| | Close
Feb 20 | Close
Feb 13 | Weekly
Change | Net Weekly
Change % |
DJIA | 49,625.97 | 49,500.93 | +125.04 | +0.25% |
Nasdaq | 22,886.06 | 22,546.67 | +339.39 | +1.51% |
S&P 500 | 6,909.51 | 6,836.17 | +73.34 | +1.07% |
| S&P TSX | 33,817.51 | 33,073.71 | +743.80 | +2.25% |
Source: Globe & Mail
BoC Rate Cut Door Opens a Crack
Benjamin Reitzes
BMO Canadian Rates & Macro Strategist
The overriding message from the Bank of Canada over the past
couple of months has been that it is happy with the current stance of policy,
and it will take a material shift in the outlook to prompt a move in either
direction. That posture comes as underlying inflation has been sticky around
2.5% even as there’s been a persistent output gap for most of the past two
years. Indeed, Governor Macklem has stressed that there’s a limit to the
support the Bank can provide to offset the trade/tariff-driven economic
restructuring that is underway. That limit comes through the inflation lens, as
cutting rates into stimulative territory when inflation has been above target
for years would shred the BoC’s credibility. This week’s data deluge didn’t
change the broader macro narrative in Canada, but cracked the door open to
further easing.
The most impactful data point was January CPI. Inflation
came in softer than expected almost right across the board. Headline inflation
slowed despite challenging base effects from last year’s GST/HST tax holiday.
Notably, those base effects are extremely favourable (e.g. they will push
inflation lower) in February and March. Things flip once more (i.e. inflation
accelerates) in April when last year’s elimination of the consumer carbon tax
falls out of the calculation. Core inflation slowed across most metrics, with the
BoC’s preferred measures hitting one-year lows. The short-term metrics point to
a further deceleration. It looks like underlying inflation, which the BoC has
pegged at 2.5% for most of the past six months, might finally be moving toward
the 2% target. We’ll likely need to see two-to-three more soft inflation
reports before the Bank of Canada would be willing to act, but it looks like
the door to another cut has been cracked open.
The rest of this week’s data were mixed. Wholesale trade
volumes perked up in December, as did merchandise trade volumes. The latter
figures reaffirmed that net exports will add strongly to GDP growth in Q4. On
the other hand, January home sales fell for the fourth time in five months as
the correction continues (and still has a long way to run in Ontario and B.C.).
Retail sales slipped as well, keeping the up-and down pattern intact. And, with
the labour market struggling, there’s little to suggest consumer spending is
going to ramp up near-term. The soft skew to the data likely doesn’t move the
needle for the BoC as policymakers will need time to assess whether the
weakness is demand- or supply-driven. Next week’s Q4 GDP report is expected to reinforce
the narrative around weak growth, but the Bank is already anticipating zero growth
in the quarter, and so it shouldn’t sway policy. Note that the flash estimate
for January GDP could come in quite soft as stormy winter weather likely
disrupted activity throughout Central Canada for at least a few days. We’ll
have to wait for February to see if there’s a reversal.
Key Takeaway: It appears that underlying inflation is
finally easing toward the BoC’s 2% target after running hot for the past five
years. We’ll need to see at least two more soft CPI prints to prompt the BoC to
even consider easing, but the door has been cracked open for further cuts.
Meantime, USMCA renegotiations remain a cloud over the outlook, but isn’t
reason for action just yet.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX rose 2.2%, with broad gains led by technology,
industrials and materials. Canadian equities continue to outperform on the
year, up 6.6%. The Canadian economy
struggled to eke out any growth to end a very challenging 2025. We’re looking
for Q4 GDP growth to come in at 0.5% a.r., a touch firmer than the flash
estimate. The overhang from trade uncertainty continues to weigh heavily on the
economy, even if only a few sectors are directly impacted by tariffs at the moment.
Consumers struggled, with retail sales volumes contracting for a second straight
quarter. The housing market isn’t looking any better, with home sales falling for
the third time in four quarters amid still-strained affordability. In addition,
falling prices are restraining building activity. Despite the trade
uncertainty, firmer imports suggest that business investment in machinery and
equipment expanded modestly after two sizeable quarterly contractions.
Government spending will likely be a bright spot, doing its best to support
growth amid a challenging macro backdrop. Finally, net exports look to add
about 1 ppt to growth, with inventories a negative offset.
YTD, the TSX is up 6.64%, and the benchmark 10-year yield ended the week to yield 3.23%.
U.S. & Global
Equity markets rose last week alongside a raft of economic
data and a long-awaited Supreme Court ruling on the use of IEEPA tariffs. The
S&P 500 rose 1.1%, led by communication services, banks and industrials,
while consumer staples and utilities lagged. The mild underperformance of the
latter two sectors comes after weeks of heavy rotation into those areas.
Tariffs were in the spotlight again last week, with the
Supreme Court striking down IEEPA tariffs by a 6-3 vote on Friday. The market
response was muted with a mild initial bump in both equities and bond yields.
For one, this was the likely outcome, and the market had largely already
assumed as much. Also, this far from settles the tariff situation given the
Administration will now likely shift to alternative avenues to implement tariff
policy. For example, sectoral tariffs under Section 232 that are already
implemented (or pending) are not affected by the ruling; and other mechanisms
(e.g., Sections 122, 301 and 388) can be explored with varying conditions.
Suffice it to say that this ruling mutes the noisiest and most volatile aspect
of the tariff situation, but far from puts an end to it. The equity market, in
the meantime, just goes on about its business.
The data flow this week were supportive of an economy that
continues to grow on the back of an AI-led capital spending boom, albeit with
stubborn inflation. U.S. real GDP grew a softer-than-expected 1.4% annualized
in 2025Q4, but the government shutdown lopped 1.2 ppts from the quarter.
Consumer spending growth was a firm 2.4%, while business investment clocked in
at 3.7%, leaving final (private) domestic demand on a firm and steady growth
track. Below the surface, AI-related spending continued to ramp up, with
combined real investment in software, computer equipment and data centres now
up almost 25% from a year ago.
Inflation, however, was still perky in December with core
PCE prices jumping 0.4% in the month, or 3.0% from a year ago. Durable goods
prices are now up 2% from a year ago (some tariff passthrough, perhaps), the
fastest clip since the pandemic burst, while service inflation is holding at
3.4% y/y. The combination of firm growth and firm inflation doesn’t lend itself
to near-term rate cuts, and the market has pushed out pricing of the next full
25 bp Fed cut to July.
YTD, the DJIA is up 3.25%, the NASDAQ is down 1.53%, and the S&P 500 is up 0.94%. The 10-year Treasury yield ended the week to yield 4.08%.
Source: BMO Capital Markets
The Good:
Consumer Prices slowed to +2.3% y/y (Jan.) —cores also eased;
Merchandise Trade Deficit narrowed to $1.3 bln (Dec.); Manufacturing Sales
Volumes +1.8% (Dec.) Wholesale Trade Volumes +2.1% (Dec.) Construction
Investment +1.9% (Dec.); Household
Mortgage Credit +4.6% y/y (Dec.).
The Bad:
Retail Sales Volumes unch (Dec.)—but StatCan estimates
January nominal sales climbed 1.5%; Industrial Product Prices +2.7%; Raw
Materials Prices +7.7% (Jan.); Existing Home Sales -5.8% (Jan.); MLS Home
Prices -4.9% y/y (Jan.); New House Prices -2.3% y/y (Jan.); Housing Starts
-15.2% to 238,049 a.r. (Jan.); Global Investors sold a net $5.6 bln (Jan.); Province
of British Columbia is projecting a wider $13.3 billion deficit (FY26/27).
The Good:
Industrial Production +0.7% (Jan.); Core Durable Goods
Orders +0.6% (Dec.); Housing Starts +6.2% to 1.404 mln a.r.; Building Permits
+4.8% to 1.455 mln a.r. (Dec.); Initial Claims -23k to 206k (Feb. 14 week)
Empire State Manufacturing Survey +0.8 pts to an ISM-adjusted 52.0 (Feb.); Global
Investors bought a net $62.9 bln in U.S. securities (Dec.).
The Bad:
Real GDP +1.4% a.r. (Q4 A)—but real final sales to private domestic purchasers still
healthy at +2.4%; Core PCE Price Index +0.4% (Dec.); Pending Home Sales -0.8%
(Jan.); New Home Sales -1.7% to 745,000 a.r. (Dec.); NAHB Housing Market Index
-1 pt to 36 (Feb.) Goods & Services Trade Deficit widened to $70.3 bln
(Dec.); Philly Fed Index -4.3 pts to an ISM-adjusted 48.6 (Feb.); Leading Index
-0.2% (Dec.); U of M Consumer Sentiment revised lower to 56.6 (Feb.).
Wierd News
Source: Associated Press
Loose dog makes Olympic cameo on the cross-country ski
course at the Milan Cortina Games
TESERO, Italy (AP) — A surprise participant in Wednesday’s
action at the Milan Cortina Olympics had four legs and zero concern for race
times.
As elite cross-country skiers pushed to the finish in the
women’s team sprint heats, a dog wandered onto the course and ran with athletes
down the straightaway.
Racers stayed focused as spectators cheered on the canine
intruder before it crossed the finish line and was restrained by venue
officials.
The dog had slipped away from a local owner while out on a
nearby walk, officials later said.
The incident came on the same day and the same course where
Olympic history was made: Johannes Hoesflot Klaebo of Norway won his record
10th gold medal and his fifth of the Milan Cortina Games.