Author: Consultant

Bank of Canada delivers quarter-point rate hike, signals pause to further increases

The Bank of Canada increased its benchmark interest rate by a quarter of a percentage point, but said that it expects to hold off further rate hikes, making it the first major central bankto say it would pause monetary policy tightening.

This is the eighth consecutive rate increase, and brings the bank’s policy rate to 4.5 per cent.

“We have raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2-per-cent target,” Bank of Canada Governor Tiff Macklem said in a news conference.

“To be clear, this is a conditional pause,” Mr. Macklem added. “If we need to do more to get inflation to the 2-per-cent target, we will.”

The bank lowered its forecast for inflation on Wednesday. It also reiterated that it expects the economy to “stall” in the first half of the year, but does not foresee a significant recession.

The widely expected decision marks a turning point for the central bank. Over the past year, it has pushed Canadian borrowing costs rapidly higher to combat runaway inflation. Now, with price pressures easing and the economy slowing, the bank has said that interest rates are likely as high as they need to go.

The bank now expects consumer price index inflation to fall to about 3 per cent by the middle of this year, and to 2.6 per cent by the fourth quarter. It sees inflation returning to the 2-per-cent target in 2024.

The annual rate of inflation remains well above those levels, clocking at 6.3 per cent in December. But that is down from a peak of 8.1 per cent in June. Price pressures continue to ease thanks to a drop in oil prices and improvements in global supply chains, plus the slowing effects on the economy of the bank’s rate increases.

The average price of gasoline, for instance, has fallen from about $2 a litre last summer to about $1.50 in January, the bank noted in its quarterly Monetary Policy Report (MPR), published Wednesday.

“While the Bank did not rule out future rate hikes entirely, the new guidance reinforces our view that the Bank’s next move is likely to be a rate cut, albeit not until later this year,” Stephen Brown, senior Canada economist at Capital Economics wrote in a note to clients.

The expected drop in inflation comes alongside a slowdown in the Canadian economy. The bank expects growth to flatline through the first half of 2023, as higher borrowing costs squeeze Canadians’ finances and weigh on consumer spending and business investment.

“It’s just as likely that we’ll have two- or three-quarters of slightly negative growth as slightly positive growth,” Mr. Macklem said. “So yes, it could be a mild recession. It’s not a major contraction.”

“We do need this period though of essentially no growth to allow supply to catch up,” he added. “But I don’t want to pretend that it’s painless. It’s not painless.”

So far, the Canadian economy has proven more resilient than expected. Unemployment is near a record low and consumer spending has remained relatively robust. But there is “growing evidence that restrictive monetary policy is slowing activity,” the bank said.

Higher interest rates hammered the housing market in 2022, and consumers have begun to cut spending on big-ticket items. The bank expects spending to slow further as homeowners renew their mortgages at higher interest rates and nervous shoppers trim non-essential purchases.

“The rise in borrowing costs is expected to continue to strain many household budgets. Interest payments on household mortgages are estimated to be about 4.5 per cent of disposable income at the beginning of 2023, up from 3.2 per cent at the beginning of 2022,” the bank said in the MPR.

The bank is intentionally using interest rates to slow the economy and inflation. The goal is reducing spending on goods and services to bring overall demand in line with supply, which eases price pressures.

The bank says that the economy remains in a position of “excess demand.” This is most visible in the labour market, where unemployment is low and businesses continue having trouble finding enough workers. This is fuelling wage growth and feeding through into inflation, particularly in the service sector.

The bank has argued that unemployment will need to rise to get inflation back to target.

“With the pace of wage growth no longer increasing, the risk of a wage-price spiral has declined. However, unless a surprisingly strong pickup in productivity growth occurs, sustained 4 per cent to 5 per cent wage growth is not consistent with achieving the 2 per cent inflation target,” the bank said.

There are other risks to the inflation outlook, the bank said. Service prices could prove “stickier” than expected. Oil prices could also rise more than anticipated, depending on what happens with the war in Ukraine and China’s reopening from COVID-19 lockdowns.

U.S. business activity contracted for seventh straight month in January, but outlook perks up

U.S. business activity contracted for the seventh straight month in January, though the downturn moderated across both the manufacturing and services sectors for the first time since September and business confidence strengthened as the new year began.

At the same time, however, a survey from S&P Global out Tuesday showed price pressures ticking higher for the first time since last spring, indicating that inflation is far from licked despite aggressive measures to contain it by the U.S. Federal Reserve. That lifts the odds the U.S. central bank may need to keep up the pressure through higher interest rates, including at next week’s first policy meeting of the year.

S&P Global’s Flash U.S. Composite Output Index rose to 46.6 in January – with readings below 50 indicating contraction in activity – from a final reading of 45.0 in December. While that was the highest in three months, companies still reported demand was soft and high inflation was a headwind to customer spending.

On the manufacturing side, S&P Global’s flash Manufacturing PMI came in at 46.8 this month, up from 46.2 in December and exceeding the median estimate of 46.0 in a poll of economists by Reuters.

In the vast services sector, accounting for two-thirds of U.S. economic output, the pace of contraction moderated to 46.6 in January from 44.7 last month. That also exceeded the median estimate in the Reuters poll of 45.0.

Meanwhile, the survey’s measures of input prices for both services firms and goods producers rose month-over-month for the first time since May.

“The worry is that, not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.

Last year the Fed – after being slow to recognize that surging inflation was not the transitory phenomenon it had hoped it would be – raised its benchmark rate from near zero in March to a range of 4.25 per cent to 4.50 per cent in December. It was the most aggressive monetary policy tightening since the 1980s and was aimed at bringing inflation back to its target of 2 per cent annually.

After peaking at 7 per cent in June, inflation by the Fed’s preferred measure had receded to 5.5 per cent as of November. That gauge – the Personal Consumption Expenditures price index – will be updated for December later this week, and while it is seen having moderated further last month, it remains far too high for the liking of Fed officials meeting next week on Jan. 31-Feb. 1. Another quarter-percentage point increase is expected enroute to a policy rate officials see rising above 5 per cent this year.

The S&P Global survey is the latest indicator to show the U.S. economy is cooling off – largely in response to the Fed’s rate hikes – but whether it falls into recession remains an unsettled issue. Even as consumer demand for goods has shown notable cooling as Fed rate hikes make purchases like homes and motor vehicles more expensive, other indicators signal demand for services remains on more solid footing.

Moreover, despite growing anecdotal evidence of companies reducing hiring and in some cases laying off staff, the U.S. job market remains tight. There has been little by way of an increase in jobless benefits rolls as the new year began, and the national unemployment rate was 3.5 per cent in December, back to the half-century lows recorded right before the pandemic.

The S&P Global survey’s forward-looking indexes did show improved confidence in the outlook, indicating businesses expect the situation to improve later in the year.

“The pickup in positive sentiment was broad-based, with companies hopeful of a resurgence in customer demand as 2023 progresses,” it said.

Bank of Canada to raise rates by 25 basis points to peak of 4.5% on Jan. 25, poll suggests

The Bank of Canada will hike its key interest rate by a modest quarter point to 4.50 per cent on Jan. 25 and then hit pause on an aggressive tightening campaign, according to a Reuters poll of economists, with risks skewed toward a higher peak.

Inflation, which clocked 6.3 per cent in December, is still more than three times the bank’s 2 per cent target and is expected to remain above it at least through Q3 2024, despite a median 65 per cent chance of recession within a year, up from 51 per cent in the last poll.

That leaves the BoC in a tight spot, having been inclined to pause its rate-hiking campaign in December but with recent economic data on jobs and inflation suggesting it may not be quite done.

A strong majority of 90 per cent of economists, 26 of 29, expected a quarter-point rise on Jan. 25 to 4.50 per cent, according to a Jan. 17-20 Reuters poll, in line with interest rate futures. The other three expected no change.

The BoC has hiked rates by a cumulative 400 basis points since March 2022. That is slightly less than the U.S. Federal Reserve, which is expected to deliver two more 25 basis hikes this quarter, according to a separate Reuters poll.

“The big risk to our forecast that a 25 bp hike next week will mark the end of the tightening cycle is that the Bank is more concerned than we judge about inflation expectations and the tight labour market, which could prompt it to raise interest rates further,” said Stephen Brown, senior Canada economist at Capital Economics.

“Rather than raise interest rates much further, the bigger risk to our policy rate forecasts is that the Bank will probably keep rates high for longer than we currently assume.”

The BoC is then expected to keep its overnight rate on hold at 4.50 per cent for the remainder of the year, poll medians showed. There were just two forecasts for the terminal rate to reach 4.75 per cent in coming months.

Still, slightly more than two-thirds of respondents, 14 of 20, said the risks to their forecasts were skewed towards a higher terminal rate.

Respondents to an additional question were almost evenly split on whether the BoC was more likely to hold rates for at least the rest of the year than cut them. About 55 per cent, or 16 of 29, expected it to hold, while the remaining 13 saw a cut.

In the meantime, nearly three-quarters of economists in the latest poll had an official forecast that expects a recession to start this quarter and last until the third quarter. That is in line with a recent BoC survey which showed most firms now think a recession is likely.

“We expect a relatively mild recession with an increase in the unemployment rate of slightly less than 2 percentage points, which would be on the lower end of historical recessions,” said Josh Nye, senior economist at RBC.

The Canadian economy generated many more new jobs in December than forecast and the jobless rate unexpectedly declined to 5.0 per cent from 5.1 per cent. It was forecast to rise to 6.2 per cent in the third quarter and average 6.1 per cent next year, according to medians from the poll.

Economic Calendar: Jan 23 – Jan 27

Monday January 23

Euro zone consumer confidence

(8:30 a.m. ET) Canada’s new housing price index for December. Estimate is a decline of 0.2 per cent from November and a 3.7-per-cent increase year-over-year.

(10 a.m. ET) U.S. leading indicator for December. Estimate is a month-over-month dip of 0.7 per cent.

Earnings include: Baker Hughes Co.; Brown & Brown Inc.

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Tuesday January 24

Japan and Euro zone PMI

Germany consumer confidence

Earnings include: Canadian National Railway Co.; Danaher Corp.; General Electric Co.; Johnson & Johnson; Lockheed Martin Corp.; Metro Inc.; Microsoft Corp.; Raytheon Technologies Corp.; Texas Instruments Inc.; Union Pacific Corp.; Verizon Communications Inc.; 3M Co.

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Wednesday January 25

Germany business climate

(8:30 a.m. ET) Canadian manufacturing sales for December.

(10 a.m. ET) Bank of Canada’s policy announcement and monetary policy report with Governor Tiff Macklem’s press conference to follow.

Earnings include: Abbott Labratories; AT&T Inc.; Boeing Co.; Celestica Inc.; CSX Corp.; Freeport-McMoran Inc.; IBM; NextEra Energy Inc.; Novagold Resources Inc.; Tesla Inc.

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Thursday January 26

Japan machine tool orders

(8:30 a.m. ET) Canada’s Survey of Employment, Payrolls and Hours for November.

(8:30 a.m. ET) Canadian wholesale trade for December.

(8:30 a.m. ET) U.S. GDP for Q4. The Street is expecting an annualized rate rise of 2.6 per cent.

(8:30 a.m. ET) U.S. durable goods and core orders for December. The consensus forecasts are a month-over-month rise of 2.9 per cent and a decline of 0.2 per cent, respectively.

(8:30 a.m. ET) U.S. goods trade deficit for December.

(8:30 a.m. ET) U.S. wholesale and retail inventories for December.

(8:30 a.m. ET) U.S. initial jobless claims for week of Jan. 21. Estimate is 210,000, up 20,000 from the previous week.

(10 a.m. ET) U.S. new home sales for December. The Street is projecting an annualized rate decline of 3.1 per cent.

Earnings include: Comcast Corp.; Dow Inc.; Intel Corp.; Mastercard Inc.; Nucorp Corp.; Visa Inc.

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Friday January 27

Japan CPI

(8:30 a.m. ET) U.S. personal spending for December. The Street is estimate a decline of 0.1 per cent from November with personal income rising 0.2 per cent.

(8:30 a.m. ET) U.S. Core PCE Price Index for December. Consensus is an increase of 0.3 per cent from November and up 4.4 per cent year-over-year.

(10 a.m. ET) U.S. pending home sales for December. Consensus is a decline of 1.0 per cent from November.

(10 a.m. ET) U.S. University of Michigan consumer sentiment for January.

Also: Ottawa’s budget balance for November.

Earnings include: Real Matters Inc.

Canada CPI Inflation Cools to 6.3% in December — 2nd Update

OTTAWA–Inflation in Canada cooled slightly more sharply than anticipated in December but some price pressures remain sticky, doing little to damp expectations there is at least one more increase in interest rates to come.

The pace of inflation overall continues to ease, pulling back from the peak seen in the summer, thanks in large part to a big monthly drop in prices at the pump. But consumers continue to pay more for groceries and other items and core measures of inflation closely tracked by the Bank of Canada remain elevated. The central bank will also weigh the fact inflation expectations continue to run hot when it meets to decide on monetary policy next week.

Canada’s consumer price index rose 6.3% in December from a year earlier, Statistics Canada said Tuesday. That was modestly below the 6.4% increase expected by the market and down from November’s 6.8% increase. The index hit a roughly four-decade high of 8.1% in June.

Compared with the month before, CPI declined 0.6% in December, the largest monthly retreat since April 2020 and a slightly bigger drop than the consensus expectation for a fall of 0.5% month-over-month. On a seasonally adjusted basis, inflation slipped 0.1% in December from November.

“Canadians continue to feel the pinch, but December was one of the most optimistic prints yet in the long and painful fight for price stability,” said Marc Desormeaux, principal economist at Desjardin.

Still, Mr. Desormeaux said the latest data doesn’t alter his view the Bank of Canada will raise rates a further one-quarter percentage point this month, particularly after the strong jobs report for December and a central bank survey out this week showing still-elevated inflation expectations argue for more tightening.

With a pullback in crude-oil prices for the month, gasoline prices as expected were the biggest drag on monthly inflation in December. The price of gas on a monthly basis fell the most since April 2020 and was up only modestly compared with a year earlier. However, while prices for food from stores rose at a slower pace in December, annual grocery inflation remained elevated, hovering around 11% for the last five months.

Excluding volatile food and energy prices, Canada’s CPI rose 5.3% in December from a year earlier, after a 5.4% gain in November.

Two measures of core inflation the Bank of Canada closely monitors, median and trim, eased slightly in December to an average 5.2% from 5.3% the month before, Statistics Canada said.

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The central bank, which aggressively lifted its benchmark policy rate in 2022 to its highest in almost 15 years, has forecast inflation will decline to roughly 3% late this year and return to its 2% target by the end of 2024. Still, the bank’s survey of businesses released this week showed that more than 80% of firms expect inflation to be above 3% over the next two years.

The bank has said it will be more data-dependent in future rate decisions as it watches how the economy responds to the four-percentage-point increase in its benchmark rate over the course of the year, bringing it to 4.25%. Economists suggested the odds tilted in favor of another increase on Jan. 25 after the country added a stronger-than-anticipated 104,000 jobs in December and the unemployment rate ticked down closer to the record low recorded in the summer.

Benjamin Reitzes, managing director of Canadian rates and macro strategist at Bank of Montreal, said the slow pace of improvement in core inflation will bring little comfort to policymakers.

“Underlying price pressures remain sticky for now,” he said, adding that while the direction of inflation is at least mildly encouraging, he saw nothing in December’s CPI report to keep the Bank of Canada from lifting rates another quarter-point next week.

TD Securities similarly said the most prudent move for the central bank would be one last quarter-point rise rather than risking falling behind the curve.

Over the course of last year, CPI rose 6.8% on an annualized average basis, the fastest pace since 1982, after an average rise of 3.4% the year before and 0.7% in 2020. Price increases were broad-based, with gains in the cost of day-to-day basic such as transportation, food and shelter rising the most, the data agency said. Still, it noted that relatively large month-over-month price movements seen from January to June last year will stop influencing annual price movements when higher prices from 2022 are used as the basis for year-over-year comparisons.

As China reopens and data surprises, economists are starting to get less gloomy

• Barclays on Friday raised its global growth forecast to 2.2% in 2023, up 0.5 percentage points from its last estimate in mid-November.
• Berenberg also upgraded its euro zone forecast in light of recent news flow, particularly falling gas prices, a consumer confidence recovery and a modest improvement in business expectations.
• TS Lombard on Friday lifted its euro area growth forecast from -0.6% to -0.1% for 2023.

https://www.cnbc.com/2023/01/16/as-china-reopens-and-data-surprises-economists-are-starting-to-get-less-gloomy.html

Goldman Sachs posts its worst earnings miss in a decade as revenue falls while expenses rise

• Here’s what the company reported: Earnings of $3.32 per share vs. $5.48 estimate of analysts surveyed by Refinitiv
• Revenue of $10.59 billion vs. $10.83 billion estimate
• Shares of the New York-based bank fell more than 6% in early trading

https://www.cnbc.com/2023/01/17/goldman-sachs-fourth-quarter-results-are-coming-what-the-street-expects.html

As China reopens and data surprises, economists are starting to get less gloomy

• Barclays on Friday raised its global growth forecast to 2.2% in 2023, up 0.5 percentage points from its last estimate in mid-November.
• Berenberg also upgraded its euro zone forecast in light of recent news flow, particularly falling gas prices, a consumer confidence recovery and a modest improvement in business expectations.
• TS Lombard on Friday lifted its euro area growth forecast from -0.6% to -0.1% for 2023.

https://www.cnbc.com/2023/01/16/as-china-reopens-and-data-surprises-economists-are-starting-to-get-less-gloomy.html

Economic Calendar: Jan 16 – Jan 20

Monday January 16

U.S. markets closed (Martin Luther King Jr. Day)

Japan machine tool orders

(8:30 a.m. ET) Canadian manufacturing sales and new orders for November. Analyst estimates are month-over-month increases of 0.5 per cent and 0.6 per cent, respectively.

(8:30 a.m. ET) Canadian construction investment for November.

(9 a.m. ET) Canada’s existing home sales and average prices for December. Estimates are year-over-year declines of 39.5 per cent and 11.5 per cent, respectively.

(9 a.m. ET) Canada’s MLS Home Price Index for December. Estimate is a year-over-year decline of 7.5 per cent.

(10:30 a.m. ET) Bank of Canada’s Business Outlook Survey and Survey of Consumer Expectations for Q4 are released.

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Tuesday January 17

China real GDP, industrial production, retail sales and fixed asset investment

Germany CPI

Bank of Japan monetary policy meeting and outlook report (through Wednesday)

(8:15 a.m. ET) Canadian housing starts for December. The Street is expecting an annualized rate drop of 2.5 per cent.

(8:30 a.m. ET) Canada’s CPI for December. Analysts expect a decline of 0.6 per cent from November but an increase of 6.3 per cent year-over-year.

(8:30 a.m. ET) Canadian international securities transactions for November.

(8:30 a.m. ET) U.S. Empire State Manufacturing Survey for January.

Earnings include: Goldman Sachs Group Inc.; Morgan Stanley; United Airlines Holdings Inc.

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Wednesday January 18

Japan core machine orders and industrial production

Euro zone CPI

(8:30 a.m. ET) Canadian industrial product and raw materials price indexes for December. Estimates are flat and a decline of 3.0 per cent month-over-month, respectively.

(8:30 a.m. ET) U.S. retail sales for December. The Street expects a decline of 0.8 per cent from November.

(8:30 a.m. ET) U.S. PPI Final Demand for December. Consensus is a month-over-month drop of 0.1 per cent but a year-over-year rise of 6.7 per cent.

(9:15 a.m. ET) U.S. industrial production for December. The Street is forecasting a 0.1 per cent decline from November with capacity utilization also falling 0.1 per cent to 79.6 per cent.

(10 a.m. ET) U.S. NAHB Housing Market Index for January.

(10 a.m. ET) U.S. business inventories for November. Consensus is an increase of 0.4 per cent from October.

(2 p.m. ET) U.S. Beige Book is released.

(4 p.m. ET) U.S. net TIC flows for November.

Earnings include: Alcoa Corp.; Charles Schwab Corp.; Discover Financial Services; Kinder Morgan Inc.; PNC Financial Services Group Inc.; Prologis Inc.

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Thursday January 19

Japan trade deficit

(8:30 a.m. ET) Canada’s wholesale trade for November. Estimate is a month-over-month increase of 0.9 per cent.

(8:30 a.m. ET) Canadian household and mortgage credit for November.

(8:30 a.m. ET) Canadian new motor vehicle sales for November. Estimate is a rise of 6.0 per cent year-over-year.

(8:30 a.m. ET) U.S. initial jobless claims for week of January 14. Estimate is 212,000, a rise of 7,000 from the previous week.

(8:30 a.m. ET) U.S. existing home sales for December. Consensus is an annualized rate decline of 4.7 per cent.

(8:30 a.m. ET) U.S. building permits for December. Consensus is an annualized rate increase of 1.4 per cent.

Earnings include: American Airlines Group; Netflix Inc.; Procter & Gamble Co.; Richelieu Hardware Ltd.; Truist Financial Corp.

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Friday January 20

Japan CPI

Germany PPI

(8:30 a.m. ET) Canadian retail sales for November. The consensus estimate is a decline of 0.6 per cent from October.

(10 a.m. ET) U.S. existing home sales for December. The Street expects an annualized rate drop of 3.4 per cent.

Earnings include: Schlumberger NV; State Street Corp.