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Canada’s inverted yield curve adds to BoC rate hike dilemma

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TORONTO –

As the Bank of Canada considers ditching oversized interest rate hikes, it is dealing with an economy likely more overheated than previously thought but also the bond market’s clearest signal yet that recession and lower inflation lie ahead.

Canada’s central bank says that the economy needs to slow from overheated levels in order to ease inflation. If its tightening campaign overshoots to achieve that objective it could trigger a deeper downturn than expected.

The bond market could be flagging that risk. The yield on the Canadian 10-year government bond has fallen nearly 100 basis points below the two-year yield, marking the biggest inversion of Canada’s yield curve in Refinitiv data going back to 1994 and deeper than the U.S. Treasury yield curve inversion.

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Some analysts see curve inversions as predictors of recessions. Canada’s economy is likely to be particularly sensitive to higher rates after Canadians borrowed heavily during the COVID-19 pandemic to participate in a red-hot housing market.

“Markets think the Canadian economy is about to suffer a triple blow as domestic consumption collapses, U.S. demand weakens and global commodity prices drop,” said Karl Schamotta, chief market strategist at Corpay.

The BoC has opened the door to slowing the pace of rate increases to a quarter of a percentage point following multiple oversized hikes in recent months that lifted the benchmark rate to 3.75 per cent, its highest since 2008.

Money markets are betting on a 25-basis-point increase when the bank meets to set policy on Wednesday, but a slim majority of economists in a Reuters poll expect a larger move.

RESILIENT ECONOMY

Canada’s employment report for November showed that the labour market remains tight, while gross domestic product grew at an annualized rate of 2.9 per cent in the third quarter.

That’s much stronger than the 1.5 per cent pace forecast by the BoC and together with upward revisions to historical growth could indicate that demand has moved further ahead of supply, economists say.

But they also say that the details of the third-quarter GDP data, including a contraction in domestic demand, and a preliminary report showing no growth in October are signs that higher borrowing costs have begun to impact activity.

The BoC has forecast that growth would stall from the fourth quarter of this year through the middle of 2023.

The depth of Canada’s curve inversion is signaling a “bad recession” not a mild one, said David Rosenberg, chief economist  and strategist at Rosenberg Research.

It reflects greater risk to the outlook in Canada than the United States due to “a more inflated residential real estate market and consumer debt bubble,” Rosenberg said.

Inflation is likely to be more persistent after it spread from goods prices to services and wages, where higher costs can become more entrenched. Still, three-month measures of underlying inflation that are closely watched by the BoC – CPI-median and CPI-trim – show price pressures easing.

They fell to an average of 2.75 per cent in October, according to estimates by Stephen Brown, senior Canada economist at Capital Economics. That’s well below more commonly used 12-month rates.

“The yield curve would not invert to this extent unless investors also believed that inflation will drop back down toward the Bank’s target,” said Brown.

Like the Federal Reserve, the BoC has a two per cent target for inflation.

“The curve is telling us the Bank of Canada will be forced into a reversal by late 2023, with rates remaining depressed for years to come,” Corpay’s Schamotta said.

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Northwest Territories releases fiscal year 2023-2024 budget

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Northwest Territories releases fiscal year 2023-2024 budget

The Northwest Territories government released its new budget Wednesday, the last before the territorial election set for the fall.

Finance Minister Caroline Wawzonek said the plan aims to maintain the stability of the territory’s economy during times of “volatility and uncertainty” without reducing services and programs.

“I am confident that we are leaving the next assembly with a fiscally sustainable foundation on which to build,” she said.

The proposed $2.2-billion budget forecasts the territory will have an operating surplus of nearly $178 million. It projects revenue to increase by 2.9 per cent, largely due to an increase in federal transfers, while spending will increase by $187 million or 7.3 per cent compared to the previous budget.

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Wawzonek said initiatives to address the rising cost of living in the North include increasing student financial assistance, improved income assistance for seniors and people with disabilities, and support for non-government organizations.

“Students, seniors, the non-profit sector, these are areas where we can have a real impact and hopefully help mitigate the impacts of inflation,” she said.

Increased spending in the budget is to include $82 million for mandate priorities and enhancements to existing programs, as well as $62 million to cover the costs of flooding in 2022. Thousands of residents in Hay River and the nearby K’atl’odeeche First Nation reserve were ordered to evacuate their homes due to the worst flooding on record in May.

Other budget highlights include $10.9 million for the transition from the pandemic to endemic stage of COVID-19, $10.1 million to help recruit and retain front-line health-care workers, $10.3 million for the territory’s $10-a-day child-care agreement with the federal government, $8.3 million to help offset the effects of the increased carbon tax, and $4 million for core Northwest Territories Housing Corporation programs.

The budget also proposes $833,000 for community governments and $89,000 for the Deline Goti’ne Government to reach the territory’s goal of reducing its municipal funding gap by $5 million between 2019 and 2023.

The N.W.T. government is not proposing any new taxes, but property taxes are expected to increase due to inflation. The territory also plans to change its carbon tax system to align with new federal requirements.

The federal government announced in August 2021 it would increase the carbon price by $15 per tonne of carbon dioxide equivalent emissions annually, starting at $65 a tonne beginning in April and rising to $170 a tonne by 2030. It is also prohibiting rebates that directly offset the carbon tax. In response, the N.W.T. plans to adjust its carbon tax rates, replace its heating fuel rebate by increasing its cost of living offset, and replace a carbon tax rebate for large emitters with a rebate tied to a facility-specific baseline.

Some legislature members have expressed concern with the plan as heating costs are high in the North, especially in the Arctic, and many communities are reliant on diesel.

Wawzonek said if the proposed changes aren’t passed by the legislature, the federal government will determine how to return revenue to the N.W.T.

The territory projects borrowing will increase by 4.5 per cent, bringing its total debt to about $1.5 billion, which it said is well below the federally imposed limit of $1.8 billion.

When the previous budget was tabled a year ago, the territory expected its total debt to increase to more than $1.6 billion by the end of the fiscal year. In October, however, the territory revised its capital estimates or the amount of money it expected to spend on infrastructure, to better reflect the territory’s capacity to complete projects, reducing spending from more than $500 million to a cap of $260 million.

The territory’s 2022-2023 $2.1-billion budget saw a 2.3 per cent increase in spending compared to 2021-2022.

Wawzonek touted that budget as a sustainable plan, promising to not cut programming or add new taxes while limiting new spending.

While the budget was passed in April 2022, several legislature members opposed the plan, criticizing limited spending on communities outside of Yellowknife.

Wawzonek said at a news conference Wednesday that she suspects there may be similar criticisms of the new budget.

She said, however, that she believes the budget can respond to those concerns, adding she has had discussions with legislature members about what they wanted to see in it.

“I think we as a collective 19 are getting a little better at doing that,” she said.

“I actually think this is maybe going to be the best year for the consensus-style approach to passing a budget.”

This report by The Canadian Press was first published Feb. 8, 2023.

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This story was produced with the financial assistance of the Meta and Canadian Press News Fellowship.

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Driver charged with first-degree murder in Quebec daycare bus attack that killed two

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Quebec daycare bus attack

The driver of a bus that crashed into a suburban Montreal daycare this morning, killing two children, has been charged with two counts of first-degree murder.

Pierre Ny St-Amand, 51, appeared by video late this afternoon from a hospital room and will remain detained

Court documents show he faces a total of nine charges, including attempted murder, aggravated assault and assault causing bodily harm.

Six other children were injured and transported to hospitals in Laval and Montreal, but doctors said their lives were not in danger.

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At around 8:30 a.m., a Société de transport de Laval bus crashed into the daycare building, which sits at the end of a driveway a significant distance from the nearest bus route.

Witnesses who rushed to the scene said they had to subdue the driver, who seemed to be delirious and removed his clothing after getting off the bus.

This report by The Canadian Press was first published Feb. 8, 2023.

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Canadian assessment team deployed to Turkey after earthquake

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Canadian assessment team deployed to Turkey

A senior government official says a Canadian assessment team is on its way to Turkey to determine how Canada can contribute to earthquake relief efforts.

International Development Minister Harjit Sajjan was expected to formally announce the deployment of the Canadian Disaster Assessment Team this evening.

The senior official, who spoke on background pending Sajjan’s official confirmation, said the team consists of a handful of military and Global Affairs officials.

The official underscored that the deployment of the team does not automatically guarantee a further deployment of Canadian resources to the country.

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The earthquake, which razed thousands of buildings in Turkey and Syria on Monday, is one of the deadliest quakes worldwide in more than a decade and the federal government is facing criticism that the window to help with rescue efforts is closing.

Search teams from more than two dozen countries have joined tens of thousands of local emergency personnel and Canadian humanitarian aid workers with charitable organizations were arriving Wednesday

Defence Minister Anita Anand said late Tuesday that the federal government had not ruled out sending a Disaster Assistance Response Team, to help with the recovery effort, but that it was working to figure out what would be most useful.

The assessment team would recommend whether to send additional support, such as a DART.

Earlier Wednesday, Prime Minister Justin Trudeau announced the federal government would match funds donated to Canadian Red Cross relief efforts up to $10 million on top of an initial aid package of $10 million.

This report by The Canadian Press was first published Feb. 8, 2023.

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