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Interest rate and Bank of Canada updates

  • Andrew Masliwec, Analyst, Capital Markets

Greetings,

There’s a rumour going around that people tend to only read the first and last paragraphs of our in-depth, well-reasoned and astute market commentary. Something about jokes. That’s a shame because this is serious global impacting stuff which you can only read about here. So with that in mind, that’s the end of my paragraph.

Interest Rates
A lot of hard-hitting economic news came out of Canada this week, so let’s have a little refresher on where our key economic interest rates are.  For our Government of Canada yields, 5 year bonds began the week yielding 1.69% and are currently around 1.67%. The 10 year GoC’s or the Sir John A. Macdonald’s, as probably no one calls them but me, started the week at 2.02% and are currently at 2.00%.

Credit spreads are important to hopefully most of you. The current 5 and 10 year CMB’s are yielding +37 bps   and +44 bps over their bench mark Government of Canada’s mentioned above. You can put the calculator away, the 5 year CMB is currently 2.04% and the 10 year is 2.44%.  The highly watched spread between Aussie “Kangaroos” and New Zealand “All Blacks”, the 10 year down under spread, is currently 110bps. Oh sorry… wrong commentary.

Prime rates at the major Canadian Banks were kept the same since September 7th at 3.2% and CDOR declined on the week. Which must mean..

Bank of Canada
On Wednesday, you probably didn’t hear, the Bank of Canada left their policy interest rate unchanged from 1%. This move, or lack thereof, was widely expected by the market.  Overall, Poloz and friends delivered what many considered a balanced message (read: a snoozer), in both the October policy statement and their Monetary Policy Report. The BoC emphasized about proceeding “cautiously” with further interest rate increases, which sent our dollar to a July low of 1.28 USDCAD.  The bank mentioned NAFTA discussions, household debt levels and slack in the labour market as key concerns going forward. This was actually the first time the Bank of Canada mentioned “NAFTA” specifically in a Monetary Policy Report. This must have been HUGE news to whoever has their PHD in, “The Cross Sectional Analysis Between Bank of Canada Policy Rates and Free Trade Agreements”.

As an aside, it is also worth noting that the Finance Department released their “Fall Fiscal Update”. After spending all night reading it, the report showed a downward deficit revision of $33.5bn for the cumulative next 5 years. The deficit for 2017/2018 was shaved to $19.9bn from $28.5bn in the March budget.

All in all, many in the market are no longer predicting another hike in 2017 and that the first interest rate hike will come sometime in 2018.  Without a doubt, you will hear about all the key economic data in the coming months, right here.

Global
Next week of note we have both the U.S. Federal Reserve and the Bank of England making interest rate decisions. The Fed is expected to take our lead and keep rates unchanged. The Bank of England is expected to lag our September decision and raise interest rates 25 bps. This is definitely not a coincidence. Who says we aren’t a global financial leader!?

In other global news, Mr. Donald was supposed to declassify and release all the “JFK” files which many basement dwelling conspiracy theorists have been waiting for. Unfortunately, either due to not asking the right people or due to the material contained, the documents have still not been released. See, this is the one Trump policy I can’t get on board with. I was supposed to dress up for Halloween this weekend as JFK’s true killer, Elvis Presley, but this messed those plans up.

Now I’ll have to go as my back up and probably less controversial costume, “the Treasury Guy”.

Have a good weekend,

Andrew Masliwec, Analyst, Capital Market