Briefing highlights
- What Bank of Canada didn’t say
- U.S. hits Canada with steel, aluminum tariffs
- Canada’s economy tepid in first quarter
- Markets at a glance
- Quote of the week
Too optimistic?
Some observers suggest the Bank of Canada is sounding more upbeat than it should.
Or, to use the central bank’s own language, less cautious than it should.
Governor Stephen Poloz, senior deputy Carolyn Wilkins and their colleagues certainly sounded more optimistic than expected in their statement Wednesday as they held their key rate steady but signaled it will be rising again soon.
Which is why many observers are now betting the overnight rate will jump again in July, to 1.5 per cent from 1.25 per cent, and why the Canadian dollar shot up so sharply
To be fair, some economists believe conditions have been met for another rate increase, including a better-than-expected economic performance and inflation levels that need to be held in check.
Others, though, suggest that life isn’t just a bowl of cherries, and that the “hawkish” statement came too soon.
We’ll hear more about that this afternoon when deputy governor Sylvain Leduc gives an “economic progress report” in a speech in Quebec City.
We also got another piece of the puzzle this morning, when Statistics Canada reported that the economy expanded in the first quarter at an annual pace of just 1.3 per cent.
Economists had expected growth of between 1.5 and 2 per cent. Ironically, today’s reading is bang on the initial forecast of the Bank of Canada, though it updated that Wednesday saying the performance “appears to have been a little stronger” than it had projected.
“Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment,” it said in the statement, but added that trade is still uncertain and that home sales have tumbled as mortgage rates rose and new mortgage-qualification guidelines came into effect.
“Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly growth in 2018,” the central bank said.
“Over all, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target.”
Importantly, the statement dropped a previous reference to being cautious about future moves.
Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen PolozJustin Tang/The Canadian Press
So, what didn’t the Bank of Canada say?
“With respect to the bank’s characterization of current conditions, we were somewhat surprised that the statement had no or little mention of the slowdown in the consumer in Q1, with real retail sales down 4 per cent at an annual rate in the quarter (they did note housing was weak into Q2),” said Mark Chandler, head of Canadian rates strategy at RBC Dominion Securities.
Economists generally expect the pace of consumer spending to ease as Canadians adjust their budgets to account for higher interest rates and deal with their fat debts.
“They highlighted the composition of trade (firmer exports and imports of capital goods) as beneficial, although net exports look to have been a drag on growth in Q1,” Mr. Chandler added.
On the other hand, the central bank “made no reference to slack in the labour market” as wages rise, which has been a key point for Mr. Poloz and his colleagues, and thus another signal that points to a July rate increase.
Still uncertain is the outlook for trade, which the central bank has cited in the past and, indeed, did so again Wednesday. But comments suggest it’s not overly worried.
Having said that, the U.S. today hit Canada and others with tariffs on imported steel and aluminum. At the same time, this comes as negotiators have yet to reach a deal on overhauling the North American free-trade agreement.
“Although U.S. trade policy uncertainty remains in place, the list of justifications to delay the next policy rate hike is shrinking,” said Sébastien Lavoie, chief economist at Laurentian Bank Securities.
“We continue to see a 25-basis-point hike at the July 11 meeting if steel and aluminium tariffs are not enacted,”’ he added.
But like RBC’s Mr. Chandler, HSBC Canada’s chief economist also flagged some issues.
“In our view, the Bank of Canada’s hawkishness is premature,” David Watt said.
“To us, all of the good news on goods exports came in March, and was largely concentrated in the erratic aircraft sector, and in a rebound in agricultural exports following a very weak February performance,” he added.
“What is far from clear is that real exports are on a sustainable upswing, or that competitive headwinds or trade-related uncertainty have dissipated.”
True, oil exports have perked up and, true, the central bank suggested stronger business investment given imports of machinery and equipment.
“To us, this seems too optimistic, particularly given survey evidence that firms remain reluctant to invest and that firms have been examining increased capital expenditures in U.S. operations rather than domestically,” Mr. Watt said.
Today’s GDP report did point to a pickup in business investment.
Mr. Watt also noted that, in April, the central bank warned that exports and investment were hampered by competitiveness and trade issues.
“To us, there has been little to no improvement on either of these headwinds,” he warned.
“In fact, NAFTA-related uncertainty might well linger toward yearend, if not into 2019.”
Don’t forget, too, that the central bank has oft warned of swollen debt levels among Canadian households, though the latest numbers suggest the pace of increase is easing.
It didn’t mention household debt Wednesday, though it did say it would continue to monitor the economy’s “sensitivity” to higher rates.
“Bank of Canada Governor Poloz has said that the economy is about 50 per cent more sensitive to interest rates than it had been in the past,” Mr. Watt said.
“Instead the bank focused on the positive economic effect from the labour market. In our view, the high level of indebtedness still leaves the economy vulnerable to changes in interest rates.”
As noted, Canada’s economy turned in a tepid first-quarter performance below what was expected.
And, as RBC’s Mr. Chandler noted, household spending played its role, rising by just 0.3 per cent for the slowest pace since early 2015.
The pace of export growth also slipped. And, as expected, the housing market took a hit, marking the fast decline since early 2009, and we all remember that era.
In March alone, however, the economy perked up to the tune of 0.3 per cent.
“While the headline quarterly GDP result was a bit disappointing, even to those of us who were on the low side of consensus, the recent robust monthly readings and the strength in business investment provide a nice counterweight,” said Bank of Montreal chief economist Douglas Porter.
“The main point is that growth for the full year still looks on track to come in around 2 per cent, which is very much in line with what the BoC has been expecting. We continue to look for a rebound in Q2 growth and a July rate hike, albeit with the latter predicated on some solid evidence on the former.”
Just as an aside here, the Bank of Canada said Monday that it’s taking part in Ottawa’s “Doors Open” event this weekend, inviting the public to its headquarters and museum.
It has certainly left the door open to a rate hike, though HSBC’s Mr. Watt, for one, believes it will slam it shut for the rest of this year.
Read more
- Barrie McKenna: Bank of Canada clears way for July rate hike
- David Parkinson: The BoC just moved its bottom line on rate hikes
- Economy grew at 1.3 per cent pace in first quarter
- Canadian dollar bolts higher as Bank of Canada signals rate hike
- Steve Ambler, Jeremy Kronick: What the Bank of Canada is not signalling: Low inflation
- Global rates may be coming off 5,000-year lows, but Bank of Canada won’t hike today
- ‘Poloz doesn’t want to be remembered as the governor who caused a housing crash’
- David Parkinson: Inflation above BoC’s two-per-cent target for third straight month
- The ‘sea change’ in Canadian mortgages is going to really hurt
Quote of the week
While all pharmaceutical treatments have side effects, racism is not a known side effect of any Sanofi medication.
— Sanofi, in response to Roseanne Barr’s comments
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- John Doyle: Roseanne reboot was always going to end in bitterness and fury
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U.S. hits Canada with tariffs
Indeed, U.S. Commerce Secretary Wilbur Ross confirmed today that the Trump administration will hit Canada and others with tariffs on imported steel and aluminum, The Globe and Mail’s Adrian Morrow and Greg Keenan report.
Tariffs of 25 per cent on steel imported into the United States and 10 per cent on imported aluminum will take effect as of midnight Thursday, Mr. Ross told reporters on a conference call.
He cited a lack of progress in renegotiating NAFTA as a reason for President Donald Trump eliminating an exemption Canada was given when worldwide tariffs were announced earlier this year. “The talks are taking longer than we had hoped. There is no longer a very precise date as to when they will be concluded.”
Canada has crafted a retaliation plan that would involve U.S. steel and aluminum and other politically sensitive products, sources briefed on Ottawa’s strategy said. Canada is the biggest supplier of both metals to the United States, with the value of shipments close to $20-billion annually.
Read more
- Adrian Morrow, Greg Keenan: U.S. slaps tariffs on Canadian steel, aluminum
- Adrian Morrow, Greg Keenan, Lawrence Martin: Trump set to impose steel, aluminum tariffs on Canada
- NAFTA’s saga so far: A guide to trade, the talks and Trump
- EU prepares for a trade brawl as Trump’s tariff deadline looms