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What was the major takeaway from this week’s BoC announcement about interest rates? Find out here.

  • Andrew Masliwec, Analyst, Capital Markets

Greetings,

I found the most important statistic that you didn’t know you needed this morning. Since the 1940’s, according to the trustworthy Wikipedia, 28 teams have come back from a three-games-to-one deficit in a NHL playoff series.  In basis points terms, that’s at least in the double digits, according to the back of my beer coaster calculation last night. What are those chances? Not good.  It could be one out of a hundred or like, one out of a million, but I like to remember the words of the wise folk hero, Lloyd Christmas: ‘So you’re telling me there’s a chance!’

Bank of Canada

This Wednesday, the Bank of Canada met in one of their eight meetings of the year to give us their overnight interest rate decision. As widely expected, the BOC kept interest rates unchanged at 1.25%. Coupled with their statement on keeping the status quo, the BOC also released their April Monetary Policy Report or MPR. Overall, the market read both the statement and MPR as dovish as the CAD weakened initially 0.5% and 2 year yields fell.

The major takeaway is what was reiterated many times before:  the Bank of Canada is seemingly set on interest rate hikes this year, but are taking a ‘wait and see’ or in economist parlance, a ‘data dependent’ approach.  Part of the reason for taking it slow on hikes, even as the BOC feels confident in the economy, is that they revised their future potential output numbers going forward. What that basically means is in the next few years the economy is going to grow at a higher rate without sparking inflation concerns.  The BOC believes that the economy has more capacity, which will allow it to grow at a faster clip and accommodative interest rate hikes be won’t necessary. Typically, overcapacity would be a sign of an overheating economy and the Bank of Canada would be keen on raising rates. By widening the output gap the runway basically got longer for any interest rate policy. 

Market participants seemed to be in agreement with this new mandate, as there are still many unknowns in the economy that the bank highlighted. The BOC reiterated that competitiveness challenges are alive and well, while the ongoing trade fiascos surrounding NAFTA have yet to be sorted out. Furthermore, Canadian non-energy imports are losing share in the USA, even as our dollar depreciated, and tighter federal mortgage rules are still shaking out housing markets.  But I know you don’t come here for my opinion, so I’ll use an analyst’s opinion that I liked:

“The plot is that we are going higher in interest rates, eventually. We are just going to take a much longer time to get there, just like we were lower for much longer.”

Sounds like a plan. The current odds of an interest rate hike for 2018 are below:

Meeting

Hike

Cut

5/30/2018

38.90%

0.00%

7/11/2018

69.40%

0.00%

9/5/2018

80.30%

0.00%

10/24/2018

93.60%

0.00%

12/5/2018

93.60%

0.00%

 

CPI A.K.A Inflation and Bond yields

And you know what, as the smoke cleared from Wednesday, this Friday morning brought CPI numbers that missed expectations.  The month over month number came under consensus of 0.4% at 0.3%.  The year over year number came in at 2.3%, 10bps lower than the expected result of 2.4%. Nothing too ground breaking on the print, so moving on.

Bond yields would typically fall on the weak CPI print, which they did but have rebounded since the morning. Intraday moves are for algorithms and chart whisperers, so looking at a week chart we have benchmark yields up since last Friday. The current 10 year is yielding 2.34% while last Friday it closed at 2.24%. The 5 year followed a similar path with being about 7bps higher on the week, currently yielding 2.17% and a last Friday close of 2.10%. Yes, as many people have asked, that is a flat 5-10 yield curve. Yes, 10 year yields seem like a good commercial financing option.  No, I don’t know if that’s a sign of a recession.  Yes, I am ready for patio season.

Have a great weekend,

Andrew Masliwec