The Governor of the Bank of Canada Stephen Poloz speaks during a media conference at Western University in London, Ontario on Tuesday, February 24, 2015.Peter Power/The Globe and Mail
The bond market is starting to believe Bank of Canada Governor Stephen Poloz's newfound optimism in the Canadian economy, resetting borrowing costs back to the day of his shock rate cut.
Traders have almost completely priced out another rate cut in banker's acceptances contracts, a predictor of interest rates. Contracts due December, 2015, reached 1 per cent this month for the first time since Jan. 21, the day the Bank of Canada lowered its overnight rate to 0.75 per cent to contend with the collapse in the price of oil, the nation's biggest export.
So-called Bax contracts have settled about 20 basis points above the central bank's target rate on average since 1992, data compiled by Bloomberg show. The yield has averaged 0.91 per cent this year.
"Ever since he basically changed his tune and oil started to come back, logic only dictates he has to be on hold," said David Love, an independent trader of interest rate derivatives at Jitneytrade Inc. in Montreal. "What futures contracts are telling us right now is basically no move from the Bank of Canada at least until 2016."
The Bank of Canada Governor told policymakers two weeks ago there's no need for another rate cut at the moment on signs of a rebound in the price of oil and global growth. Even the loss of 19,700 jobs from payrolls in April wasn't enough to temper the market's optimism, as the Canadian dollar, the best-performing major currency in the past three months, extended gains Friday after the jobs report.
"Markets are definitely listening to what Poloz is saying," Emanuella Enenajor, chief Canada economist at Bank of America Merrill Lynch, said from New York. "He sounds very optimistic. He sounds like he's comfortable staying on hold, and I think markets have taken that to heart."
Should Mr. Poloz stop at just one rate cut, it would be a rare instance of a reduction of 25 basis points effecting enough stimulus. Since 1996, the Bank of Canada has always made successive cuts to its policy rate, according to data compiled by Bloomberg. Mr. Poloz has said he expects the damage from the drop in oil prices will start to be overshadowed in the second half of this year as "positives" including stronger U.S. demand for Canadian goods move to the forefront.
Seven of 22 economists in a Bloomberg survey, including Ms. Enenajor, are expecting at least one more rate cut this year. David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, also predicts further easing.
"As we adapt to lower oil prices, will other sectors step up?" Mr. Watt said from Toronto. "We haven't really seen that. We're still dealing with the oil price shock. We're still in flux. We're not sure whether those that are more bearish like me or the ones that are more optimistic like the Bank of Canada are right."
April's job losses were led by declines in part-time work and coincided with layoffs by retailers Target Corp. and Best Buy Canada, a unit of Best Buy Co. They were less concentrated in Ontario factories, where Mr. Poloz has pinned his hopes for a manufacturing-led rebound.
Economists had forecast a 5,000-position decline in a Bloomberg survey. Part-time positions dropped by 66,500, the most since March, 2011, and full-time employment rose by 46,900.
Mr. Poloz said he's satisfied with how the economy is responding.
"The insurance amount was about right," Mr. Poloz said April 28 in comments to the House of Commons finance committee in Ottawa. "Therefore, there is no need for us to take further action to offset the shock that has occurred."