Included in today's market update are the following articles:
- Bank of Canada says economy's resilience will be tested. Holds rates steady but hinted at an easing bias.
- Fed cuts rates for the third time, and with a neutral statement, suggested it is done cutting rates for now.
- The Big Picture and the most recent webcast from Eric Lascelles, Chief Economist, RBC Global Asset Management
BoC says economy's resilience will be tested - The overnight rate was held steady at 1.75%
- Global growth forecasts revised lower
- 2020 and 2021 Canadian GDP projections marked down
The Bank of Canada held rates steady but hinted at an easing bias for the first time this year. With trade conflicts and uncertainty weighing on global trade flows and business investment, the BoC marked down its global GDP forecast by 0.1 ppt this year and next (average growth of 3% is slightly below the bank’s estimate of global potential GDP). Governing Council said a soft global outlook will increasingly test the Canadian economy’s resilience heading into 2020. The BoC is asking the same question we are: will a slowdown in industrial production and business investment eventually spill over into other sectors? At this point there’s is little evidence of that dynamic in Canada—as the BoC noted, the services sector has been robust and job growth remains strong. Rising wages and lower interest rates are providing support to the consumer and housing sectors. But falling commodity prices, a strengthening Canadian dollar, and ongoing softness in the energy sector are clearly headwinds.
Today’s dovish policy statement boosted market odds of a rate cut in the first half of 2020, and leaves us more comfortable with our call for a move early next year. The BoC’s forecast (and our own) shows sub-trend growth around the turn of the year—with the economy already carrying about 1/2 ppt of slack in the BoC’s view, the central bank likely has a limited appetite for disappointment. That said, the potential for a post-election fiscal boost might be cause for patience. In addition to resilience of the Canadian economy, the BoC said it will be paying close attention to fiscal policy developments.
Fed cuts rates for a third time
- Fed funds target lowered by 25 bps
- Tweaks to policy statement suggest a pause
- Two committee members voted against the cut (again)
As was widely expected, the Fed cut rates for a third consecutive meeting today, lowering the target range for fed funds rate to 1.50-1.75%. September's dot plot suggested the Fed was split on whether a Q4 rate cut would be appropriate, but ongoing concerns about global growth, and weakness in exports and business investment at home, likely helped form a consensus. The two committee members who dissented today also voted against July and September's cuts.
The committee pared back its forward guidance, no longer saying it will "act as appropriate to sustain the expansion." Today's more neutral statement suggests the Fed is done cutting rates for now. The 75 bps easing to-date, much of which was priced in earlier this year, has had some traction. While this morning's Q3 GDP report showed trade tensions and global growth concerns are weighing on business investment, consumer spending rose at a nearly 3% pace and housing activity picked up. Overall growth of 1.9% is close to the economy's potential and what the Fed expects to see in 2020. As the committee noted, uncertainties about the outlook remain, but at this stage it looks like the Fed has delivered its mid-cycle insurance cuts and will move to the sidelines.