How To Anticipate Interest Rate Movement In 2019:
- How Canada’s latest inflation data might impact the Bank of Canada’s January 9th interest rate announcement.
- U.S interest rate and economic summary: how much interest rate movement Canada can expect to inherit.
Canadian Interest Rate Update:
Canada’s central bankers (Bank of Canada), use Monetary Policy tools to help navigate our national economy.
The BoC’s primary mandate is to maintain a 1-3% inflation range with the economy operating at or near capacity.
Various factors influence Canada’s inflation rate which Statistics Canada refers to as the Consumer Price Index (CPI).
CPI is a basket of goods that change price over time. This price change is referred to as inflation.
The main basket of goods to determine CPI is quite diverse. This diversity includes several volatile items.
The Bank of Canada created several other core measures of inflation to strip out volatility for a better sense of Canada’s core inflation.
Below are the inflation numbers for November 2018 (data is in arrears):
Consumer Price Index – 1.7%
CPI Trim – 1.9%
CPI Median – 1.9%
CPI Common – 1.9%
The Bank of Canada has a graph and explanations you can read on each CPI measure here.
With CPI inflation dropping from the Summer high of 3% to 1.7% and other core measures of inflation all lower, now below 2%, I think this is reason for the BoC to consider pausing their interest rate hike trajectory.
I’ve reported to you our Central Bankers are aiming for a neutral interest rate. Neutral meaning the Key Overnight Rate is neither stimulative or restrictive.
This target interest rate zone is 2.50% – 3.50%. Our rate today is 1.75% which is considered stimulative (I think our economy still needs the stimulation).
I’ve also been reporting our Bankers have this target range in mind, but are basing their path to a neutral interest rate on incoming data.
Canada’s inflation is within target range (and falling) with a recent oil shock which saw Western Canadian Select oil drop below $15 per barrel. Expect lower overall GDP numbers to be reported in the New Year.
Our economy is also adjusting to 5 interest rate hikes and a major Mortgage rule change that is working through our economic system.
I think it’s prudent to continue to anticipate upward pressure on variable interest rates. I am reading other experts anticipate 2 rate hikes in 2019. This is considerably less than the rhetoric I was reading and reporting to you in October.
U.S Interest Rate & Economic Summary: Importing Interest Rates.
The U.S is Canada and Alberta’s largest economic trading partner. For this reason, I think having a high level understanding of their economic fundamentals is important.
The saying goes …when the U.S economy sneezes, the Canadian economy catches a cold.
Here are some points for consideration with the frame related to interest rate movement:
- U.S unemployment rate is 3.7% (47 year low) with 3% year over year (y/y) wage growth. This wage growth percentage is higher than U.S inflation so there is increased purchasing power for the U.S consumer. U.S GDP is also strong at 3.5%.
Some concerns in the U.S economy stem from:
- Economic momentum has been fueled by debt financed tax cuts and fiscal spending. These effects are starting to wane with U.S debt now at 4% of GDP.
- U.S Federal Reserve has raised the key policy rate 8 times over the past two years. The Fed is also allowing U.S treasury bonds to mature in the open market. These bonds were a part of several rounds of Quantitative Easing (QE) resulting from the liquidity crisis in 2008. We are entering an era of Quantitative Tightening (QT). The net result of QT is removing liquidity from the economy, similar to raising interest rates.
- The U.S/China trade war is looming over the global economy. Both China and U.S economies saw increased economic activity as businesses pulled forward inventory and other purchases. Now the impact of tariffs are rearing up.
The guidance provided from the chair of the U.S Federal Reserve, Jerome Powell, did not carry the dovish tone (lower rates for longer) many market watchers were looking for. The S&P 500 is down 17.5% from it’s September peak.
The U.S Federal Reserve is expected to raise their policy rate twice in 2019.
Conclusion:
I am hearing grumblings of the beginning of a bear market (down market) in the U.S. I’m also hearing the possibility that the U.S economy is heading toward “the R word”.
(R word = recession (didn’t want to say it)).
As mentioned earlier, the S&P 500 is down 17.5% since September and during that time Canada’s bond market is also down 19%.
During volatile times, investors seek the safety of Government bonds. This should drive fixed interest rates lower.
I’ve been reminding people that even during an era of increasing interest rates, which we are in, that interest rates do eventually come down.
This isn’t a time to cheer. Our Bankers would respond to negative economic data and then lower rates. Good news, bad news type of event.
That said, as a client of mine, as our market changes, I am looking for opportunities to help save you money where the bank makes less.
Thanks for your time reading and Merry Christmas,
Chad Moore
