Election 2019 - Canada

We thought we would provide some Canadian Election statistics along the way. While we won't predict one way or another in terms of outcome, we think that providing you with some information about what Canadians are thinking about.

We will try to update as frequently as information comes available. We would love to hear your thoughts and feelings about this topic!

Federal Budget 2019

Please select the link for a detailed analysis: Federal Budget 2019

RBC Economics push back 2019 CAD rate hikes and remove 2020 hike

In their latest release of financial markets monthly, RBC Economics decided that the BoC are likely to be on pause until the third quarter of this year after which they expect two more hikes from the governing council – in the third and fourth quarter this year - before they hit the pause button for longer. By making this change the team remove the lone hike in 2020 out of their forecast and expect the overnight lending rate will reach 2.25%, one hike below where the BoC estimate the neutral rate range begins (2.5% - 3.5%).

Exhibit 1: Rate hike expectations in Canada have been pushed back and are limited to just two more

Source: RBC Economics

While the Economics team expect the BoC will maintain their tightening bias over time, they expect they will be in less of a rush to get to neutral than previously. They also expect the 10-year GoC yield to re-test the October 2018 high of ~2.60% later this year.

The ~65 basis point expected increase is similar to where they see the 10-year U.S. Treasury yield heading, up to 3.30% by the end of this year. In January the team pushed back their forecast for U.S. rate hikes to June and December as the Federal Reserve took a more dovish stance.

Chart Corner: Federal Reserve’s Capitulation

· The Fed appears to have caved to pressure from softening economic data and financial market volatility at its meeting yesterday, delivering an outcome that was meaningfully more dovish than anticipated, as least judged through the lens of price action across asset classes. As our Fixed Income Strategies team opined in today’s Morning Insight, there was a strong “QE-style” reaction to the FOMC meeting (see table below).

· This monetary policy U-turn by the Fed was underscored by the removal of the guidance that further gradual rate hikes would be appropriate, which was replaced with a pledge to be “patient” in light of heightened global economic uncertainties. Further bolstering the view that the Fed has fully moved into “risk management” mode, policymakers noted that they are “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments,” a signal that quantitative tightening could end sooner than previously expected.

· In our view, the dovish turn at the Fed is unquestionably a net positive for risky assets, but we would exercise prudence and refrain from aggressively adding risk in portfolios for a couple of reasons. First, late-cycle worries, while likely to fade somewhat in the near term thanks to a more flexible Fed, are likely to linger and continue to serve as a source of volatility. Second, while the Fed has strongly signaled that it’s on pause for at least a few months or quarters, it remains to be seen whether we have indeed reached the end of the rate-hike cycle. If economic data stabilize/rebound and/or risk assets embark on a sharp rally in the months ahead, a potential risk that investors may be overlooking at present is that the Fed could change its tone on monetary policy just as abruptly as it did this week. Fed Fund futures are currently trading below the December 24 equity market low levels – indicating the market is not priced for such a U-turn (see chart below).

Source: Portfolio Advisor Group, RBC Dominion Securities

The New NAFTA...USMCA

Here is a quick overview on our thoughts on the "new" deal: (here is the link NAFTA USMCA)

The long anticipated “re-worked” trade agreement between the US, Mexico and Canada has been completed in principle.

What does “in principle” mean?

  • All governments need to vote and approve the pact
  • Headwinds with midterms in the US as Democrats might not support
  • Nuances of the pact still need to be solidified – this may cause some short term friction and delay

The Good:

  • Canadian Dairy sector weakened – this is only a good thing in the eyes of a consumer not the farmer
  • The 2019 budget might address some shortfalls for Canadian farmers
  • Higher cross border spending rates as well as GST savings on first $40 of spending
  • Modernization – bringing technology and intellectual property into the forefront
  • Stronger Intellectual property rights

The “Bad”:

  • Auto sector quotas – this is more effected in long term rather than short term
  • Steel and Aluminum tariffs are still in place – although there are sideline discussions to remove these
  • There is still a sunset clause although extended
  • The US has made is more difficult to negotiate new trade with China

Our view is this new deal is fairly neutral on a short term and long term economic growth effect. A lot of grand-standing for not much, however it has put off a trade war that would hurt all parties – Canada and Mexico most.

We are sure these is more to come, but for now this is what we have. If you have any questions please email or call us at your convenience. In the meantime; stay tuned, stay calm and stay invested.