Stephen Poloz's three options (two of which you'll hate if you're buried in debt)
- Stephen Poloz’s three options
- Why markets are eyeing two key reports
- Global markets mixed so far
- New York futures up
- Canadian dollar cracks 76 cents
As Citigroup sees it, Stephen Poloz has three options on interest rates, and markets will be watching closely for signs of what the Bank of Canada Governor might be thinking over the next three days.
Here's how Citi Research economist Dana M. Peterson sees as the potential routes for Mr. Poloz and his central bank colleagues after they surprised observers earlier in the month by signalling interest rates could rise sooner than expected:
Option 1 (which you'll like most of all if you're one of those vulnerable types who's drowning in debt): The Bank of Canada could officially drop its "easing" bias at its July meeting, leaving its benchmark rate at 0.5 per cent for some time yet.
This would allow the central bank to gain "greater confidence" that the economy has rebounded from its oil troubles, allow time for a pickup in wages and inflation, and allow breathing room to see how Toronto's market bubble, infrastructure spending and U.S. trade tensions play out.
It will also give Mr. Poloz time to see if and when the U.S. Federal Reserve raises rates again, "leading to higher global bond yields and possible stress on Canada's heavily indebted households."
Good news for those folks: This is Ms. Peterson's base-case scenario, which would see the Bank of Canada hold off until early next year.
Option 2 (which you won't like): Start raising rates next month and "downplay key uncertainties" noted above, and forget about the renewed pressure on crude prices. Oh, and ignore (my word, not Ms. Peterson's) how higher rates could dampen consumer spending among those of us who have borrowed too much.
Option 3 (which you really won't like): Raises interest rates twice over the course of the July, October and December meetings, thus removing the half-a-percentage-point stimulus the central bank brought in to counter the oil shock.
"This scenario is a possibility if the BoC is confident that the 50 basis points of 'insurance' purchased in the wake of the plunge in oil prices is no longer needed, but higher rates are not quite warranted amid still stimulus-fuelled economic growth, modest inflation, and a laundry list of uncertainties," Ms. Peterson said.
Mr. Poloz & Co. have a lot to consider, then, the latest being a recent report from the Bank for International Settlements (BIS) that warned Canada is at risk of a financial crisis, according to its indicators.
Notably for this discussion, the debt service ratio among borrowers would be in the red zone if interest rates were to rise by 2.5 percentage points, according to the indicators published by the BIS, a body made up of central banks around the world.
Some observers believe the Bank of Canada will wait until October for its first rate hike, though some market players see a chance of a July move.
Douglas Porter, Bank of Montreal's chief economist, thinks Mr. Poloz should wait it out.
"In summary, even to a card-carrying member of the hawkish club, it would make sense for the bank to stand aside and ensure that the latest sag in oil prices doesn't persist and/or deepen before moving on rates," Mr. Porter said.
"While [economic] growth has been a tremendous pleasant upside surprise for Canada this year, inflation is surprising consistently to the downside, reinforcing the message that there's no rush," he added in a recent report.
"And while Home Capital is less of a concern for housing, the 16 measures taken by the Ontario government seem to have effectively calmed the market, also relieving some pressure on the bank to tighten immediately."
Thus, markets will be watching this morning as Mr. Poloz takes part in a panel discussion in Portugal, and again this afternoon as deputy governor Lynn Patterson delivers a speech in Calgary.
Ms. Peterson, for one, hopes they will "provide guidance on the policy path," though that's not certain.
Then on Friday, Statistics Canada reports another piece of the puzzle when it releases its monthly look at how the economy fared.
Economists expect that report to show a slower pace of economic growth in April, possibly of about 0.1 per cent, but potentially enough to still kick off a second quarter that would see an annual rate of 2 to 2.5 per cent.
Later Friday morning, another piece of the puzzle comes in the central bank's business outlook survey.
"This will be the most closely followed [business outlook survey] in some time as market participants look for clues on potential rate hike timing following the BoC's hawkish shift on June 12," Royal Bank of Canada said in a lookahead.
- Rachelle Younglai: Busy week to offer clues on Bank of Canada rate-hike timing
- Why ‘14.1’ means Canada still risks a financial crisis
- Janet McFarland: Toronto market: Taking a breather or set for a market correction?
- After the GFC (Great Financial Crisis), the GHF (Great Canadian Housing Froth)
- Toronto, Vancouver: Housing bubbles or simply world-class cities?
- David Parkinson: Threat from housing, high debts growing: Poloz
- David Parkinson: OECD sees higher rates as housing remedy
- Matt Lundy: Sustained chill or Vancouver-style rebound?
- Janet McFarland: Toronto’s housing market feels chill
- Yes, a sudden chill. But look at these Toronto home prices
- Vancouver housing market heats up
- Chill, Canada isn’t 2006 America
- Citi on Canada: Solid outlook, housing correction, loonie that won’t hit par
It looks like this is just a market being jolted out of its complacencyJoshua Mahony
Loonie cracks 76 cents
Global markets are mixed, though largely sinking, as the loonie sits nicely above 76 cents (U.S.).
Tokyo's Nikkei lost 0.5 per cent, while Hong Kong's Hang Seng and the Shanghai composite each shed 0.6 per cent.
In Europe, London's FTSE 100 was little changed by about 6:45 a.m. ET, with Germany's DAX and the Paris CAC 40 down by between 0.3 and 0.5 per cent.
New York futures were up.
"The relative lack of volatility seen in markets over the past few weeks means that any sudden drop looks more impressive than it actually is," said IG market analyst Joshua Mahony.
"It was only natural to see tech stocks turn south as Fed members began opining once more about valuations, but the Dow fall was only around 1 per cent, and already this morning markets are moving off their lows," he added.
"It looks like this is just a market being jolted out of its complacency, and it will take something more than a few comments from the Fed to really make investors worry."
The Canadian dollar has topped the 76-cent mark, with a low of 75.77 cents and a high of 76.41 so far.
Indeed, the loonie has led the charge among major currencies as the U.S. dollar sinks for a couple of reasons.
"Firstly, late yesterday voting on the U.S. health care bill was delayed until after the July 4 recess, again raising doubts on the pace and extent of reform," said Adam Cole, Royal Bank of Canada's chief currency strategist in London.
"Secondly, yesterday was a rare example of bond and equity markets both selling off sharply," added.
"The moves were provoked by Fed vice chair Fischer's call for 'close monitoring' of rising risk appetite. This is the first time since December that equities and bonds have both fallen significantly."