The Bank of Canada’s move to come off the sidelines after a five-month pause has sent a signal that some economic pain will be needed to tame stubborn inflation, leading investors to raise bets on a hard landing for the economy.
The central bank is worried that the Canadian economy is running too hot for inflation to return to its two per cent target and that if it waits to act, inflation expectations could rise, making matters worse.
Immigration, a key source of strength for the economy, is growing at a record pace. But some other economic supports, such as pandemic-era savings, government spending and extending mortgage amortizations are likely to fade over the coming years, while an increasing share of home loans will renew at higher interest rates, analysts say.
That could mean the economy becomes more sensitive to increased borrowing costs just as consumers start to feel the effects of the Bank of Canada’s latest rate hikes. The central bank lifted its benchmark rate to a 22-year high of 4.75 per cent this month and is expected to tighten further in July or September.
A hard landing for the economy, or a recession, could raise unemployment, something the BoC has been hoping to avoid. It could also lead to a reversal of rate hikes, perhaps as soon as next year.
“If central banks such as the Bank of Canada continue to raise rates at this pace, they risk tilting the economy into a recession and forcing themselves into an eventual embarrassing climb down,” said Karl Schamotta, chief market strategist at Corpay.
“Markets are convinced that this is the exact scenario that is playing out.”
The BoC is not the only central bank that has turned more hawkish in recent weeks, but yield curve inversion, which is usually seen as a predictor of recession, is even more pronounced in the Canadian bond market than in the United States.
The Canadian 10-year rate CA10YT=RR has fallen further below the 2-year CA2YT=RR this month to a gap of about 130 basis points, marking the deepest inversion in Refinitiv data going back to 1994.
“The question is not what is the economy doing now. The question is what will the headlines be reading 12 months from now,” said David Rosenberg, chief economist and strategist at Rosenberg Research.
“I’m not going to be betting against interest rates and I’m not going to be betting against policy lags.”
The BoC says it takes between six and eight quarters for rate hikes to sink in.
Data on Tuesday showed Canadian inflation easing to its slowest pace in two years, but underlying price pressures remained strong and the BoC has said that GDP could outrun its one per cent growth projection for the second quarter, after rapid growth at the start of the year.
The data has left analysts pushing back their forecasts of a slowdown to later in 2023 or in 2024 but accompanied by higher than anticipated interest rates.
“What I think most economists would agree on is that the downside risks – the really severe downside risks – have increased in their likelihood of materializing,” said Royce Mendes, head of macro strategy at Desjardins.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets also climbed higher.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
This report by The Canadian Press was first published Sept. 13, 2024.
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in the base metal and energy sectors, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 172.18 points at 23,383.35.
In New York, the Dow Jones industrial average was down 34.99 points at 40,826.72. The S&P 500 index was up 10.56 points at 5,564.69, while the Nasdaq composite was up 74.84 points at 17,470.37.
The Canadian dollar traded for 73.55 cents US compared with 73.59 cents US on Wednesday.
The October crude oil contract was up $2.00 at US$69.31 per barrel and the October natural gas contract was up five cents at US$2.32 per mmBTU.
The December gold contract was up US$40.00 at US$2,582.40 an ounce and the December copper contract was up six cents at US$4.20 a pound.
This report by The Canadian Press was first published Sept. 12, 2024.
