Briefing highlights
- What to watch for from Poloz today
- Global markets on the rise
- Investors eye possible Santa rally
Markets await Poloz
Don’t expect Governor Stephen Poloz and his Bank of Canada colleagues to do much of anything later in the morning.
Or next year, barring an unforeseen circumstance like a Trump shock.
Maybe in 2018 they’ll raise interest rates.
Mr. Poloz is expected to hold his key overnight rate at 0.5 per cent with the release of his policy statement at 10 a.m. ET, given everything from the state of the Canadian economy, which performed slightly better in the third quarter than the central bank had projected, to the uncertainties sweeping the globe.
“The Canadian economy received a major dose of good news last week: the federal government’s pipeline approvals, the OPEC’s agreement to cut production, the better profile for Canadian real GDP in 2016 and encouraging data from its main trading partner,” said Laurentian Bank chief economist Sébastien Lavoie.
“These positive developments have led to a rapid turnaround on the Canadian curve: Instead of pricing chances of easing from the BoC in 2017, market participants are starting to anticipate a rate hike.”
Some observers, including Mr. Poloz earlier, had suggested the central bank could yet cut rates somewhere down the road, but stronger economic indicators of late now suggest otherwise. Indeed, Mr. Poloz himself pulled back last week. But that doesn’t mean a rate hike, either.
“The bank remains in absolutely no rush to tighten, and we continue to see it on the sidelines through mid-2018,” said BMO Nesbitt Burns senior economist Robert Kavcic.
“For one, there is plenty of uncertainty surrounding the precise policy tack of the incoming administration south of the border, particularly with respect to fiscal stimulus and trade,” he added.
“But, from the bank’s perspective, Poloz highlighted [last week] that ‘we only incorporate actually announced policy changes, and there haven’t been any of those’ (i.e., that will be well into 2017).”
Like BMO, Royal Bank of Canada also expects the central bank to sit on its hands through next year.
“When the Bank of Canada opted not to lower rates in October, they identified three major sources of uncertainty in the economic outlook: fiscal policy, housing and exports,” said RBC economist Josh Nye.
“If anything, those uncertainties have intensified, and are likely to continue to cloud the outlook early next year.”
Those uncertainties run globally, of course, from politics across Europe to trade protectionism sweeping the globe, including the United States, as Laurentian’s Mr. Lavoie noted.
Given everything, “it would be a surprise if the BoC comes up with an upbeat statement at 10 a.m.,” he said.
“Instead, the recent rise in Canadian interest rates driven principally by global factors is, among other factors, calling for a dovish tone.”
Indeed, Mr. Lavoie added, “all told, there is no sense of urgency to act right now; but the BoC remains closer to add stimulus rather than remove stimulus.”
The one thing Mr. Poloz has going for him, of course, is the low Canadian dollar, despite its recent bump.
Many economists believe it will slide again, closer to the 70-cent (U.S.) mark than its current 75-cent area, given the strength of the U.S. dollar, among other things. That should help Mr. Poloz’s goal of juicing Canadian exports.
“The loonie could fall to 72 U.S. cents or lower if Canada is hit by the crossfire of a U.S. administration erecting trade barriers or intensifying threats that discourage trade flows,” said Toronto-Dominion Bank chief economist Beata Caranci.
“However, it’s important to bear in mind that the loonie will also reflect dynamics occurring in the oil market, which offers a counterweight to any downside that materializes on the former. Hopes of supply reduction under the recent OPEC agreement should support oil prices in a $50-$60 range.”
Stocks up
Investors are in an upbeat mood, with global markets on the rise so far.
“Could we be about to see a ‘Santa rally’ gather momentum?” said IG market analyst Joshua Mahony.
Tokyo’s Nikkei and the Shanghai composited gained 0.7 per cent, and Hong Kong’s Hang Seng 0.6 per cent.
In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were up by between 0.9 and 1.5 per cent by about 8 a.m. ET, buoyed by reports of a pending rescue plan for an ailing Italian bank.
New York futures were little changed.
“With the bulk of the 2016 risk events out of the way, there is a feeling of positivity spreading through the markets, as investors look forward to a potential Santa rally,” Mr. Mahony said.
“Looking back at everything that has been overcome over the past six months, the incredible resilience of stock markets provides us with a great degree of confidence that further gains could be in store.”
How markets ended Tuesday