| | Close
January 31 | Close
January 24 | Weekly
Change | Net Weekly
Change % |
| DJIA | 44,544.66 | 44,424.25 | +120.41 | +0.27% |
| Nasdaq | 19,627.44 | 19,954.30 | -326.86 | -1.64% |
| S&P 500 | 6,040.53 | 6,101.24 | -60.71 | -1.00% |
| S&P TSX | 25,533.10 | 25,468.49 | +64.61 | +0.25% |
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Source: Globe & Mail
BoC Pause in Play Absent Tariffs
Benjamin Reitzes
BMO Canadian Rates & Macro Strategist
The Bank of Canada cut policy rates 25 bps this week, as expected. The move was characterized as risk management, consistent with our thinking. There were a couple of minor surprises attached, as the Bank announced the end of QT, with term repos starting in March, and an additional 5 bp cut to the deposit rate to help bring CORRA closer to target. The latter two changes have a market impact, but little-to-no macro impact. On the macro side, the BoC was more constructive than it’s been in some time. Unfortunately, that comes amid the looming threat of tariffs.
Absent tariffs, the Bank noted that the recent round of GDP revisions narrowed the output gap modestly. The growth outlook was sliced for 2025 and 2026, but that was largely due to the coming huge decline in population growth. Indeed, potential growth estimates were similarly cut, though 2026 is now an additional tick above potential. Accordingly, the Bank views the risks to the outlook as balanced, dropping the easing bias that had been present through the second half of 2024. Rate cuts are working to boost domestic demand, gradually strengthening the economy and allowing inflation to trend towards target.
The Bank’s views on core inflation were eyebrow-raising. There was no discussion of the “preferred” core inflation measures in the policy statement. Sr. Dep. Governor Rogers effectively dismissed CPI Trim as biased due to its construction, with a similar note also in the MPR. Recall when the BoC changed core measures, it moved to Trim, Median and Common. So far it has ditched Common and now Trim appears to be getting turfed. Perhaps it’s time to return to simpler core CPI measures like CPIX or CPI ex. food & energy. Nonetheless, policymakers aren’t particularly concerned about the recent pop in core CPI, as the breadth of inflation remains consistent with 2%.
All the above goes out the window in the event of tariffs. Robert lays out how the BoC views the potential impact, and where our view differs. If Canada is slapped with 25% tariffs, growth takes a big hit, there’s no debate there. The inflation story is much more complicated with reciprocal tariffs and C$ weakness influencing prices. The Bank assumes that inflation remains relatively subdued in year 1, while growth faces a chunky downgrade, suggesting that rate cuts would be coming. However, the medium-term inflation worries would likely keep the Bank from cutting too far, with something in the ballpark of 100 bps coming relatively quickly, and more potentially to come as the damage unfolds. Of course, the C$ and fiscal policy reaction will need to be accounted for as well, and could also limit how far the BoC will cut.
Key Takeaway: While this week’s rate cut was intended to help mitigate potential tariffs, there’s extreme uncertainty about the outlook. Indeed, it’s not often that there’s a looming massive negative shock that may or may not occur at seemingly any moment that only one person (President Trump) has any control over. There are very plausible scenarios with policy rates holding steady for the next few quarters, while we could also see rates materially lower. The Bank reflected this uncertainty and wanted to make it clear that monetary policy cannot solve this problem alone. Responsible, efficient and effective fiscal policy needs to provide a helping hand, as Robert outlines above.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The BoC’s 25 bp cut was accompanied by another 5 bp reduction in the deposit rate and the official end of QT. The refreshed growth outlook included updated population estimates but no tariffs in the baseline—understandable given all the questions still surrounding that possibility. For now, we look for two more cuts this year, taking the overnight rate down to a terminal 2.50%. Tariffs (and retaliation) will have some offsetting impacts on policy: there’s the upside risk to inflation—which may well be a one-time effect—and the downside risk to growth. We judge the latter to be more important, meaning the net risk is for the Bank to ease faster (and possibly further) if tariffs are implemented.
YTD, the TSX is up 3.26%, and the benchmark 10-year yield ended the week to yield 3.06%.
U.S. & Global
Last week kicked off with a dramatic sell-off driven by DeepSeek’s low-cost AI model, though the pain was mostly contained to big names in the AI and semiconductor spaces, especially in the U.S. As the days went on, much of those losses had recovered, with the TSX hitting a record close at one point. A late-week ramp-up in tariff threats drove another sell-off, though the broad response to that possibility has been relatively muted so far. When all was said and done, North American equities were mixed on the week. The Dow and TSX managed to eke out gains but the S&P 500 and NASDAQ were down at least 1%. The TSX benefitted from the shift away from U.S. tech stocks, with that sector jumping 6.4% and its S&P 500 equivalent dragging by almost 5%.
There was no shortage of excitement last week, with the Federal Reserve’s on-hold announcement taking up relatively little spotlight compared to recent years. The as-expected move (or lack thereof) and subsequent press conference didn’t have many surprises: inflation remains sticky, growth remains sturdy (pencil in another +2.3% a.r. for Q4), and the labour market isn’t flashing any warning signs either. We continue to expect the Fed to remain on hold until the second half of the year—we’re looking for three cuts this year, and another two in 2026, bringing the fed funds rate to 3.00%-to-3.25%. But, much will depend on tariffs.
On that note, we turn our attention to Feb. 1st, which is the date President Trump has circled to introduce tariffs on Canada, Mexico and possibly China. (Note the EU was also threatened, but it’s unclear whether they would be included in the immediate plan.) As of writing, there are still plenty of questions about the size and scope of the tariffs, with the President musing late Friday of the possibility of a reduced rate for Canadian oil and gas. The policy is reportedly tied to the movement of fentanyl into the U.S., so we expect to see another ramp-up in border security measures, and/or retaliatory action, over the coming days—if the tariffs do indeed come into effect.
YTD, the DJIA is up 4.70%, the NASDAQ is up 1.64%, and the S&P 500 is up 2.70%. The 10-year Treasury yield ended the week to yield 4.54%.
Source: BMO Capital Markets
The Good: Wholesale Trade +0.1% (Dec. A); Conference Board’s Consumer Confidence Index +4.7 pts to 64.7 (Jan.); Conference Board’s Business Confidence Index +1.6 pts to 74.5 (Jan.); BoC’s SEPH Average Hourly earnings slows to +5.2% y/y (Nov.)—but still high.
The Bad: Monthly Real GDP -0.2% (Nov.)—but StatCan estimates December rebounded +0.2%; Ottawa posted a budget deficit of $22.7 bln (Apr.-to-Nov.)—wider than $19.1 bln reported last year.
The Good: Real GDP +2.3% a.r. (Q4 A)—and consumer spending +4.2%; Real Personal Spending +0.4% (Dec.)—and Personal Income +0.4%; Core PCE Price Index +0.2% (Dec.); Core Durable Goods Orders +0.5% (Dec. P); New Home Sales +3.6% to 698,000 a.r. (Dec.); Chicago Fed National Activity Index rebounded to 0.15 (Dec.); S&P Case-Shiller Home Prices +4.3% y/y; FHFA Home Prices +4.2% y/y (Nov.); Initial Claims -16k to 207k (Jan. 25 week).
The Bad: Employment Cost Index picked up a tick to +0.9% (Q4)—but consistent with price stability; Goods Trade Deficit widened to $122.1 bln(Dec.)—deepest on record; Wholesale Inventories -0.5%; Retail Inventories -0.3% (Dec.); Pending Home Sales -5.5% (Dec.); Conference Board’s Consumer Confidence Index -5.4 pts to 104.1 (Jan.).
Source: Canoe.com
Krakow’s fire-spitting dragon sculpture will hold its breath for a fuel-saving checkup
WARSAW, Poland (AP) — An iconic metal sculpture of a dragon that spits real fire in the Polish city of Krakow will hold its breath for a month to check why it’s been devouring so much fuel lately, authorities said Wednesday.
Starting this week, experts will check the gas feeds for the 6-meter (19-foot) sculpture to find ways of reducing the dragon’s energy bills, said Krzysztof Wojdowski, spokesman for Krakow’s road infrastructure office.
The dragon figure at foot of the Wawel Castle in the southern historic city is a major tourist attraction. Millions of visitors come each year to watch flames jutting from its snout every three minutes.
The figure by Polish sculptor Bronislaw Chromy dates to the late 1960s, but refers to centuries-old legend in Krakow’s history.
According to the story, the city was harassed by a blood-thirsty dragon that fed on the citizen’s cattle, and sometimes even on young maidens. A resourceful young shoemaker offered the beast a sheep skin stuffed with sulfur that gave the dragon a burning feeling inside. Then, the dragon drank so much water from the nearby Vistula River that it burst.
The sculpture should regain its fire-breathing abilities in March.
