Economy

Canada among investors’ favourite bets for sooner-than-expected interest rate cut

Published

1 year ago

June 20, 2023

The Bank of Canada building in Ottawa. Photo by Sean Kilpatrick/The Canadian Press files

A growing chorus of investors is buying bonds from certain developed nations where they believe interest rates will be cut sooner and faster than many economists expect.

Australia and Sweden are among money managers’ favourite markets for such trades, along with South Korea, Norway, New Zealand and Canada. What they all have in common is an economy battered by highly leveraged households, and a market that has not priced in rate relief so soon.

It’s the opposite of what’s going on in the U.S., where traders have been fading bets on rate cuts this year after stronger-than-expected activity data. While the Federal Reserve is seen reducing rates early next year, the Reserve Bank of Australia and the Riksbank are only seen easing later in 2024.

“The U.S. economy is structurally healthier and able to withstand higher rates for longer than those economies with household leverage imbalances,” said Iain Cunningham, a portfolio manager at Ninety-One Asset Management.

Cunningham has been buying government bonds from Australia, New Zealand, South Korea, and, to a lesser extent, Sweden, since mid-2022, based on the view that the market is wrong in pricing in rate cuts will take so long to come into place.

Investors holding those bets argue that these economies are way more exposed to higher interest rates than the U.S. due to their more elevated household debt levels, and the full effect of their tightening cycles is yet to kick in.

Household debt accounts for about 190 per cent of gross domestic product in Australia, Sweden and South Korea, according to the latest available OECD data referring to the end of 2021. That compares with a ratio of around 95 per cent in the U.S. and Germany.

“As we go into late 2023 and early 2024, we may see a situation where rates are coming down fairly quickly in these economies relative to the U.S. or Europe,” said Martin Harvey, a portfolio manager at Hartford World Bond Fund.

Since late last year, Harvey has increased his exposure to Sweden, Norway and Australia, with the latter being the U.S.-based fund’s biggest exposure excluding Treasuries.

While Australia surprised markets this month by raising interest rates, minutes from the meeting show that the decision was a finely balanced one, given risks to the economy and employment, and Harvey doesn’t rule out cuts later this year as the economy slows. That goes against swaps pricing, which implies the key rate being lifted by an additional 54 basis points to 4.64 per cent by December before cuts begin in the second half of 2024.

In Sweden, markets price roughly 40 basis points in additional hikes by November, according to calculations by SEB, before policy starts to loosen around mid-2024. Pictet Asset Management is mulling increasing its exposure to the nation’s bonds as it expects that excessive tightening by the Riksbank will further hurt the economy, requiring more rate cuts.

Brendan Murphy, a portfolio manager at Insight Investment, which manages around US$1 trillion, is buying South Korean bonds betting the country could take a relatively big hit if global economic growth slows in the coming months.

South Korea’s central bank held policy rates unchanged for a third straight meeting in May, while reinforcing a message that another hike may be possible amid sticky inflation. Prior to the BOK’s announcement, investors and many analysts were betting on rate cuts in Korea later this year, as risks to economic growth build.

“The danger for markets, and risk assets in particular, is that central banks effectively have to sacrifice growth to get inflation back under control,” Ninety-One’s Cunningham said.

— with assistance from Alice Gledhill

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Economy

Minimum wage to hire higher-paid temporary foreign workers set to increase

Published

1 day ago

October 21, 2024

Anne Joseph

OTTAWA – The federal government is expected to boost the minimum hourly wage that must be paid to temporary foreign workers in the high-wage stream as a way to encourage employers to hire more Canadian staff.

Under the current program’s high-wage labour market impact assessment (LMIA) stream, an employer must pay at least the median income in their province to qualify for a permit. A government official, who The Canadian Press is not naming because they are not authorized to speak publicly about the change, said Employment Minister Randy Boissonnault will announce Tuesday that the threshold will increase to 20 per cent above the provincial median hourly wage.

The change is scheduled to come into force on Nov. 8.

As with previous changes to the Temporary Foreign Worker program, the government’s goal is to encourage employers to hire more Canadian workers. The Liberal government has faced criticism for increasing the number of temporary residents allowed into Canada, which many have linked to housing shortages and a higher cost of living.

The program has also come under fire for allegations of mistreatment of workers.

A LMIA is required for an employer to hire a temporary foreign worker, and is used to demonstrate there aren’t enough Canadian workers to fill the positions they are filling.

In Ontario, the median hourly wage is $28.39 for the high-wage bracket, so once the change takes effect an employer will need to pay at least $34.07 per hour.

The government official estimates this change will affect up to 34,000 workers under the LMIA high-wage stream. Existing work permits will not be affected, but the official said the planned change will affect their renewals.

According to public data from Immigration, Refugees and Citizenship Canada, 183,820 temporary foreign worker permits became effective in 2023. That was up from 98,025 in 2019 — an 88 per cent increase.

The upcoming change is the latest in a series of moves to tighten eligibility rules in order to limit temporary residents, including international students and foreign workers. Those changes include imposing caps on the percentage of low-wage foreign workers in some sectors and ending permits in metropolitan areas with high unemployment rates.

Temporary foreign workers in the agriculture sector are not affected by past rule changes.

This report by The Canadian Press was first published Oct. 21, 2024.

— With files from Nojoud Al Mallees

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Economy

PBO projects deficit exceeded Liberals’ $40B pledge, economy to rebound in 2025

Published

5 days ago

October 17, 2024

Anne Joseph

OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.

However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.

The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.

Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.

The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.

The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.

This report by The Canadian Press was first published Oct. 17, 2024.

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Economy

Statistics Canada says levels of food insecurity rose in 2022

Published

6 days ago

October 16, 2024

Anne Joseph

OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.

In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.

The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.

Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.

In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.

It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.

This report by The Canadian Press was first published Oct 16, 2024.

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