| | Close
Oct 30 | Close
Oct 23 | Weekly
Change | Net Weekly
Change % |
DJIA | 51,770.31 | 52,215.16 | -444.85 | -0.85% |
Nasdaq | 25,436.99 | 25,955.34 | -518.35 | -2.00% |
S&P 500 | 7,580.07 | 7,623.68 | -43.61 | -0.57% |
| S&P TSX | 35,620.03 | 35,788.18 | -168.15 | -0.47% |
Source: Globe & Mail
BoC: Ready or Not, Here Come the Hikes
Benjamin Reitzes
BMO Canadian Rates & Macro Strategist
The Bank of Canada raised policy rates 25 bps to 2.50%, as
widely expected. There were some doubts on whether we’d get a move this week,
especially after the RBNZ’s surprise pause the night before. The Bank’s
rationale for tightening policy was driven by a combination of factors, with
expectations of persistently high headline CPI at the top of the list. While
inflation is a real worry, a more upbeat growth outlook also played a role in
the move. How far and how fast the rate hike cycle unfolds remains subject to
uncertainty as there are plenty of two-sided risks.
The inflation projections saw a massive upgrade for 2026 and
2027, with a slight bump to 2028. Headline CPI is now expected to rise faster
than 3% for most of next year and doesn’t even get back to 2% by 2028Q4 (though
it’s not far at 2.1%). The Monetary Policy Report outlined where the pressure
is anticipated to emanate from, with energy a big near-term driver followed by
what appears to be pass-through with core goods and services ex. shelter
inflation accelerating. There are plenty of unknowns that could change the
outlook for inflation, with energy prices the main variable. Nonetheless,
policymakers are keen on not falling behind the curve on inflation for a second
time in five years. The change to the inflation outlook and expected spillover
to broader price pressures are the key reasons for this week’s rate hike.
There were changes to the economic outlook as well. GDP
growth was raised for 2026 through 2028. For the next two years, firmer
business investment drove the upgrade, though consumption was also pushed
markedly higher, countered by softer net exports and inventories. The better
economic outlook comes despite ongoing uncertainty around the trade/tariff
situation, with another round of threatened tariffs on the horizon. Indeed, the
impact of the most recent round of tariffs has yet to be seen in the data. The
BoC is anticipating GDP growth to slow to 0.8% a.r. in Q4 due to the trade
flare up. Despite those ongoing worries, policymakers have highlighted building
evidence that Canadian businesses are looking beyond the tariff uncertainty. Investment
rose sharply in Q2, and machinery and equipment spending has risen three
quarters in a row. The Business Outlook Survey also suggests businesses are finding
ways to press forward. Meantime, consumer spending has been solid with booming
equity markets and a stable labour market providing a lift. Housing will remain
weak, as rate hikes cause even more downward pressure on prices, while government
spending isn’t likely to retreat anytime soon. Ebbing growth worries were a key
ingredient to the BoC’s hawkish turn.
Coming out of this week’s policy announcement, we’re left
with the question of how far and how fast will this rate hike cycle unfold? The
arguments are similar to the prehike debate. On the slower and lower side,
there’s a non-trivial chance the U.S. slaps yet more tariffs on Canada in the
coming months. The recent friendlier headlines aren’t sufficient to ease
worries here. The impact of rate hikes on an already-weak housing market and
indebted consumer are also valid concerns. Inconveniently for policymakers, the
weak August GDP report and softer September/Q3 flash estimate suggest there’s
less economic momentum than expected. That should drive some doubt as to how
much tightening will be necessary and how much pass-through will materialize.
One more factor to add to the list is that there’s been no
sign that price pressures are broadening. Core inflation actually slowed in
September to new cycle lows. It’s also worth keeping in mind that the new
inflation forecast and pass-through expectations are driven by the new PRIMA
model. While the Bank has surely been watching the model for some time, this is
the first time it’s being used to help determine policy. Time will tell if it’s
as sound as the BoC believes. On the higher and faster side, the BoC’s
inflation outlook looms large. The headline inflation forecast looks to be on
the aggressive side, and there’s no guarantee that the anticipated passthrough to
underlying inflation will actually occur. Nonetheless, these are the Bank’s forecasts
and are driving policy. If these forecasts are accurate, we’ll likely be in for
at least a few more rate hikes in 2027. Indeed, policy rates have no business
being on the stimulative side of neutral with accelerating underlying
inflation. The question is how restrictive should they be?
Key Takeaway: This week’s Bank of Canada rate hike wasn’t
well received by many, with Friday’s soft GDP report fuelling the naysayers,
but there was little choice for policymakers given the inflation forecast. It
also means that there are more hikes to come, with the next move likely in the
next couple of meetings. Beyond that, further tightening will depend on how the
trade/tariff backdrop evolves and how GDP growth unfolds. Since a firmer growth
backdrop was an ingredient in this week’s move, the Bank will want to ensure
the economy remains in good shape before it pushes rates above the mid-point of
the neutral range.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX was down 0.5% last week, with technology and gold
lagging. The Bank of Canada: Raised rates, as they told everyone they would.
Despite little sign of accelerating or broadening core inflation in the data
through September, the Bank clearly envisions pass-through ramping up through
2027. Indeed, the Bank is now expecting a hot (relative to both the prior
forecast and current consensus) 3.1% headline inflation print for 2027.
Combined with firming economic momentum, this is a move to get policy back to
the middle of the presumed neutral range. Where next? The Bank said they will
be cautious which, in central banker speak, means they don’t want the market to
just assume a follow-up rate hike in December. We see the next move in January,
with a December hold reinforced for now by some soft growth data through September.
The Canadian economy likely added 20,000 jobs in October
following two months of cumulative 110k job losses. Hiring related to
provincial and municipal elections likely drove the increase, although that is
expected to be a temporary support. Indeed, public administration employment
looks to resume its downtrend in the months ahead as Ottawa’s buyouts start to
weigh. For October, the jobs gain could be enough to push the unemployment rate
down by a tenth, reversing the previous month’s increase as soft population
growth and aging demographics restrain labour force growth.
YTD, the TSX is up 12.32%, and the benchmark 10-year yield ended the week to yield 3.84%.
U.S. & Global
Equity markets navigated major central bank policy
announcements and a raft of high-profile earnings reports this week. The
S&P 500 dipped 0.6%, with technology and communication services lagging
sharply. The tech-heavy Nasdaq gave back 2%, and is flirting with a 10%
correction from the early-October high by late Friday. Weakness in those areas
was offset by firmness in more defensive and rate-sensitive areas of the equity
market—see consumer staples, health care and utilities.
Here’s the earnings rundown: Expectations for Q3 earnings
growth were amped up coming into the reporting period. Consensus was (and still
is) calling for growth to top 30% y/y in the quarter, after knocking out better
than 50% y/y growth in Q2. Strength is widespread, but still driven by the AI
boom, capex and mark-to-market gains. Some notables:
Alphabet: Google’s parent was hammered by negative free cash
flow, a robust capex plan for this year, and guidance of even stronger capex in
2027.
Amazon: Capex came in higher than expected, cash flow swung
more negative, and guidance for 2027 capex is even stronger. Same result as
above.
Intel: A solid quarter was overshadowed by word that soaring
chip demand is driving up PC prices, and is likely to weigh on sales in 2027.
Like search and advertising revenue above, the AI boom may be eating into the
staple business here. Investors sold.
Microsoft: A solid result but, unlike the others, a
lighter-than-expected capex number allowed investors to hold firm.
We’ve clearly learned in recent weeks where the concerns
lie, and investors began to push back—namely around massive capex plans,
dwindling cash flow and some cannibalization of existing business.
The central bank rundown: We are in the throes of a global
tightening cycle. The question is how far we go, and this week reiterated that
the pace, for now, will be gradual.
The Federal Reserve: Left rates unchanged as widely
expected, despite two dissenters voting for rate hikes. That comes despite
stubborn core inflation and growth accelerating into Q3. Final domestic demand
in the U.S. economy surged 5% in Q3 as businesses invested and consumer
shopped. That drove 3.4% headline real GDP growth in the quarter. The market is
almost fully pricing in a December rate hike, and we would concur with that,
with more tightening likely through 2027.
The ECB: On hold, as expected. But, barring a dramatic
change in the outlook or step down in above-target inflation, more tightening
is coming. Likely at the next meeting in December.
The BoJ: On hold, as expected. But, the central bank hinted
that further rate hikes are coming, as its 2027 inflation forecasts were
lifted. The door is also open for that BoJ rate hike in December.
YTD, the DJIA is up 7.71%, the NASDAQ is up 9.44%, and the S&P 500 is up 10.73%. The 10-year Treasury yield ended the week to yield 4.93%.
Source: BMO Capital Markets
The Good:
Core Wholesale Trade +0.5% (Sep. A); Ottawa posts a budget
deficit of $5.4 bln (Apr.-to- Aug.)—vs. $11.1 bln in same period last year.
The Bad:
Monthly Real GDP unch (Aug.)—and StatCan estimates Sep.
dropped 0.1%; SEPH Payrolls -49,600 (Aug.); Job Vacancy Rate stuck at 2.8%
(Aug.); Province of Ontario is projecting a deeper $16.9 bln deficit (FY26/27).
The Good:
Real GDP +3.4% a.r. (3Q A); Core Durable Goods Orders +0.5%
(Sep. P); Employment Cost Index slows to +0.8% (Q3); Chicago Fed National
Activity Index 0.07 (Sep.); Retail Inventories +0.3%; Wholesale Inventories
+0.6% (Sep. P); Conference Board Consumer Confidence Index +7.5 pts to 91.7
(Oct.); S&P Cotality 20-City Home Prices +2.7% y/y; FHFA Home Prices +2.5%
y/y (Aug.); Initial Claims -1k to 194k (Oct. 24 week).
The Bad:
Core PCE Price Index +0.3%, +3.1% y/y (Sep.); Dallas Fed
Trimmed Mean PCE Inflation rises to +2.3% y/y (Sep.); Real Personal Spending
unch (Sep.); Goods Trade Deficit widens to $134.9 bln (Sep.); New Home Sales
-0.6% to 676,000 a.r. (Sep.).
Source: Associated Press
The roof of a water tower in Manhattan where a rare family
of barn owls nested has been removed
The roof of a water tower where a family of celebrity barn
owls had been nesting in Manhattan’s Upper West Side has been removed, sparking
outrage among New Yorkers who have been captivated by the elusive birds.
The barn owl family was discovered weeks ago, drawing crowds
of people in the street eager to get a glimpse of the birds, including nature
photographers. It is believed to be the first documented instance of barn owls
nesting in Manhattan in modern history.
Jessica Wilson, the executive director of NYC Bird Alliance,
said that she saw one barn owl fledgling Thursday on the roof of a nearby
building after the roof of the water tower, which is located atop a building,
was removed. Barn owl fledglings “should not be out in the middle of the day”
because barn owls are nocturnal, she said.
“It had been disturbed from the nest,” Wilson added. “We
didn’t see any more fledglings.”
NYC Bird Alliance received reports Thursday morning from
residents and birders of work happening at the top of the tower, Wilson said.
When Wilson got to the building, no workers were present. Enforcement police
with the state’s environmental conservation agency also arrived, Wilson said,
and they were able to access the building’s roof with the permission of the
building’s superintendent. On the roof, Wilson saw that the top of the water
tower where the barn owls had been nesting was gone.
The New York State Department of Environmental Conservation
said in a statement that its police officers “investigated the area and found
that the roof of the water tower on the building was removed, exposing the barn
owl nest.”
The officers told the building owner to “halt demolition of
the water tower until further notice” while the department investigates any
potential violations, the department added.
Reached by phone, the building’s superintendent declined to
comment. It’s not immediately clear who owns the building or ordered the
removal of the water tower’s roof.
Thomas Obersteiner, an Upper West Side resident, said he saw
a man with an extension cord climbing down from the water tower around noon on
Thursday.
The news of the water tower roof removal prompted criticism.
“I am outraged by reports that construction work on an Upper
West Side water tower destroyed part of the structure that was home to
Manhattan’s first Barn Owl nest, potentially endangering a pair of owls and
their several fledglings,” state Sen. Erik Bottcher said in a social media
post, adding that active “migratory bird nests” are protected by state and
federal law.
“Our city’s wildlife deserves protection, and there must be
accountability when these protections are violated,” Bottcher said.
“That nest was well-known, incredibly well-known, written
about widely,” said David Barrett, a Manhattan-based birder who runs the
popular social media account Manhattan Bird Alert. “It should never have
happened.”
Barrett said he observed the water tower Thursday and saw
that the roof had been removed.
Birds have captivated New Yorkers in the past. Residents
have fallen in love with American woodcocks, who are known to stop in Midtown
Manhattan’s Bryant Park every year as they migrate north in early spring. After
Flaco the Eurasian eagle-owl died in 2024, dozens of mournful fans gathered to
say goodbye to the beloved creature who flew around Manhattan and became a joy
to many after someone let him out of his zoo enclosure the previous year. Then
there was Pale Male, a red-tailed hawk who nested above Fifth Avenue for three
decades before dying in 2023.