The Big Canadian Banks Weigh In On The Bank Of Canada Following Today's Monetary Policy Decision

BMO: The BoC appears very patient at this juncture, with little appetite to move in January despite the near-record low jobless rate. They will be minding NAFTA progress (or otherwise), any early impacts from the OSFI rule change at the start of 2018, and how Q4 growth, wages and prices shape up. We continue to have the March meeting circled for the next rate hike (with two more in H2 next year), but will be like the Bank in watching NAFTA and housing in particular.

CIBC: It was always going to be a wait-and-see decision, but today's Bank of Canada statement also didn't offer a clarion call on just how long they will be waiting and seeing before raising rates again. Further rate hikes are still coming, but even if they move ahead of our April target, that needn't mean that we'll see more than 50 basis points in total next year, given the Bank's emphasis on being cautious on that front. The statement acknowledged recent upside surprises on employment and the rebound in exports, and added the phrase citing "diminishing" labour market slack, but still said that, overall, the picture is "in line" with their last published outlook. The only real dovish note was that they hinted that potential GDP might be faster than earlier estimated. Hawks may be slightly disappointed by the lack of a clear signal of a January hike, but that really isn't their style, and instead, we like others, will have to watch upcoming data on October GDP and December employment to fine tune forecasts for when the next hike comes.

RBC: The Bank of Canada delivered a fairly neutral statement today in a widely expected decision to maintain the overnight target rate at 1.00%. The central bank maintained a tightening bias overall (i.e., “higher interest rates will likely be required over time”), but also reiterated that they will be cautious on the timing of any hikes due to uncertainties around “the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.” Ahead of today’s statement, there was interest in how the Bank might interpret the strong November jobs report (which included a 0.4pp drop in the unemployment rate as well as firmer average hourly earnings growth of 2.7% beyond a headline job gain of 79.5k). In the event, they took a balanced stance on the monthly report. They acknowledged that “employment growth has been very strong and wages have shown some improvement” but they also noted that “…despite rising employment and participation rates, other indicators point to ongoing – albeit diminishing – slack in the labour market.” More importantly, with Q3 GDP growth close to the Bank’s MPR forecast (1.7% versus 1.8% projected), the Bank could legitimately say that “…recent Canadian data are in line with October’s outlook”. Recently completed interviews for the Bank’s Business Outlook Survey – which will be released on January 8th – may colour Governor Poloz’s remarks in his speech next Thursday, in particular how some of the uncertainties outlined in today’s statement, including “geopolitical developments and trade policies” may be weighing on capital spending and hiring plans by Canadian businesses.  The odds of a January rate hike had been close to 50% before today’s statement and they have receded to about 32% now – which seems about right to us. Our base case remains for the next move to come in April.

Scotiabank: Overall, the BoC remains in data dependent mode, unconvinced to change its bias by the broad tone of recent data relative to its October MPR forecasts and more mindful of ongoing uncertainties like NAFTA negotiations than backward looking data in any event. Scotia’s BoC forecast remains for a policy hold until April. In fact, think the BoC’s focus is more upon the risk of hiking in response to (mixed) backward looking data that over-hypes future inflation risk only to then get a ‘dear john’ letter from the Trump administration that would make it look rather foolish for having tightened policy in the face of a rising risk to one-third of the economy that is driven by exports. There is obviously a limit to the point to which monetary policy can be put on hold by never ending uncertainties, but I simply don’t buy that the data is screaming out that this limit is being breached now or that the BoC’s inflation target range of 1–3% is at risk of being materially overshot in the projection horizon. Governor Poloz is well aware of years of model-based forecasts for a return to 2% inflation that haven’t worked out and I think his bias is to wait for much clearer evidence the projections will be right this time and being patient in the meantime. One key is that the statement takes a broadly neutral stance on the evolution of data relative to its expectations and forecasts. The BoC stated “Recent Canadian data are in line with October’s outlook…” That pretty clearly—and rightly in my opinion—says that the BoC is looking at more than just the latest and greatest jobs report. Please see the morning note for a run down on the other high frequency data since the October statement. Other data references traded off against each other by noting “very strong” jobs and “some improvement” to wage growth while driving “robust” consumption but acknowledging that exports “declined by more than expected” in Q3 while expecting the resumption of export growth. There are, however, two data observations that struck me as somewhat odd which might imply that if future data doesn’t reinforce a possible data filter bias then references to them may be at risk of revision. One is that the BoC says that “measures of core inflation have edged up in recent months” which would have been a fairer depiction in the September or even the October report but less so now that the average of the core measures has been stuck at 1.6% for each of the past three months. Will the BoC have to soften such a reference if core inflation doesn’t average out higher over the next one or more months? Can you still say that if core inflation is stuck unchanged for 4, 5, 6 or more months? We’ll see, conditioned by data that no one in consensus tries to credibly forecast for monthly core inflation readings. Secondly, the BoC didn’t flag any concern about business investment given gains in Q3 but it could well have done so given three months of declining imports of machinery and equipment given Canada imports most of its capital goods. Again, the evolution of data will inform how strongly they stand by this remark in January onward. On headline inflation, the BoC noted that “temporary factors, particularly gasoline prices” are boosting headline inflation which implies at least a partial bias to look through some of the rise. The BoC targets headline with core as the operational guide and they’re saying headline isn’t a big worry near-term. Last, the BoC continues to see slack “albeit diminishing” in the labour market regardless of very strong job gains. Some measures they and others have tended to cite have included the labour force participation rate that is still hovering around cycle lows, people working part-time who would prefer full-time work, shrinking average weekly hours worked over the years etc. Indeed, if wage growth accelerates as we think, then in theory that should attract more contestants into the work force to contest higher pay.

06 Dec 2017 - 16:46- Fixed IncomeData- Source: BMO/CIBC/RBC/Scotiabank

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