What does the latest economic data mean for the BoC’s view on rates? Find out here.

  • Andrew Masliwec, Analyst, Capital Markets


Happy Friday mortgage market people and loyal readers. By now you know it’s our job here on the Capital Markets team to keep on top of all the important market trends and signals to better serve you, the reader. Obviously, that not only applies to interest rate news but all aspects of your daily lives.

Take for example the field study we conducted last night. As the summer is concluding in only 29 short days, it was vitally important to be forward-looking in our analysis of summer retail trends.  Most notably, alcohol trends, as it is 1.66% of the CPI basket. The summer of 2018 has been all about Rosé and the even more niche, ‘Frosé’. Nothing lasts forever so as astute market observers, it’s my self-proclaimed duty to think outside the box and find the next big thing. I thought I stumbled upon it last night, with the hip, new and groundbreaking, ‘Frozen Beer’. I was skeptical about the idea at first, but shortly after trying it, I soon realized that even with it being free, I would never order it again. It was truly awful. The search continues.

Economic data and the Bank of Canada

Last week brought two pieces of data that is helpful in determining the Bank of Canada’s views on rates going forward. We had June manufacturing sales last Thursday which beat expectations by .1% month-over-month. This was mostly attributed to sharply higher sales in the petroleum and coal industry.  Manufacturing sales feed into GDP growth, however this beat was mostly brushed off by the market and will not change Q2 GDP monitoring, meaning growth looks to be as the BoC and market expects.

Friday, the 17th , brought the more important news with July CPI numbers being released. The CPI MoM number beat by a whopping +0.4% (actual was 0.5% vs 0.1% estimated). This means inflation was higher than expected, which could drive the Bank of Canada to increase rates. Diving into the details a big gain was in the recreation, education and reading category which was up 2.0% MoM. This category is 10.89% of the CPI basket and travel is included, so it makes sense that number would be up higher in the vacation-filled July.  You probably also noticed that you are paying more for gas these days as well. It’s almost a Canadian summer tradition. Gasoline prices have increased 25.4% Y/Y and added to the July number. Finally, in a feedback loop of sorts, mortgage interest cost has also increased which should be no surprise to anyone. The Bank of Canada increased interest rates, so people pay more interest and that category is included in the CPI. Adding Gas, Travel and Mortgage Interest, that’s worth 1.5 percentage points to the headline GDP number.

Finally, this week brought the last key piece of data going into the June and 2nd quarter GDP numbers coming out next week on the 30th. June retail sales, both auto and ex-auto sales, came in right on expectations at -0.2% and -0.1% month-over-month respectively.  So with that, the market is more than likely to keep their expectations unchanged going into the GDP data next week.

Of note, if you still have one eye open at this point, there are a few speeches coming up which could give insight into the September BoC decision. Stephen Poloz, the Bank of Canada Governor, is giving a couple speeches today and into the week. One of which references the digitization and automation of the economy – anyone out there still remember blockchain? 

Bond News and Rates

The 10 year Canada Mortgage Bond was issued last week with a new coupon (2.65%) and maturity ( 12/15/2028). The bond was issued at a spread over +41, which is 5 bps wider of the last new issue back in February 2018. Today, the bond is trading about the same at a spread of +40bps over the 10 year GoC. We also had a new re-opening of the 5 year Government of Canada bond this week. With the $3 Billion reissuing of the 2% Sep/23 this bond became the new 5 year benchmark often quoted. The current 5-year is yielding 2.21% and the 10-year is yielding 2.26%. To give an idea of the flat yield curve, the 30-year GoC is yielding 0.2bps more than the 10-year. What does it mean?  I make no assumptions or predictions of interest rates, but I will let you know my fantasy football sleeper picks if you ask politely.

The current Bank of Canada “will they hike” probabilities:














Finally, Canada is sitting on the sidelines in the latest round of NAFTA negotiations as Mexico and the USA try to hash things out. Our Prime Minister is confident something can get done but will only sign a good deal. Whatever the outcome, just remember, Canada already signed the deal of the century: Tavares.

Have a good weekend,