Briefing highlights
- Bank of Canada expected to raise key rate
- The pros and cons of such a move
- Three scenarios for the loonie
- Global markets mixed, Europe up
- New York set for higher open
- Yellen points to gradual rate hikes
- Home Capital names new CEO
- Canadian home prices rise in June
- CPPIB buys into off-shore gas field
Today may well mark ecstasy for some, and agony for others.
And for the loonie, it could go either way, depending on what the Bank of Canada does and says.
Markets expect the central bank to raise its benchmark overnight rate this morning by one-quarter of a percentage point, to 0.75 per cent. That would be a first for Governor Stephen Poloz, who so far in his tenure has only cut.
He has done so twice, amid the oil shock, and believes those cuts have now done their job. So, if markets have it correctly, he's ready to pull back halfway from the two quarter-point cuts needed to buffer the economy as crude prices collapsed.
The Bank of Canada has certainly signalled this, though some observers don't necessarily see an increase today as a done deal.
When central bankers speak, they don't actually say a rate move will occur on such and such a date. Rather, they prime the market with signals.
Which the Bank of Canada has been doing since it caught everyone off guard with a sudden shift in tone in mid-June. And which is why its credibility is at stake today.
The first hint came in a speech from senior deputy governor Carolyn Wilkins, and comments later from Mr. Poloz and deputy governor Lynn Patterson sealed the deal where markets were concerned.
Here's what's at stake:
The ecstasy
Besides those on fixed incomes, there's a general benefit to the economy, say those in favour of a rate increase.
Canada's economy is now on a strong footing, as is the jobs market, business investment is picking up and wage growth is "showing signs of life," said Royal Bank of Canada senior economist Nathan Janzen.
"The pause in 2015 and, to a lesser extent last year, has clearly ended," Mr. Janzen said in a report arguing the case for a rate hike.
"Growth over the last three quarters in Canada has led the G7 once again," he added.
"Outperformance relative to other G7 countries dating back to pre-2008-09 recession levels never fully reversed over 2015 and 2016, and the gap is growing again."
There's also a benefit to moving early, and gradually, given the threat to the economy of record consumer debts, say economists such as Mr. Janzen.
"To adopt an analogy used recently by Governor Poloz, when a driver sees a red light ahead they (typically) start to slow down gradually before reaching the intersection," he said.
"The same is true with interest rate policy. Gradual adjustments are better than sharp shocks. To achieve that, rates have to begin to rise before the economy is overheating and inflation pressures have emerged."
Bank of America Merrill Lynch agreed, saying a rate hike can help in the area of financial stability in Canada.
"Financial stability considerations play a role as the credit market is very tight, households are highly leveraged, and house prices show bubble-like behaviour in some regions," said Carlos Capistran, the bank's Canada and Mexico economist, and his colleagues Ralph Axel, a rates strategist, and John Shin, a foreign exchange strategist.
"Probably the biggest risk of having the real rate too low for too long is that it encourages excessive risk taking," they added in their report.
"If firms and consumers expect rates to go up, with some rates actually moving up somewhat, they have less incentive to take excessive risks. We believe this is one of the reasons several central banks in developed markets have taken a more hawkish tone."
The agony
This is the other side of that coin for those juggling huge debts, particularly if the Bank of Canada follows today's expected hike with two more by the end of next year, as some observers forecast.
"Servicing debt is easier when interest rates are low, so rate hikes could increase the risk that households will not be able to manage the higher payments on debt, creating a wave of defaults and collapse in household spending that would have harsh consequences for the macroeconomy," said economist Paul Matsiras of Moody's Analytics, a sister company to the rating agency.
"However, with the labour market likely to maintain upward momentum for the rest of the year, wage pressures will pick up as the supply of available workers becomes more limited. An acceleration in income growth should ensure that household debt loads remain manageable."
Of course, Canada is also a series of regions, each with their own economic might or weakness.
Notably, the commodities-dependent provinces are still recovering from the shock and, thus, a rate increase can look different in Alberta than it does in British Columbia.
"There are risks to keeping interest rates low, but hiking will also cause pain," said Mr. Matsiras.
"One is that interest rate hikes will disproportionally impact provinces, as economic growth is far from uniform across Canada," he added.
"The jobless rates in British Columbia, Ontario and Quebec are testing new post-recession lows, but unemployment in Alberta and Saskatchewan remains stubbornly high relative to historical averages."
The loonie
The central bank's mid-June shift in tone sparked a rally in the Canadian dollar, which could move (one way or the other) today depending on what the central bank says in its policy statement and accompanying monetary policy report. It could also move on Mr. Poloz's comments at a news conference that follows.
Here are three scenarios laid out in a report by Bank of Nova Scotia foreign exchange strategists Shaun Osborne and Eric Theoret:
The expected quarter-point hike
"The statement/press conference tone will be crucial in determining how quickly the governing council wants to bring the policy rate back to 1 per cent."
A "potential knee-jerk" reaction could drive the loonie up to almost 79 cents, though the currency would fall back to between about 77.5 cents and 78 cents.
"A 'dovish hike' – meaning a 25-basis-point tightening and no guidance on subsequent policy action, suggesting no rush to follow up, would tilt the balance of corrective risks more obviously against the CAD," said Mr. Osborne and Mr. Theoret, referring to the loonie by its symbol.
The unexpected hold
"Such a move would go against the clear, consistently hawkish messaging delivered since senior deputy governor Wilkins' June 12 speech," the Scotiabank strategists said.
"Neither Governor Poloz nor deputy governor Patterson saw any need to check the shift in expectations driven by Wilkins, and a decision to hold would call into question the BoC's credibility in terms of its communication."
Such a development would "likely be negative" for the loonie, driving it down to somewhere between just below or just above the 76-cent mark.
The (really) unexpected half-point hike
"We see this is the most underappreciated possible outcome and would assign it a slightly greater (though still miniscule) risk," said Mr. Osborne and Mr. Theoret, referring to what the market expects.
"Tightening 50 basis points in one go delivers fully on removing emergency accommodation and would blunt speculation regarding how quickly additional moves would come," they added.
"We think the only reason to go 50 basis points in one go would be to choke off speculative upward pressure on the CAD and would likely be delivered with a neutral-sounding policy statement that made it clear that no further rate increases were likely for some time."
This would push the currency up to between almost 79 cents and just below 79.5 cents, though "the markets would quickly move to book profits and drive the CAD lower again" to a range of just above 76 cents and just below 77 cents.
Read more
- Fed’s Yellen says economy steady enough for more hikes, bond wind down
- ‘Rate tantrum’: Poloz has some explaining to do
- David Berman: Banks that will profit most from a rate hike
- Ian McGugan: Potential rate hike at odds with inflation
- Rachelle Younglai: Strong Canadian job growth sets stage for rate hike
Stocks mixed
Global markets are on the rise so far.
Tokyo's Nikkei lost 0.5 per cent, and the Shanghai composite 0.2 per cent, while Hong Kong's Hang Seng gained 0.6 per cent.
European markets are rising across the board, with London's FTSE 100, Germany's DAX and the Paris CAC 40 up by between 0.9 and 1.1 per cent by about 8:35 a.m. ET.
New York futures were also up, and the Canadian dollar was just below 77.5 cents.
Read more
Home Capital names new CEO
Troubled mortgage lender Home Capital Group Inc. has chosen Yousry Bissada, a 57-year-old executive with experience in the mortgage industry, as its chief executive officer, The Globe and Mail's James Bradshaw reports.
Hiring a new chief executive was a crucial step in the company's turnaround plan.
After a crisis of confidence sparked a run on Home Capital's deposits earlier this year, pushing Home Capital to the brink, a refreshed board of directors secured support from Warren Buffett, whose firm Berkshire Hathaway Inc. is now the largest shareholder.