From housing to trade to the broader economy, there’s more than enough uncertainty to stay Stephen Poloz’s hand this week.
The Bank of Canada Governor, senior deputy Governor Carolyn Wilkins and their colleagues are expected to hold their benchmark overnight rate steady at 1.25 per cent on Wednesday, choosing to wait until July, at the earliest, to begin tightening again.
“With much uncertainty remaining and a third consecutive quarter of soft growth, we anticipate the BoC will hold policy rates steady,” said Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist.
“However, our expectation that housing will at least stabilize in Q2 and that the data will turn more positive underpin our call for the next rate hike to come in July.”
Much is at play as the Bank of Canada, which is monitoring the impact of its earlier rate increases, ponders when to move again. Here are the big issues:
Canada’s economy has downshifted, and Statistics Canada will highlight this Thursday, a day after the central bank decision, with a look at first-quarter growth.
Economists expect that reading to show gross domestic product expanded at a soft annual pace of between 1.5 per cent and 2 per cent.
“We now look for an even 2-per-cent real GDP pace, which nicely tops the last BoC projection,” said CIBC World Markets chief economist Avery Shenfeld.
“But there’s no reason for governor Poloz to rush to judgment. The average pace over the last three quarters will still have been below 2 per cent, and core inflation has yet to breach the bank’s target for [overall inflation].”
Of course, Mr. Shenfeld’s projection is on the high side of the range.
Royal Bank of Canada economists, for example, expect to see 1.8 per cent, which, they noted, would be half of a percentage point above the central bank’s forecast of 1.3 per cent.
That “would still mark a third straight quarter of growth at or slightly below the 1.8 per cent the bank estimates as the economy’s underlying ‘potential’ growth rate,” RBC said.
“With the economy assumed to be at or close to capacity, growth close to potential is desirable as it prevents the economy from slipping into excess demand and potential inflationary pressures.”
All in all, RBC and other observers expect the central bank to signal an increase in its key rate, but with no stated timeline.
These just keep mounting.
Already, Canadian, U.S. and Mexican negotiators have missed a so-called congressional deadline to strike a new North American free-trade agreement.
And the central bank has already flagged NAFTA as a key uncertainty, and now come added threats of tariffs on a few fronts.
First, there’s President Donald Trump’s latest threat, a tariff of up to 25 per cent on auto imports, after his administration launched a probe under national security provisions.
Then there’s the fact that the exemption from U.S. tariffs on steel and aluminum runs out on Friday, and “a rate hike just days before tariffs could be imposed would look quite bad,” BMO’s Mr. Reitzes said.
As for the Bank of Canada’s policy statement Wednesday, added CIBC’s Mr. Shenfeld, “no doubt, the BoC will also include a reference to trade uncertainties, which have only gotten messier as the U.S. now waves the threat of auto tariffs.”
Mr. Trump threatens a lot of things, of course, but even a bark adds to uncertainty whether or not it’s followed by a bite.
“President Trump’s latest threat may ultimately prove to be another negotiating tactic in the ongoing NAFTA saga, particularly since such a visible price increase is unlikely to be popular among voters,” said Toronto-Dominion Bank senior economist Brian DePratto.
“But, it adds yet another challenge to already difficult negotiations,” he added.
“Not only does the auto file remain murky, there have been few signs of progress in other contentious areas, such as dispute resolution. Given the realities of the North American political calendar (Mexican presidential elections in July, U.S. midterms in November) it appears that this cloud of uncertainty will be sticking around for some time to come.”
Home sales have tumbled in the wake of provincial government measures to cool off the Vancouver and Toronto area markets and, most recently, new mortgage-qualification rules from Canada’s commercial bank regulator.
Mortgage rates have also increased, adding even more pressure.
“With sales yet to stabilize, it’s hard to imagine the BoC will opt to tighten policy further and increase the downside risk to housing,” Mr. Reitzes said in a lookahead to the rate decision.
“Recall that pundits have been calling for a housing crash for the better part of a decade; governor Poloz doesn’t want to be remembered as the governor who caused a housing crash.”
Indeed, Canadians have been walking a fine line, having driven up home prices and borrowing to finance that. Thus, the Bank of Canada’s balancing act.
“Perhaps what is most on the bank’s mind is the gargantuan debt load that the Canadian household sector carries on its balance sheet,” said David Rosenberg, chief economist at Gluskin Sheff + Associates.
“It’s like a ball and chain that can really only be serviced adequately out of current incomes if rates stay low,” he added.
“But the bank has already raised rates three times since the oil crisis ended, and the reality is that the local bond market is highly correlated with U.S. Treasuries — where yields across the curve have been on a discernible upward trajectory. Hence, the recent bond-induced rise in Canadian mortgage rates.”
MONDAY: TAKING STOCK
It will be a slow start to the week, given U.S. markets are closed for Memorial Day.
But watch for how other exchanges fare after Europe’s losses last week on political concerns in Italy, with Canadian stocks also down, though by less than 0.5 per cent.
“As U.S. indices are searching for direction, still consolidating after the early-year blowout and subsequent correction, we’re all acutely aware that the S&P 500 is closing in on the longest post-war bull market on record, now more than nine years old and within shouting distance of that laid down through the 1990s,” BMO senior economist Robert Kavcic said.
TUESDAY: BANKS, BOOKS AND POT
Here’s where it picks up, with Bank of Nova Scotia, CannaRoyalty Corp., Indigo Books & Music Inc. and others releasing quarterly results.
Markets will also get the latest reading on U.S. home prices.
WEDNESDAY: MORE BANKS
Before Mr. Poloz and his colleagues take the stage, Statistics Canada will lay some groundwork with its first-quarter measure of the current account balance.
Economists expect we’ll see a fatter deficit of $18-billion or more, an increase of almost $2-billion.
“Transportation bottlenecks were largely to blame for a slowdown in goods exports, while firming domestic demand later in the quarter supported healthy growth in imports,” Royce Mendes of CIBC said.
“The deficit will be at the wider end of the range seen post-crisis, another headwind to the Canadian dollar.”
The day also brings quarterly results from BMO and National Bank of Canada.
Plus, the Federal Reserve’s Beige Book of regional economic conditions, the first of two reports this week that may suggest where the U.S. central bank is headed.
THURSDAY: AFTER THE HANGOVER
The GDP report may, as noted, highlight a weak first quarter, but economists believe the first three months were weighed down by January, and that the March showing will be better, and point to stronger days ahead.
“The Canadian economy woke up in 2018 with a bit of a hangover,” CIBC’s Mr. Mendes said.
“But, after a brief decline in January, economic activity appears to have perked back up,” he added.
“Our forecast of a 0.2-per-cent advance in March reflects positive readings on manufacturing, retailing, and wholesaling, but also the potential drag from earlier than expected maintenance at an oil production facility.”
On the earnings front, watch for Lululemon Athletica Inc. and Costco Wholesale Corp.
Overseas, watch for what Capital Economics says will be higher inflation in Europe and unemployment holding at 8.5 per cent.
India, meanwhile, is expected to report first-quarter economic growth of 7.5 per cent from a year earlier, a pickup from the fourth-quarter pace of 7.2 per cent, “with the strength of industrial production growth, various consumer indicators and soft survey data in Q1 all suggesting that underlying conditions have improved,” Shilan Shah of Capital Economics said.
“However, we remain skeptical about how useful the GDP data are as a gauge of the health of the economy.”
Consider it akin to the Fed getting its ducks in a row as it heads into its mid-June meeting.
After Wednesday’s release of the Beige Book, markets will weigh whether Friday’s U.S. jobs report will nudge the U.S. central bank into another rate hike soon.
Economists expect to see May job creation of between 180,000 and 200,000 positions, with unemployment holding at 3.9 per cent.
“We expect a strong U.S. employment report to keep the Fed on track for a June hike,” Capital Economics said.
Also expected are manufacturing purchasing managers index readings from across the globe, which will add to the economic picture.