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The Canadian dollar bounced around today on the latest report on economic growth, after last week’s inflation numbers caused a “head fake” for the loonie and left the central bank in a “pickle.”
The loonie initially slipped, to about the same as Wednesday’s close but a drop from where it was earlier in the day. It then shot higher as the morning wore on.
This came just after Statistics Canada reported that the economy contracted slightly in January, by 0.1 per cent.
Manufacturing rebounded and, among other notables, the real estate industry lost ground as new mortgage qualification rules, known as B-20 regulations, came into effect at the beginning of the year.
It wasn’t as bad as it appeared at first blush, however, because much of the trouble related to unscheduled maintenance in the energy patch.
“As expected, real estate services took a nose dive on much softer home sales under new mortgage rules,” said CIBC chief economist Avery Shenfeld.
“Elsewhere, the news was much brighter, with solid gains in factories, construction and wholesaling, and a middling 0.2-per-cent advance for retailing GDP.
Consider what has happened over the past few days, starting on Friday when Statistics Canada reported faster-than-expected inflation in Canada in February, at an annual 2.2 per cent, sending the loonie higher as markets bet on a speedier rate hike timeline from the Bank of Canada.
But that was a “temporary head fake,” a knee-jerk reaction to a number that looks behind us amid forward signs of a cooling economy, said Mark McCormick, North American head of foreign exchange strategy at TD Securities.
“The bump in inflation is supportive of the view that the output gap has closed,” Mr. McCormick wrote earlier this week.
“However, we also believe that most of these price pressures are backward-looking,” he added.
“The inflation story is telling us the output gap closed last year, but the forward-looking data suggest further cooling in the growth story [in the second half of the year].”
Which is exactly what today’s report showed.
Since that spike, Mr. McCormick noted in an interview, the loonie has slipped, though not in a big way.
The combination of the inflation and economic reports brings us to why David Rosenberg believes the central bank is now “in a bit of a pickle.”
“The BoC has a bit of a challenge here because the inflation figures are getting hotter as the activity data are cooling off,” said the chief economist at Gluskin Sheff + Associates.
“By our assessment, growth has already fallen back to potential, and thus there isn’t a need for urgency on the rate hike front,” he added.
“All the more so given the vast number of uncertainties facing the economy at the current time – NAFTA, B-20, tax reform stateside and stretched consumer debt loads, to name a few.”
But he also pointed out that, while the Bank of Canada has an inflation target of 2 per cent, its band is 1 to 3 per cent, and thus can be flexible in pickles such as these.
“For a central bank looking through the windshield as opposed to the rear-view mirror, the weaker activity data of late and the growing uncertainty stemming from U.S. trade actions argues for a cautious approach to monetary policy,” Mr. Rosenberg said.
“We continue to see the bank on hold for the time being, though a sustained move higher in inflation could change this forecast.”
CIBC’s Mr. Shenfeld had much the same thought.
“Does the Canadian economy need rate hikes to slow it down, or maybe it’s already slowing enough on its own?” he said.
“That’s what markets, and the Bank of Canada, will be asking in light of today’s January GDP numbers, which showed a weaker than expected reading, falling 0.1%, and only partially rescued by an upward revision to December (now at +0.2% vs. 0.1% previously reported).
Mr. Shenfeld believes the economy perked up in February and March, but CIBC is nonetheless revising its forecast for first-quarter growth to less than 2 per cent, “adding weight to our view that the Bank of Canada is on hold until July.”
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Schitt’s Creek, indeed
Canadian investors are taking stock as a tumultuous quarter comes to an end.
Here’s a scene that just might be playing out in households beyond the realm of TV.