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Liberal's second budget review

  • Jason Ellis, Managing Director, Capital Markets

Good Morning,

I’ll be honest; Treasury Guy is hurting this morning.  I remember something about a seafood tower and thinking Caesars would go well with it.  Other than that, it’s a bit hazy.  I was inclined to skip today’s post but that would be two weeks in a row and the evil task masters in marketing would give me a hard time.  So here we go…

The Liberals’ second budget was released on Wednesday.  Minister of Finance Bill Morneau put on his new “Poppy Barley” shoes and generally underwhelmed the market.  Of course, housing prices have prompted calls for even further government intervention, but fortunately, no new changes related to mortgage lending or insurance were announced.  The budget did include $40 million over 5 years for Statistics Canada to develop and implement a new Housing Statistics Framework…so we’ve got that going for us.  Sounds like an exciting project.  Ground floor kind of stuff.

Most importantly, no changes to the capital gains tax were in the budget.  Phew.  On the downside though, excise duty rates on alcohol were increased by 2 per cent.  

In up to the minute news, Canada’s annual inflation rate fell to 2.0% in February from 2.1% in January.  The drop was largely attributable to lower gasoline prices.  The report certainly doesn’t give the Bank of Canada any reason to be concerned about inflationary pressures (aka ‘dovish’).  The bank next meets on April 12th and not surprisingly, there is virtually no probability of a change in the overnight rate from the current 0.50%.  The US Fed next meets on May 3rd and the current probability of another hike is around 13%.

Speaking of interest rates, yields are off their recent highs.  After trading around 1.31% last Monday, 5 year GoC’s have drifted back down to 1.15% as of this morning.  10 year bonds have fallen from 1.87% to 1.66% over the same horizon.  I’ve consulted the Magic Eight-Ball about the future direction of rates, because I know you were wondering about that, but all I got was “Reply Hazy, Try Again Later”.  Sorry.  At least I tried.

I should also mention that the new 5 year Canada Mortgage Bond came and went last week.  The new 1.75% June 2022 bond was well received ($5.25 billion) and has tightened in a couple basis points since.

Finally, Pagans across the globe celebrated the Vernal Equinox earlier this week.  The days are now longer than the nights and it is now officially Spring.  Of course, this means it won’t be long before the Ducati comes out of hibernation, and that’s a thought that’ll cure just about any hangover.

Stay Classy,

Treasury Guy
Jason Ellis, Managing Director, Capital Markets