As expected, the BoC raised interest rates

Posted: Thursday, October 25, 2018 - 08:34 EDT

As expected, the Bank of Canada raised interest rates by 25bps moving the overnight rate to 1.75%.  Within the monetary policy statement, the central bank did acknowledge that the USMCA agreement will reduce trade uncertainty going forward, but the trade conflict between the U.S. and China continues to weigh on global growth.  The new trade deal also reflects improved expectations for future business investment and exports, although lack of pipeline capacity will continue to constrain commodity prices.  The tone of the statement leaned towards a hawkish stance after removal of the word ‘gradual’ in the statement related to the pace of future hikes.  Deputy Governor Wilkens explained the decision to change the rhetoric during the press conference indicating that this would allow the BOC more flexibility in its rate policy by either moving faster or slower depending upon the pace of the economy and inflation pressures.  Inflation is expected to hover around 2% through to 2020 and GDP growth of 2.1% in 2018 and 2019.  The BOC will remain focused on adjusting policy rates back to neutral as policy rates remain negative in real terms.  One outstanding risk persists in the housing markets as higher interest rates could lead to vulnerabilities due to higher consumer debt.

Following the Bank of Canada announcement, the Canadian dollar rallied against the U.S. dollar by almost a penny, although the risk-off sentiment yesterday led to a flight-to-quality bid on the U.S. dollar.  In the front-end of the curve, the rate hike was mostly priced in so yields on 3-month and 1-year bills only increased by approximately 2-3bps to end the day.  In the Canadian corporate credit market, sentiment followed equity markets that continued to put pressure on spreads.  Flows were understandably skewed towards client selling although volumes were light.  Spreads widened across the board by approximately 2-4bps.

Equity Markets:

 

  Index Level % Change QTD YTD Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018
S&P 500 2,656.10 -3.09% -8.76% 0.88% 3.09% 4.48% 6.64% -0.76% 3.43% 7.71%
TSX

14,909.13

-2.46%

-7.07%

-5.80%

-1.64% 3.68% 4.44% -4.52% 6.77% -0.56%

Rates:

 

Today

% Change

QTD change

YTD change

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Canada 5 Year

2.41%

0.04% 0.07% 0.54% 1.39% 1.75% 1.87% 1.97% 2.07% 2.34%
Canada 10 Year 2.46% 0.01% 0.03% 0.41% 1.76% 2.10% 2.05% 2.09% 2.17% 2.43%
Canada 30 Year 2.49% 0.00% 0.07% 0.22% 2.15% 2.47% 2.27% 2.23% 2.21% 2.42%
30yr Generic Corporate A rated Spread 1.30% 0.02% 0.00% 0.02% 1.21% 1.24% 1.21% 1.24% 1.28% 1.30%
30yr All-in Corporate A rated Yield

3.79%

0.02% 0.07% 0.24% 3.36% 3.71% 3.48% 3.47% 3.45% 3.72%
US 10 Year 3.13% 0.02% 0.07% 0.72% 2.31% 2.33% 2.41% 2.74% 2.86% 3.06%
CDX IG 69.146 -0.556                

The information contained herein is intended for advisors for general information only and is compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy. All opinions contained in the commentary and expressed by the portfolio manager are subject to change without notice and are provided in good faith without legal responsibility. All market data is sourced from Bloomberg.