PrefBlog

The quality of quotes provided by the Toronto Stock Exchange seems to get worse every day.

The Bank of Canada’s press release today regarding the policy rate was unusually lengthy:

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

The global economic expansion continues to moderate, with growth forecast to slow to 3.4 per cent in 2019 from 3.7 per cent in 2018. In particular, growth in the United States remains solid but is expected to slow to a more sustainable pace through 2019. However, there are increasing signs that the US-China trade conflict is weighing on global demand and commodity prices.

Global benchmark prices for oil have been about 25 per cent lower than assumed in the October Monetary Policy Report (MPR). The lower prices primarily reflect sustained increases in US oil supply and, more recently, increased worries about global demand. These worries among market participants have also been reflected in bond and equity markets.

The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income. As well, transportation constraints and rising production have combined to push up oil inventories in the west and exert even more downward pressure on Canadian benchmark prices. While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further.

These developments are occurring in the context of a Canadian economy that has been performing well overall. Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low. Looking ahead, exports and non-energy investment are projected to grow solidly, supported by foreign demand, the CUSMA, the lower Canadian dollar, and federal tax measures targeted at investment.

Meanwhile, consumption spending and housing investment have been weaker than expected as housing markets adjust to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates. Household spending will be dampened further by slow growth in oil-producing provinces. The Bank will continue to monitor these adjustments.

The Bank projects real GDP will grow by 1.7 per cent in 2019, 0.4 percentage points slower than the October outlook. This revised forecast reflects a temporary slowing in the fourth quarter of 2018 and the first quarter of 2019. This will open up a modest amount of excess capacity, primarily in oil-producing regions. Nevertheless, indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1 per cent in 2020.

Core inflation measures remain clustered close to 2 per cent. As expected, CPI inflation eased to 1.7% in November, due to lower gasoline prices. CPI inflation is projected to edge further down and be below 2 per cent through much of 2019, owing mainly to lower gasoline prices. On the other hand, the lower level of the Canadian dollar will exert some upward pressure on inflation. As these transitory effects unwind and excess capacity is absorbed, inflation will return to around the 2 per cent target by late 2019.

Weighing all of these factors, Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target. The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy.

Barrie McKenna of the Globe notes:

The bank’s new qualified commitment to raise rates “over time” is meant to “inject ambiguity” into what it will do in the months ahead, Bank of Canada Governor Stephen Poloz explained to reporters. He said the bank is hoping to have a clearer picture of how the economy is evolving by the time it releases its next forecast in April.

“It’s all about the data,” Mr. Poloz said.
…
The bank also released its first quarterly forecast of 2019, highlighted by a sharp downgrade in GDP growth. The Bank of Canada says the economy will grow just 1.7 per cent this year, down sharply from its previous forecast of 2.1 per cent, and below the estimated 2-per-cent pace of 2018.
…
The bank also highlighted that housing activity has been “weaker than expected” as home buyers adjust to tougher mortgage rules, new restrictions on foreign buyers in some provinces and previous mortgage rate hikes. It’s the bank’s first hint that the real estate slump in Toronto and Vancouver may be worse than initially thought.

Nonetheless, the Bank of Canada reckons the economic swoon will be short-lived, lasting only through the first half of the year. It says the economy will grow 2.1 per cent in 2020, up from its previous estimate of 1.9 per cent. It bases its optimism on a host of factors, including an expectation of stronger exports, higher investments outside the oil patch, a cheaper Canadian dollar and the positive impact of the newly agreed USMCA, which will replace the North American free-trade agreement.

PerpetualDiscounts now yield 5.77%, equivalent to 7.50% at the standard conversion factor of 1.3x. Long corporates now yield a little under 4.10%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 340bp, a dramatic narrowing from the 360bp reported January 2.

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The C. D. Howe Institute has released a new report titled Two-Parent Families with Children: How Effective Tax Rates Affect Work Decisions. Assiduous Readers will remember that I am extremely irritated by the counter-productive nature of targeted tax programmes and their associated increase in the Effective Marginal Tax Rate of those whom these programmes purport to assist:

Governments need to be cautious of discouraging work among certain segments of the population, such as mothers and secondary earners in a family, because taxes and benefit programs can interact to potentially create extraordinarily high effective tax rates.

Because benefit programs pile up at the lower end of the income scale, low-income families’ METRs [Marginal Effective Tax Rates] have generally been higher than those of higher-income families. In some cases, the lower-earning parent in a dual earner family of four might lose more than 70 cents per extra dollar of earnings. Nationally, 9 percent of lower earning parents in dual-income families with children face a METR above 50 percent, and 13 percent of stay-at-home parents face a PTR [Participation Tax Rate, the tax paid if a non-working spouse commences work] above 50 percent.

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Sadly the author, Alexandre Laurin, advocates addressing this problem by increasing the complexity of the tax system, rather than by implementing universality:

Federal and provincial policymakers should pay special attention to effective tax rates when they consider changes to the tax and transfer system. Clearly, geared-to-income fiscal benefit programs provide valuable financial assistance to families with children. However, these benefits can come with high family METRs and PTRs for the second working parent in two-parent families, especially at lower income levels.

Any further expansion of the targeted transfer system – through larger low-income supplements or the creation of new targeted family benefits, for example – should be approached with broader analysis of the impact on parents’ work decisions. Relief measures meant to encourage work participation, such as Quebec’s newly created tax shield, should be explored by other high-METR jurisdictions, such as Ontario. Income-averaging provisions for highly fluctuating incomes could also be explored, as well as greater tax relief for childcare expenses – a key factor in family paid work decisions.

TXPR closed at 637.38, up a very good 1.73% on the day. Volume of 2.36-million is the highest of the post-tax-loss-selling season but below almost all tax-loss-selling days. The total return index is now positive year-to-date!

CPD closed at 12.75, up 2.00% on the day. Volume of 236,924 was respectable, outpacing a few of the tax-loss-selling days.

ZPR closed at 10.41, up 2.56% on the day. Volume of 204,319 was relatively low.