“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…” - A Tale of Two Cities, Charles Dickens
It’s too soon to predict how the new government in the United States will impact the economy, but some pro-growth initiatives are a distinct possibility. Possible corporate tax and regulatory reforms have had a material impact on expectations.
After years of stimulus including quantitative easing, the market is flush with liquidity, but the increasingly restrictive capital and regulatory framework introduced along the way has severely limited the transfer of that liquidity into the market.
Regulatory reform could encourage a significant increase in the extension of credit, releasing excess liquidity from the banking system. This would be inflationary, and the move in interest rates since the election reflects that sentiment. Inflation makes a central bank hawkish, and while the recent move in rates may prove to be aggressive, monetary policy in the US (the Fed’s interest rate path) may be shifting higher.
US yields are approximately 30-40bps higher since the election. Canadian rates have been pulled along, but GoC’s have outperformed Treasuries, with rates “only” 20-25 basis points higher.
5 year GoC’s are at 0.88% (vs 0.61% on September 30th) and 10 year GoC’s are at 1.43% (vs. 0.99% on September 30th).
Equities have pushed higher all week too, with the Dow posting all-time highs.
That’s all for today.
Lest we forget.
Jason Ellis, Managing Director, Capital Markets