PrefBlog

Just in time for Hallowe’en comes a scary surprise:

The nation’s gross domestic product unexpectedly contracted in August, Statistics Canada reported Wednesday, after a flat reading in July.
…
If the economy fails to expand in September, third-quarter annualized growth would be on pace for a sub-2 percent increase, after a gain of 4.5 percent in the second quarter. The Bank of Canada projects growth of 1.8 percent in the third quarter. Economists surveyed by Bloomberg News forecast an average 2.1 percent expansion in the second half.

The nation’s currency dropped as much as 0.6 percent to C$1.2915 against the U.S. dollar after Tuesday’s report, which may fuel concern the Bank of Canada’s caution about raising interest rates will only deepen.

On the other hand, the most recent BoC governor worthy of respect thinks policy should tighten anyway:

David Dodge, who led the Canadian central bank between 2001 and 2008, thinks Poloz should focus more on the long-neglected issue of financial stability and take the opportunity to raise rates now that the economy is running more or less at potential. Poloz kept his benchmark rate at 1 percent last week and indicated he’s in no rush to tighten, given that he still sees signs of wage and inflation slack.

Keeping borrowing costs low will only encourage households and businesses to keep adding debt, risks that should factor in more to the central bank’s decision making, Dodge said in a telephone interview.

“While I understand why they want to be cautious, and I think that’s quite correct, the fact that they are not moving to deal with what is a problem in financial markets arising from this very long period of very low interest rates I think is a mistake,” Dodge said.

Interest rates could rise by a full percentage point and still remain well below the 3 percent the Bank of Canada estimates is “neutral” for the economy — neither stimulative or contractionary.

“It’s not like the bank is being unreasonable,” said Dodge. “Their’s would be more or less the mainstream view, whereas I put a little bit more emphasis” on financial system distortions. “I’ve lived through earlier periods,” he said, in reference to the financial crisis.

The big news today is that the Bank of Canada did not change policy:

The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation has picked up in recent months, as anticipated in the Bank’s July Monetary Policy Report (MPR), reflecting stronger economic activity and higher gasoline prices. Measures of core inflation have edged up, in line with a narrowing output gap and the diminishing effects of lower food prices. The Bank projects inflation will rise to 2 per cent in the second half of 2018. This is a little later than anticipated in July because of the recent strength in the Canadian dollar. The Bank is also mindful that global structural factors could be weighing on inflation in Canada and other advanced economies.

The global and Canadian economies are progressing as outlined in the July MPR. Economic activity continues to strengthen and broaden across countries. The Bank still expects global growth to average around 3 1/2 per cent over 2017-19. However, this outlook remains subject to substantial uncertainty about geopolitical developments and fiscal and trade policies, notably the renegotiation of the North American Free Trade Agreement.

Canada’s economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors. Growth is expected to moderate to a more sustainable pace in the second half of 2017 and remain close to potential over the next two years, with real GDP expanding at 3.1 per cent in 2017, 2.1 per cent in 2018 and 1.5 per cent in 2019. Exports and business investment are both expected to continue to make a solid contribution to GDP growth. However, projected export growth is slightly slower than before, in part because of a stronger Canadian dollar than assumed in July. Housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates. Because of high debt levels, household spending is likely more sensitive to interest rates than in the past.

The Bank estimates that the economy is operating close to its potential. However, wage and other data indicate that there is still slack in the labour market. This suggests that there could be room for more economic growth than the Bank is projecting without inflation rising materially above target.

Based on this outlook and the risks and uncertainties identified in today’s MPR, Governing Council judges that the current stance of monetary policy is appropriate. While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate. In particular, the Bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

This led to mutterings that the bank is dovish:

The Canadian dollar sank more than 1 percent against the U.S. dollar and investors pushed back bets on the timing of further interest rate increases from the central bank after Poloz, who left his benchmark rate at 1 percent, warned that the prior appreciation of the currency would dampen export growth and inflation.
…
Implied odds of a December rate increase fell to one-in-three after the Bank stood pat, from almost 50 percent before the decision. The yield curve for Canadian Bankers’ Acceptances shows markets are pricing in a less urgent path for rate normalization, with the total amount of tightening expected in 2018 only modestly reduced relative to a month ago.
…
Excess capacity in the labor market suggests little risk of inflation overheating in the near term, said Poloz, who highlighted involuntary part-time workers, subdued work force participation among youths, lower than expected hours worked and softness in wage growth as signs the economy has further room for improvement.

The Bank of Canada expects a broad-based pick-up in business investment to continue, with capital spending playing a larger role in driving economic activity. Policy makers raised their assessment of how fast the economy can grow without generating inflationary pressures, with Poloz later telling reporters that the revision was a conservative one.

PerpetualDiscounts now yield 5.30%, equivalent to 6.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.95%, so the pre-tax interest-equivalent spread [in this context, the “Seniority Spread”] is now about 290bp, a slight [and perhaps spurious] narrowing from the 295bp reported October 18.

How about a good news drone story?

One company may be giving your local food delivery person some cause for worry, or atleast a run for his money. Project Wing, which is a drone delivery service project supported by the Google-owned Alphabet-X Lab, is now sending drones carrying burrito food orders to various parts of the Australian countryside.

We need this in Canada! Specifically, Toronto. Particularly, my place.