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Briefing highlights

  • How oil cuts could affect rates
  • CIBC raises crude outlook
  • Markets at a glance
  • BMO boosts dividend as profit rises
  • Teck sells stake in Chile project

The Alberta effect

Alberta’s oil production cuts could delay the Bank of Canada’s next interest rate hike, Toronto-Dominion Bank suggests.

Economists are waiting to see what the central bank says when it releases its rate decision Wednesday, and what governor Stephen Poloz adds to that when he speaks publicly a day later.

Mr. Poloz, senior deputy governor Carolyn Wilkins and their colleagues aren’t expected to move their key rate from 1.75 per cent Wednesday. Markets are speculating, though, that the next increase could come in January.

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But Alberta Premier Rachel Notley may well have thrown the Bank of Canada off course with her decision to order oil companies to temporarily cut 8.7 per cent of production, or 325,000 barrels a day.

Those cuts will eat into economic growth in Canada, though not in a big way. Still, the central bank will have to adjust its economic forecasts to account for those cuts.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Adrian Wyld/The Canadian Press

TD senior economist Brian DePratto and economist Omar Abdelrahman raised the possibility of the central bank holding off through January given the uncertainty of it all.

“Monetary policy ‘should’ look through a temporary shock, but a risk management framework implies staying on the sidelines through the January meeting, as well,” they said in a report on the economic ripples of the Alberta measures.

“There is little to be lost by taking a ‘wait and see’ approach,” they added.

“Economic momentum outside of the energy sector has faded somewhat while core inflation remains firmly at target. Waiting until the March interest rate decision to hike again offers more time to observe that price dynamics, takeaway capacity and general economic dynamics are all sending the right signal.”

Ms. Notley’s announcement sent the Western Canadian oil benchmark up sharply, while global crude prices are rising in anticipation of OPEC and its allies, a group known as OPEC+, also agreeing to supply cuts when they meet Thursday and Friday.

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Western Canada Select, a blend of bitumen and heavy oil, shot up Monday on the Alberta cuts, while OPEC gave a boost to West Texas intermediate and Brent crude, the global benchmarks.

“While it’s found some stability, WTI oil prices are about $20 weaker than when the October MPR came out,” said CIBC World Markets chief economist Avery Shenfeld, referring to the Bank of Canada’s fall monetary policy report.

“Canada’s heavy oil benchmark, WCS, has rebounded to within reach of the Bank of Canada’s assumed 2019 average, but only because of production cuts that will take two ticks off annualized real GDP growth in each of Q4 and Q1,” he added.

“More broadly, wage inflation seems to be in retreat, and GDP growth has been zero over the most recent two months. South of the border, both the [Federal Reserve] chair and vice chair sounded less assured that American overnight rates would keep climbing as steadily as they have in the past year.”

All of which sets up the central bank for “an obvious pause” on Wednesday.

The more interesting question, Mr. Shenfeld said, is how far the Bank of Canada decides to “walk back its assuredness” that its benchmark rate is headed to an end point of 2.5 to 3.5 per cent.

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“We’ll need to see reasonable hiring, and signs of strength in non-energy export volumes in October, to keep a January rate hike in play,” the CIBC economist said.

“Although we don’t see room for more than two BoC hikes next year, our expectation that OPEC+ production cuts will prompt a further rebound in global crude benchmarks could firm up market expectations for BoC hikes and give a bit more support to the loonie.”

The Alberta cuts shouldn’t have a “big impact” on Bank of Canada policy given that they’re temporary, said Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist, and his colleague, senior economist Robert Kavcic.

But key will be the tone it sets.

“The BoC was particularly upbeat in October, but with oil prices since falling sharply, the Fed sounding a bit more dovish and the Q3 GDP details on the soft wide, a more cautious tone is expected,” the BMO economists said.

“The market will be watching for clues to the potential for a January hike, which is currently about 70 per cent priced.”

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Economists are waiting to see what the Bank of Canada says about it all when it releases its rate decision Wednesday, and what governor Stephen Poloz thinks when he speaks publicly, also this week.

The central bank wasn’t expected to raise its benchmark rate Wednesday, regardless, but markets will watch the language, as always. The question now becomes whether there’s a rate hike in January.

And at some point, the central bank will have to trim its own economic growth forecasts given the Alberta cuts.

“Monetary policy ‘should’ look through a temporary shock, but a risk management framework implies staying on the sidelines through the January meeting, as well,” said TD’s Mr. DePratto and Mr. Abdelrahman.

“There is little to be lost by taking a ‘wait and see’ approach,” they added.

“Economic momentum outside of the energy sector has faded somewhat, while core inflation remains firmly at target. Waiting until the March interest rate decision to hike again offers more time to observe that price dynamics, takeaway capacity and general economic dynamics are all sending the right signal.”

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CIBC raises WCS outlook

CIBC has raised its outlook for WCS, with possibly even higher prices should OPEC+ cut, as well, this week.

“Should OPEC+ reinstate cuts at their confab later in the week (our base case), we could see further upside in global oil benchmarks, including Canadian grades,” said Joan Pinto, associate, energy specialist at CIBC World Markets.

Assuming OPEC+ cuts, as expected, Ms. Pinto now sees WCS at US$25 to US$30 a barrel by the end of this year, and US$30 to US$35 a barrel in the first quarter.

She also puts the 2019 average at US$40.50 and the 2020 average at $41.75.

“As excess crude capacity is drawn from storage and supply is no longer a price taker, we can expect further improvement in WCS and Canadian crude differentials,” Ms. Pinto said.

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Markets at a glance

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BMO boosts dividend

Bank of Montreal raised its dividend today as it posted a hefty jump in fourth-quarter profit.

Profit climbed to $1.7-billion, or $2.57 a share, from $1.5-billion or $2.31 a year earlier.

On an adjusted basis, profit slipped to $1.5-billion or $2.32 from $1.57-billion or $2.36.

Return on equity rose to 16.1 per cent from 12.1 per cent, and credit loss provisions declined to $175-million from $202-million.

BMO boosted its dividend by 4 cents to $1.

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