Yahoo Finance Posthaste: Why the Bank of Canada might not hike as high as many fear
Good Morning!
A “hawkish” statement from the Bank of Canada this month and an inflation shock in the United States has pushed many investors and economists to hike their rate forecasts.
The surprise strength of the U.S. core consumer price index last week roiled markets and pushed up expectations for the U.S. Federal Reserve’s rate to hit almost 4.5 per cent by next April.
Markets are now betting the Bank of Canada will hike its policy rate to a peak of 4.1 per cent by next March, about 50 basis points higher than a month ago, said Paul Ashworth, Capital Economics’ chief North America economist.
Among Canada’s major banks, Royal Bank of Canada and Toronto-Dominion Bank now expect Canada’s interest rate to peak at 4 per cent, and Canadian Imperial Bank of Commerce has raised its forecast to 3.75 per cent. The Bank of Nova Scotia and Bank of Montreal also predict a 3.75 per cent peak.
But Capital argues that there are several reasons why the central bank might not hike as much as many now suppose.
First, a cloudy outlook for manufacturing. Though manufacturing sales increased 0.5 per cent in June and 0.6 per cent in July, these gains only partially offset a 2.1 per cent decline in May.
July gains also appear to have been boosted by a temporary spike in motor vehicles and parts sales, due to fewer retooling shutdowns. U.S. data showed a similar surge, but was then revised down and output in August fell by 1.4 per cent “suggesting that the Canadian surge will also prove to be fleeting,” Ashworth said.
“With the manufacturing PMI dropping sharply over the past couple of months, it appears that the global manufacturing malaise — caused by zero-covid lockdowns in China and soaring energy prices in Europe — will infect Canada too,” he said.
Next, household wealth in Canada plunged in the second quarter in the biggest quarterly drop on record, as both the housing market and stock markets lost ground.
In one quarter, Canadians shed a record $990 billion in net worth. During the financial crisis in 2008, net worth fell by only $520 billion over 12 months.
Ashworth said this would be more worrying but for the huge stock of wealth Canadians accumulated over the pandemic years; net worth still remains significantly higher than before the pandemic. It will decline further as housing wealth continues to fall over coming quarters.
The biggest reason, though, that Capital expects the Bank of Canada’s peak rate will be lower than the Fed’s is the surge in household debt. As borrowing rates rise, Canadians’ household credit market debt as a proportion of disposable income has risen to a record high of 182 per cent. That means there was about $1.82 in credit market debt, which includes mortgages, for every dollar of household disposable income in the second quarter.
“With higher household debt and now a markedly weaker labour market, we expect the peak in the Canadian policy rate to be closer to 3.5 per cent,” Ashworth said.
_____________________________________________________________
Was this newsletter forwarded to you? Sign up here to get it delivered to your inbox.
_____________________________________________________________
FINAL FAREWELL Members of the crowd on The Mall listen to the State Funeral of Queen Elizabeth at Westminster Abbey, London. Hundreds of thousands of people lined the streets of the capital for her funeral, and millions from around the world mourned the monarch who ruled the Commonwealth for 70 years. Photo by Mike Egerton/Pool via Reuters
___________________________________________________
Prime Minister Justin Trudeau will attend the opening of the high-level general debate of the 77th session of the United Nations General Assembly. Foreign Affairs Minister Melanie Joly will also attend
Trudeau will also take part in the Global Food Security Summit and “Countdown to CBD COP15: Landmark Leaders’ Event for a Nature Positive World.” Environment and Climate Change Minister Steven Guilbeault will also attend
Bank of Canada Deputy Governor Paul Beaudry delivers speech “Pandemic macroeconomics: What we’ve learned, and what may lie ahead”
Officials from the Department of Finance Canada, Health Canada, Canada Mortgage and Housing Corporation, and the Canada Revenue Agency will hold a technical briefing on implementing the recently announced dental, housing and GST credit affordability measures
The competition bureau will host the Competition and Green Growth Summit, where experts will discuss the interaction between competition law and policy and sustainability. The summit will bring together international competition authorities, regulators, businesses, non-governmental organizations, lawyers and academics
The standing committee on natural resources holds a meeting about greenhouse gas emissions cap for the oil and gas sector
Elevate Festival tech conference in Toronto
The president and CEO of the Mining Association of Canada, Pierre Gratton, delivers the keynote address at a Vancouver Board of Trade forum on mining
Today’s Data: Canadian CPI, Teranet/National Bank home price index, and job vacancies; U.S. housing starts and building permits
Earnings: Aurora Cannabis
_______________________________________________________
Why gold has lost its status as a haven from inflation and market chaos
Inflation has likely slowed, but economists warn we’re not out of the woods yet
Former CPPIB CEO Mark Machin launches private capital platform
Kinross Gold stock jumps as company promises to boost share buybacks
Howard Levitt: If you’re thinking of shortchanging a departing employee on a bonus, think again
_____________________________________________
__________
Canada’s inflation rate comes out today and after the shock markets got last week, when U.S. inflation rose rather than declined, it would be understandable for some to be wary. Most expect data to show headline inflation cooled slightly in August but RBC economists say “beneath the weakening headline number, some prices are still powering up.” They expect inflation rate excluding food and energy to hold steady at 5.5 per cent and not to peak until later this year when Bank of Canada rate hikes really start to bite.
__________________________________________
The landscape of Canadian stock trading has shifted significantly in recent years. With growth making more room for traders without significant capital, now could be an excellent time for an aspiring investor to get started. The Toronto Stock Exchange (TSX) may be intimidating to new traders, but there are relatively easy ways to pick up skills as you start testing the waters and learning how to make money trading stocks.
If you want to learn how to start day trading, plus gain some stock investment tips and stock analysis skills, our content partner StackCommerce offers a Premium Novice-to-Expert Day Trading & Technical Analysis Bundle.
This 16-hour course bundle includes introductory and advanced lessons on day trading and can help you learn what to look for as you become an investor on the world stage or more locally with the TSX.
____________________________________________________
Today’s Posthaste was written by Pamela Heaven (@pamheaven), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.
Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.
Listen to Down to Business for in-depth discussions and insights into the latest in Canadian business, available wherever you get your podcasts. Check out the latest episode below:
