And now, you can add the Bank of Canada to the list when it comes to policymakers dropping their tightening bias in light of ongoing concerns about the global economy.
On Wednesday, one of the bigger overnight stories was the extent to which unexpectedly lackluster inflation data effectively cemented the case for RBA rate cuts, less than three months after Philip Lowe first tipped a shift to a neutral policy stance.
Although not everyone agrees that the case is made, most do, and the market reaction across FX, equities and rates underscores traders’ conviction.
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Fast forward 12-ish hours and the BoC removed its reference to further hikes from the policy statement in the course of keeping rates on hold, as expected.
The BoC also said it sees lower growth in H1 and the neutral rate estimate was revised lower. Potential growth estimates were revised down as well.
“In Canada, growth during the first half of 2019 is now expected to be slower than was anticipated in January”, the statement reads. “Last year’s oil price decline and ongoing transportation constraints have curbed investment and exports in the energy sector [while] investment and exports outside the energy sector… have been negatively affected by trade policy uncertainty and the global slowdown.” The bank also cites weaker-than-anticipated housing and consumption.
The loonie, like the Aussie overnight, dove on the dovish pivot.
That’s a four-month low. 2-year yields in Canada promptly dropped 6bps.
Here’s the bottom line:
The Governing Council judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.
Again, no más on the tightening bias and that’s pretty much all you need to know here.
Invariably, there will be belabored attempts to parse Poloz and to otherwise read the maple tea leaves, but the overarching point is that one by one, policymakers have thrown in the towel on the effort to cling to (possibly disingenuous) biases towards tighter policy.
The normalization push is over. The cynics among you will argue that it never really got started in the first place. If that’s you, you’re not wrong, although when it comes to the BoC, the effort was at least some semblance of valiant.
I have been thinking about what the new narrative will be going forward. I think it will be the opposite of Sturm and Drang, kinda like animal spirits on Xanex. I think that growth will be subdued, inflation will be tolerated around 2% without anyone who counts, hyperventilating about hyperinflation. The CB’s will all be on hold, not dropping rates but not threatening to raise them either. Basically it will be about muddling along and allowing industry and consumers a year or two to adjust their behaviour to present interest rates, without the threat that they will just keep rising. This allows for some slow de-leveraging to take place, for example in the Canadian mortgage market, where stats show just that happening.
It is a Goldilocks kind of scenario, but will frustrate those who want aggressive growth in economies, like Trump. There will be no throwing gasoline on the fire to boost growth, as with the tax cuts, as that just causes a counter-reaction from the Fed. It is really a continuation of the Obama-era modest growth, steady but slow.
My sense is that we are still very much dealing with the after effects of the 2008 GFC and the dislocations and anomalies it created, like vast amount of bonds and other assets purchased by CB’s.
We have to accept that we are not going back to the old business cycle of recessions followed by strong growth that leads to over-heating and the Fed removing the punch bowl, and repeat. The model is now the after effect of the 90% collapse of the Japanese stock market in 1989. Japan has some special demographic challenges, made worse by no immigration, which make their situation especially bad but
as the old song has it “I’m turning Japanese, I’m turning Japanese, I really think so!”