To all the loyal readers out there, it would have come as no surprise that the Bank of Canada rose interest rates by 25 bps this past Wednesday. What did come as a surprise, is that Marketing is offering my team ice cream if I wrote a commentary this morning. Well I can’t be bought, but I’m writing this anyways, for you, the faithful commentary readers.
Bank of Canada Meeting and MPR
Market participants weren’t thrown for a loop this Wednesday when the Bank of Canada raised rates to 1.5%. Going into the meeting there was a 90%+ probability that the BoC would hike interest rates so as the 10:00 am (EST) meeting came and went, bond yields were not drastically affected. Taking a quick look at the yield curve over the past week, as you would expect the front end was the most reactive as 3 month and 6 month T-bills are trading 14bps and 5bps wider respectively. On the benchmark bond yields we constantly quote, both the 5-year and 10-year Government of Canada bonds are about 1 bp wider on the week. This speaks to the flatness of the Canadian yield curve, where the 5-10 spread is only 8 basis points. A year ago, basically to the day, that spread was 38 basis points. You might find yourself asking, “What’s the implication of the flat yield curve, does it signal a recession?” Maybe. Maybe not. I don’t have a crystal ball. Speaking as a lender, it means that 5-year commercial rates are a great deal and 10-year rates are an even better deal, as long as it’s with First National.
There are always a lot of inquiries on what happens to bond yields right after the Bank of Canada hikes interest rates. Since the market was so confident in the hike, it is safe to say that bonds yields were correctly priced and the hike was “priced in” previous to the announcement. Hence, as mentioned longer term rates were not drastically changed this week. Why? Efficient markets and all that. It is worth mentioning that the prime rates have increased in lock-step with the BoC rate, where the prime rate raised from 3.45% to 3.7%. This will of course affect your variable mortgage rates.
The Bank of Canada gave a fairly mixed look from their statement. The BoC implied that additional hikes would be gradual and data-driven, with ‘data-driven’ meaning they will need hard economic data to support further rate hikes. This has been their mantra for a long-time now. Softer metrics like labour slack can go against their strong economy theme but harder CPI and GDP metrics are more supportive of hikes. One new paragraph that sparked interest from the statement was that the BoC will be assessing the responses of businesses and consumers on the US trade tariffs. Poloz further reiterated this in the question period as he said trade tensions are “the biggest issue on the table”. The Governor also spoke about how monetary policy is ill-suited to combat protectionism (tariffs) and can be more inelastic than the market expects in regards to data. Finally, in an interview this Friday in regards to the unknown positive or negative effects on exports, Poloz said there were “monkeys in murk”. I consulted UrbanDictionary and came up short.
Suffice to say after all that, the market is 50/50 on another hike in the back half of 2018. Crazy to think we are already more than halfway through 2018, but that just means we are that much closer to the Leafs Stanley Cup parade in 2019. The market is predicting a 1.2% chance of a hike in September, 54% in October and 48% in December. I’m predicting a 100% chance of pints this weekend.
On second thought, I could also go for some ice cream right about now.
Have a great weekend.