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Today was the Bank of Canada rate announcement:

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

The global economy is showing signs of stabilization, and some recent trade developments have been positive. However, there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences. The Canadian economy has been resilient but indicators since the October Monetary Policy Report (MPR) have been mixed.

Data for Canada indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October. The Bank now estimates growth of 0.3 percent in the fourth quarter of 2019 and 1.3 percent in the first quarter of 2020. Exports fell in late 2019, and business investment appears to have weakened after a strong third quarter. Job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft. In contrast, residential investment was robust through most of 2019, moderating to a still-solid pace in the fourth quarter.

Some of the slowdown in growth in late 2019 was related to special factors that include strikes, poor weather, and inventory adjustments. The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted. Moreover, during the past year Canadians have been saving a larger share of their incomes, which could signal increased consumer caution. This could dampen consumer spending but help to alleviate financial vulnerabilities at the same time.

Looking ahead, Canadian business investment and exports are expected to contribute modestly to growth, supported by stronger global activity and demand. The Bank is also projecting a pickup in household spending, supported by population and income growth, as well as by the recent federal income tax cut. In its January MPR, the Bank projects the global economy will grow by just over 3 percent in 2020 and 3 ¼ percent in 2021. For Canada, the Bank now forecasts real GDP will grow by 1.6 percent this year and 2 percent in 2021, following 1.6 percent growth in 2019.

While the output gap has widened in recent months, measures of inflation remain around 2 percent. This is consistent with an economy that, until recently, has been operating close to capacity. The Bank expects inflation will stay around the 2 percent target over the projection horizon, with some fluctuations in 2020 from volatility in energy prices. Meanwhile, labour markets in most regions have little slack and wages continue to firm.

In determining the future path for the Bank’s policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast. In assessing incoming data, the Bank will be paying particular attention to developments in consumer spending, the housing market, and business investment.

… and there is the usual amount of chatter:

The odds of a rate cut at its next announcement in March rose on Wednesday to 24.1 per cent, and the chances of a cut by June jumped to 57.7 per cent, according to bond-market pricing tracked by Bloomberg after the bank’s announcement.

The Canadian dollar was down 0.41 US cents as of midafternoon Wednesday, to US$0.76, and bond yields dropped as well, with the two-year Government of Canada bond down seven basis points to 1.56 per cent.

Several bank economists described the bank’s statements as more dovish than expected.

“Today’s statement makes us more comfortable with our call for a rate cut in April,” Royal Bank of Canada senior economist Josh Nye said in a note.

But National Bank Financial Markets economists said in a research note that despite the change in tone from the central bank, they are not predicting a rate cut before Mr. Poloz’s term expires in June.

… and …

While [The Bank of Nova Scotia’s senior vice president and chief economist Jean Francois] Perrault wasn’t anticipating a recession, he does foresee changes coming to North America’s rate environment.

Interest rates will fall, but not by very much and not enough to enter negative rate territory, he said.

He predicted Canadian rates will fall slightly more in Canada than the U.S.

He anticipated the U.S. will see 25 basis points more of easing by the summer because inflation is still below some objectives and will need a monetary boost.

Canada, he said, will see an easing of 50 basis points by the end of the summer because downward pressures on inflation are slightly stronger than they were six months ago.

So the five-year Canada yield dropped to 1.47%, a far cry from the year-end value of 1.69%. So much for the rally! … unless … ?

PerpetualDiscounts now yield 5.32%, equivalent to 6.92% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.30%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 360bp from the 365bp reported January 15.

This entry was posted on Wednesday, January 22nd, 2020 at 10:50 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.