Volume 27, Issue 4
Jan. 23, 2023.

Jan 20

Jan 13


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Source: Globe & Mail


BoC Preview: Is This the End

Benjamin Reitzes

BMO Canadian Rates & Macro Strategist


The Bank of Canada’s January 25 meeting will likely bring one final 25 bp rate hike, pushing policy rates up to 4.5%, matching the highest level over the past two decades. With the overnight rate clearly in restrictive territory, the Bank will be more cautious with rate hikes going forward. However, with inflation still well above target, we anticipate that Governor Macklem and the Governing Council will leave the door open to further hikes just in case the data force their hand. There’s an additional wrinkle with this meeting, as we’ll get the summary of deliberations for the first time two weeks later. We break down the rationale for a hike into three arguments:

1) The fundamental argument: In the December policy announcement, the Bank stated that it “will be considering whether the policy interest rate needs to rise further”, a change from deciding by how much to lift rates. Indeed, policymakers signalled the debate has shifted to whether to hike 25 bps or hold fast. Since the December meeting, we’ve seen two inflation reports, and both showed the BoC’s core CPI measures holding above 5% y/y. There was some modest improvement in the short-term metrics (3-month annualized rate), but even those remained well above the 2% target. The small improvements are an encouraging sign that peak inflation is behind us, but aren’t anywhere close to slow enough to have the BoC breathing easy. 

On the economic front, activity held up better than expected in the second half of 2022. Employment growth was solid, with December surging 100k for the second time in three months. The details weren’t quite as strong, but we have yet to see any big cracks forming in the labour market or the economy. The latest Business Outlook Survey softened, but was still consistent with modest GDP growth. Momentum is slowing, but that’s exactly what the BoC wants to see following 400 bps of rate hikes in 2022.

2) The risk management argument: Which way would the Bank of Canada rather miss with policy? Too tight, slowing the economy and inflation quickly, likely driving rate cuts a bit earlier and more aggressively? Or, too loose, allowing inflation to fester and risk losing control of inflation expectations? The BoC has a 2% inflation target, putting their bias squarely on overtightening. While the recent inflation news has been somewhat encouraging, there’s no guarantee that the trend continues. Inflation risks remain on the upside, even if less so than a few months ago.

3) The market argument: Canadian bond yields have rallied aggressively since the start of the year, with everything 5-years and out trading through 3%. That suggests fixed mortgage rates will continue to pull back from the highs. The market is also pricing a series of rate cuts starting in the fall, contributing to an easing of financial conditions. If the BoC refrains from hiking at this meeting, that will only reinforce market expectations that rate cuts aren’t too far off and we’ll see even more easing priced in. While the BoC isn’t overly occupied with the market, easier financial conditions work counter to the goal of dampening inflation pressure, and cannot be a welcome development.

The meeting will also feature a Monetary Policy Report. In October, the BoC was looking for softening economic growth into year-end and flat growth in H1, with the potential for a recession. Since then, Q4 GDP growth looks like it will get a modest upgrade to around 1%, while Q1 will be introduced at flat or a small positive. The overall economic picture is a bit better, but the BoC isn’t likely to change its GDP forecast materially. On the inflation front, 2022Q4 averaged 6.7% y/y, 0.4 ppts below the October MPR forecast. Look for 2023Q1 to have a 5-handle, as the base effects are going to pull headline inflation down sharply through the first half of the year. Given the latter, expect the BoC to reinforce that it will pay more attention to core inflation trends over the coming months.

Key Takeaways: The fundamentals, risk management, and market moves are all signalling that another 25 bp rate hike is the prudent move. However, the Bank has had a tendency to surprise over the past year, so we cannot rule out a pause. No matter the outcome, we anticipate Governor Macklem will keep the door open to further rate hikes in case core inflation proves stickier than expected.


Frank & Mark.

Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.



Equity markets struggled last week, as a soft run of economic data stoked slowdown concerns, while the U.S. ran into the debt ceiling, setting up possibly months of headlines and negotiation while extraordinary funding measures are used.  Canadian home prices were still correcting through December, while U.S. homebuilders continue to report very depressed traffic despite a small uptick to start the year, and permits for new construction continue to fall.

The TSX added 0.7%, outperforming on the back of higher energy and technology sectors, and much better results across the rest of the spectrum.


YTD, the TSX is up 5.77% and the benchmark 10-year yield ended the week to yield 2.85%.


U.S. & Global

Growth in the U.S. economy looks to have downshifted to a 2.0% annual rate in Q4 from 3.2% in Q3 as the thrust of rapidly rising prices and loan costs, coupled with shrinking wealth, begins to overwhelm support provided by excess savings and sturdy labour markets. A big reversal in exports, a further plunge in home building, and slower business spending will likely contribute to the downshift. By contrast, an early start to the holiday shopping season (spurred by aggressive retail discounting) should see consumer spending rise 3.0%, the most in a year. But the discounts also pulled spending forward, with the latest retail sales results indicating that consumers went into partial hibernation at year-end. Despite the expected decent advance for the economy, waning momentum through the quarter raises the risk of an outright contraction in Q1.

YTD, the DJIA is up 0.69%, the NASDAQ is up 6.44%, and the S&P 500 is up 3.47%.  The 10-year Treasury yield ended the week to yield 3.48%.


Source: BMO Capital Markets


The Good: Consumer Prices eased to +6.3% y/y (Dec.)—slowest since February; Industrial Product Prices -1.1%; Raw Material Prices -3.1% (Dec.); New Motor Vehicle Sales +5.5% y/y (Nov.).


The Bad: Existing Home Sales -39.1% y/y (Dec.)—pulling average prices -12.0% y/y; Housing Starts -5.5% to 248,625 a.r. (Dec.); Manufacturing Sales unch; Wholesale Trade +0.5% (Nov.)—but volumes only up 0.1%; Retail Sales Volumes -0.4%; Household Credit slowed to +6.4% y/y (Nov.); Construction Investment -1.4% (Nov.).


The Good: Producer Prices -0.5% (Dec.)—but core +0.1%; Initial Claims -15k to 190k (Jan. 14 week); NAHB Housing Market Index +4 pts to 35 (Jan.); Philly Fed Manufacturing Survey +3.1 pts on an ISM-adjusted basis to 3-mth high of 49.2 (Jan.).


The Bad: Retail Sales -1.1% (Dec.)—with downward revisions; control measure -0.7%; Industrial Production -0.7% (Dec.); Housing Starts -1.4% to 1.38 mln a.r.; Building Permits -1.6% to 1.33 mln a.r. (Dec.); Existing Home Sales -1.5% to 4.02 mln a.r. (Dec.); Empire State Manufacturing Survey -6.6 pts on an ISM-adjusted basis to 45.5 (Jan.).



Toddler survives getting swallowed, then spit up, by hippo

Talk about biting off more than it could chew.

A hungry, hungry hippo managed to gobble up a two-year-old boy who was playing at his house in Katwe Kabatoro Town Council, in Uganda’s western Kasese district, local police said in a news release.

The hippo snatched the child head-first and would have went kept going on with its day except a man who witnessed the entire thing managed to save the boy by throwing stones at the animal.

The startled hippo “regurgitated the infant” and retreated to a nearby lake that sits on the border between Uganda and the Democratic Republic of the Congo, police said.

“This is the first such kind of incident where a hippo strayed out of the Lake Edward and attacked a young child,” the Uganda Police Force said in a statement, warning that those who live near animal sanctuaries and habitats should be vigilant as “wild animals see humans as a threat and any interaction can cause them to act strangely or aggressively.”

They added: “We want to remind all residents of Katwe Kabatoro Town Council, which is located within Queen Elizabeth National Park, to remain vigilant and always alert rangers about animals that have strayed into their neighborhoods.”

The child was rushed to hospital, where he was treated for minor injuries and vaccinated against rabies.

He has now back at home with his parents.