Good morning all,
We’ve got two important days next week that you should probably have circled on your calendars. On April 19th there is going to be a federal budget published and read. Rest assured that all members of parliament will be fully clothed during the reading of this budget…I hope. On April 21st there will be a BoC rate announcement. The BoC meeting will also include the long-awaited Monetary Policy Report (‘MPR’) and updated forecasts followed by a press conference.
Rates and Curves
Rates have been trading sideways since the beginning of the month, that is until Thursday’s dramatic bond rally. The U.S. led rally seemed to have been caused by technical factors rather than fundamentals. In other words, based on positions within the market instead of underlying economic data.
As of Thursday’s close, the 5 and 10-year Government of Canada bonds were trading at 0.92% and 1.48% down 4 and 5 basis points respectively from the open.
The 5-year CMB was down 5 basis points on the day closing at 1.19% and the 10-year CMB was down 6 basis points on the day and closed at 1.86%.
The market rallied as much as 8 basis points yesterday but started to reverse part of their gains later in the afternoon.
BoC Rate Announcement next week
There is a strong consensus view that the BoC will announce their second round of tapering during the April 21st rate announcement. This means that the BoC will scale back its Canada bond purchases (otherwise known as QE) from the current amount of $4 billion per week. It is expected that the majority of the reduction will come from the shorter end of the curve (2 or 3-year maturities) where the impact per dollar spent is not as great as the long end. A tapering of asset purchases will pave the way for the eventual start of increasing the overnight rate.
Last Friday we also saw Canadian employment data outperform for a second month in a row. Employment now stands at 98.5% of pre-pandemic levels and Canada is on track for a full recovery in employment by this summer.
What you should know: This job outperformance is yet another puzzle piece to account for within the updates to the economic forecasts in the MPR at the bank of Canada meeting. The economic recovery in Canada has outpaced the Bank of Canada’s projections over the last quarter so we can expect the market to be closely monitoring what changes, if any, the bank makes to its economic forecasts and the implications for the timing around additional tapering and moving rates.
With the May 10-year and June 5-year CMB quickly approaching, the early rate lock option that we offer at First National is definitely worth discussing with your advisor to help mitigate these potentials market risks.
Federal budget
On Monday April 19th (two days before the BoC Rate Announcement) the Federal government is publishing its first budget in over a year. Unfortunately, with the timing of the budget and BoC MPR being so close together, there will be no formal discussion of the effects of the budget provided within the report. Freeland already indicated that government spending will be between $70 - $100 billion over the next three years.
What you should know: From a market impact perspective, market participants will be keeping a close eye on the Debt Management Strategy component of the budget. This will provide insight on the amount of treasury bills and bonds that will need to be issued and the timing of their issuance in order to support the federal agenda. After a massive year of issuing bonds to support economic growth during covid, the BoC will need to strongly consider liquidity and market absorption to keep yield curve volatility to a minimum.
In case you missed it:
The Bank of Canada announced that all market liquidity programs will be ending or suspended by the end of May. This includes the Provincial bond purchase program, commercial paper program, corporate bond purchase program, and the term repo operations. This is good news that the BoC is seeing enough progress within the economy that it feels it can begin reducing outdated programs and remove stimulus from within the system.
I would be remiss if I didn’t at least mention the new measures announced by The Office of the Superintendent of Financial Institutions (OSFI) in their attempt to tackle soaring housing prices. Last week, OSFI announced a higher minimum qualifying rate for uninsured mortgages, the "stress test". The downside impact on purchasing power is marginal and will not likely have a material impact on the housing market.
If you’ve made it this far you are all set for next week’s events and more importantly, deserving of a drink!
Thanks for reading and have a good weekend.
Neil