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What will the Bank of Canada do next?

  • Andrew Masliwec, Analyst, Capital Markets

Greetings,

We’ll get right into it this week. I heard there’s a leprechaun serving golden pints of Guinness somewhere at the end of a rainbow.

Last week: Bank of Canada, what will they do next?

The major news last week, which you all know by now, is that the Bank of Canada decided to keep their overnight interest rate unchanged last Wednesday. If you are keeping track, that’s an 0-for-2 on interest rate increases this year by the BoC. If you were wondering, that’s a surprisingly worse record than my March Madness bracket, which is currently 10-for-16.  Overall, the BoC decision to keep the interest rate level at 1.25% was interpreted as ‘small dovish’, meaning they are kind-of-sort-of-maybe being cautious with hikes going forward. The statement released had many plagiarized lines from their previous statements, so you would have to split hairs to find any sharp leanings one way or the other on their stance. Luckily, bank economists thrive on hair splitting.

 In brief, the statement largely re-iterated their data dependent tone which means any further action taken by the BoC will be driven by hard stats on wages, growth and inflation.  Of the few changes to the statement, housing got a shout out as the BoC stated ‘time’ will be needed to judge the impact of new housing measures.   The Bank of Canada also noted their growing uncertainty on Canadian and global economic outlooks due to trade policies.

Trade policy was the topic du jour last week as the hypothetical trade war targeting Canada/Mexico was called off by the USA. The aluminum and steel tariffs which dominated the news wires a couple weeks ago also came with exemptions for Canada and Mexico, as the countries strived to get NAFTA worked out. The markets reacted favourably as the Loonie gained off the 8-month lows seen earlier last week. However, the CAD is still the worst performing major currency this year.

It’s worth mentioning that last week also had employment numbers for Canada. As the BoC is increasingly seen as being ‘data dependent’, the report was not much of a needle mover. Last Friday’s February job’s data was a rebound from the -88k loss in January, but still came in under expectations of 21,000 new jobs vs 15,400 actual.  The unemployment rate came in at 5.8%, which is a historical low.  All of this begs the question, “When will the next interest rate hike come?” Well, firing up the CANADA-OIS Model, the market is predicting a 30% chance of increase in April and only 47% chance in May. Yawn.

This week: BIS and CMB’s

The major news this week was probably missed by most as its ‘March Break’ for many and information seeking is at an all-time low on the beach. Thankfully, for all the beach goers and office dwellers alike, this week was relatively soft on the economic news front.

A report came out on Monday which swept across many a sleepy trade floor. The BIS or Bank for International Settlements, noted that Canada was among the three countries to be flagged for signs of a potential banking crisis. This was raised before I’m pretty sure, but the report highlighted our high aggregate credit-to-GDP and total debt-service ratios.  It’s also worth noting that the Bank of Canada disagrees with some aspects of the flag-raising, as they have us in the amber and not red category, which is nice.

More importantly for all the commercial mortgage people out there, the new 5 year CMB was priced this Wednesday.  The new 2.35% June 2023 was priced at 32.5 Bps over the GoC 5 year. Pricing was wider by 0.5bps compared to last December’s 5 year auction. However, the new bond was tighter by 12.5bps compared to last year’s March 5 year auction (+45 bps).  Let us know if you can figure out why. The auction size was only $5 billion which is lower than the last four auctions which were all $5.25 Billion. The program is now running $500 Million below pace, which can suggest higher issuance going forward. Overall, demand for the 5 year CMB was strong, which is a good thing if you’re in the business issuing mortgages.

Finally, Saturday brings us one of the most celebrated holidays of the year: St. Patrick’s Day.  The day where everyone wears green and can trace back their lineage to Ireland. I suggest you read up on the holiday, there is a storied history and many interesting facts I didn’t know that I was planning on mentioning. However, as I was writing this up I read something that awoke a moment of self-realization and enlightenment, something I assumed you achieved only after years of study in the Himalayas. A Romanian court just rejected a man’s claim that he is alive and that, legally, he is dead. Are we all in a simulation? Is this real life? I’ll need another pint of Guinness.

Have a good weekend,

Andrew