‘Rate hikes are over and done’: How today’s GDP surprise has shifted the views of economists and markets

OPINION

Weaker-than-expected second-quarter gross domestic product data this morning has money markets pricing in stronger odds that the Bank of Canada is done hiking rates for this economic cycle.

Canada’s economy unexpectedly contracted in the second quarter at an annualized rate of 0.2%, while real GDP was most likely unchanged in July after a 0.2% fall in June, Statistics Canada said Friday.

The second-quarter reading was far lower than the Bank of Canada’s forecast for a 1.5% annualized GDP growth as well as the 1.2% gain expected by analysts.

The quarterly slowdown was largely due to declines in housing investment, smaller inventory accumulation, as well as slower international exports and household spending, Statistics Canada said.

The month-over-month decline in June was in line with forecasts. Statscan also downwardly revised May GDP growth to a 0.2% increase from an initial report of 0.3% growth. First-quarter annualized growth rate was also downwardly revised to 2.6% from 3.1%.

Friday’s GDP report is the last major piece of domestic data before the Bank of Canada makes its next policy decision next week.

Credit markets have quickly reassessed the odds that the bank will further hike interest rates at next week’s meeting and they are now signalling very strong odds – about 91% – that the BoC will hold rates steady, according to Refinitiv Eikon data that’s based on implied probabilities in the swaps market. That’s up from about 79% odds of no change prior to the 0830 am ET GDP release.

Here’s a detailed look at how money markets are pricing in further moves in the Bank of Canada overnight rate, as of 0840 am ET. The current Bank of Canada overnight rate is 5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.

Beyond the September meeting, money markets are also now pricing in much stronger odds that the bank won’t hike rates any further through the course of this year and next. By next June, money markets are now pricing in nearly 50% odds that the bank would have implemented a rate cut.