot a missile over Japan on Tuesday.

In general market news, Gold surged this week to a 2017 high at $1,322 USD/oz. in reaction to the North Korea/Japan situation. Hurricane Harvey has continued to devastate refineries in Texas and the southern USA, as gasoline climbed for the eighth straight day. As a side note, I’ve been told that gasoline prices always climb for an eighth straight day before a long weekend.

CMHC
The Canada Mortgage and Housing Corporation also had their Q2 results come out this week. Due to new eligibility criteria, portfolio insurance for financial institutions is 76% lower than a year ago and year-to-date CMHC insurance volumes on single-family homes are down 45%. The CMHC also paid a dividend of $240 Million to their major shareholder, the Government of Canada.

In what was maybe the biggest news of the week back home, The Air Canada Centre will be called the “Scotiabank Arena” starting July 2018. Scotiabank paid approximately $800 Million for the honour. I see some pros and cons on the name change. For a con, I’m not sure the name change will stick. I’m pretty sure everyone I know still calls the Rogers Centre, Sky Dome. However for a pro, fans will probably need a loan from Scotiabank to afford the Leafs tickets and the $18 beers. I’m torn on the deal.

Have a good “stop wearing white” long weekend. 

Andrew Masliwec
Analyst, Capital Markets