The Gloves Are Off!

Last week I wrote about the Capital Economics conference that I attended on June 5 where they suggested that the next move by the Bank of Canada may be to cut rates by 1/4%.

Yesterday, Carolyn Wilkins, Senior Deputy Governor of The Bank of Canada (in a speech given at the Asper School of Business in Winnipeg) stated that "Monetary policy actions influence financial conditions and economic decisions right away but can take as long as two years to have their full effect on inflation. To ensure that inflation gets back to target on a sustainable basis, we must consider not only current economic conditions but also how they will evolve". 

Here is the part that got bond and currency traders all fired up yesterday: "If you saw a stop light ahead, you would begin letting up on the gas to slow down smoothly. (Really? When I drive, what I witness is not so predictable).

The kicker: "You do not want to have to slam on the brakes at the last second". Down went bond prices, up went bond yields and the C$!, with traders taking it that this meant some kind of immediate tightening of monetary policy was now being put into play.

Just for fun, I thought it might be interesting to have a look back at the last couple of years of headlines from the BOC's quarterly Monetary Policy Reports:

"Economic growth in Canada is expected to average 2.1% in 2015 and 2.4% in 2016 with a return to full capacity around the end of 2016".

This coincided with a cut in the Bank Rate to 1% from 1.25%.

On April 15, 2015 the MPR headline was: "Real GDP in Canada is expected to grow by 1.9% in 2015 and 2.5% in 2016 and by 2.0% in 2017.

Then on July 15, 2015: "Economic growth in Canada is projected to average just over 1% in 2015 and about 2.5% in 2016 and 2017."

2015 GDP growth expectations went from 2.1% to 1.0% in just six months.

And they cut the Bank Rate by another 1/4%.

Fast forward to January 2016: "Growth in Canada's economy is expected to reach 1.4% this year (2016) and accelerate to 2.4% in 2017."

So, the pattern has been somewhat overly optimistic growth and inflation targets that over time gradually get revised lower and lower again. There have been plenty of "stop lights" in the distance, but they keep turning green (apparently) and the "gas" pedal has been pushed a little harder. 

The latest Monetary Policy Report headline: April, 2017: "Canada's economy to grow by 2.5% this year and just below 2% in 2018 and 2019."

Stay tuned for the July report, should be a "barn burner"!

For you floating rate borrowers out there, I would suggest sticking to the plan, if short-term rates are going up (IE if GDP and inflation targets are met, which has not been the case over the past couple of years), it will likely not happen until 2018 (six months to a year away and probably not by more than 1/4 to 1/2%). Bond / Currency traders might be a little restless at the moment (not much to do since the great short-covering rally slapped them around a little) and who knows how the housing market is all going to shake out.

Today is Webinar Tuesday (4:15pm EDT, live, for clients) at High Rock, or feel free to tune in at or about 5pm EDT for the recorded version where we will talk about this and any other important developments in the global economy, financial markets and the world of wealth management.