Category: Canada

Bank of Canada holds at 1%

The Bank of Canada continues to hold its short term target rate steady at 1%. The salient quotation:

While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes. Core inflation has fallen further in recent months, in part due to temporary factors. It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

My own metric, the spread between the short term rate and the 10-year government bond, is at a 2.48% spread as of present. If this goes higher then the Bank of Canada might consider raising rates. BAX futures still imply a rate increase is on the horizon before year’s end. 3-month corporate paper is yielding 1.18%.

Canada hits the polls

Canadians will be subject to relentless federal election advertising over the next 5 weeks as the major parties try to win seats in the House of Commons.

The big financial question will be: Can the Conservative government achieve a majority government? The House of Commons has 308 seats and thus 155 seats are required for a majority. The Conservatives were able to win 143 seats in the prior election.

If the Conservatives do not win a majority, it is more likely than not that the Liberals, NDP and Bloc Quebecois will try to form a coalition government. One of the first items on their legislative agenda will be to raise corporate income taxes, which will have a negative effect on valuations of profitable Canadian companies, in addition to causing capital outflows.

This uncertainty will have some indirect impact on the Canadian markets, and the Canadian currency. In essence, some proxy bets can be made on the outcome of this election. Now that the UBC Election Stock Market is unfortunately not open to allow people to take direct bets on the election, there will only be a limited way for investors to speculate on the outcome.

Just as a word of warning for readers – I do have heavy political involvement and because of this my writing will slow down considerably until the beginning of May (when I presumably will have recovered). There is zero chance of me finding suitable investment candidates in the meantime!

Canadian Interest Rate Futures

Examining the short-term interest rate expectations of the futures market:

Month / Strike Bid Price Ask Price Settl. Price Net Change Vol.
+ 11 AL 0.000 0.000 98.710 0.000 0
+ 11 MA 0.000 0.000 98.640 0.000 0
+ 11 JN 98.660 98.665 98.670 -0.005 17877
+ 11 SE 98.490 98.500 98.500 0.000 25173
+ 11 DE 98.310 98.320 98.310 0.000 32785
+ 12 MR 98.130 98.140 98.140 0.000 15601
+ 12 JN 97.950 97.970 97.960 -0.010 4616
+ 12 SE 97.770 97.790 97.790 0.000 945
+ 12 DE 0.000 97.640 97.610 -0.030 648

The Japanese earthquake and general instability in the marketplace has driven the June futures up from 98.545 on March 1st to 98.66 today – which is pricing in a small chance that the Bank of Canada will increase interest rates on their May 31 interest rate announcement. It is far more likely that the short term rate will be 1%.

The futures still anticipate that the year-end short-term rate will be 1.5%, so it will be interesting to see if this comes to fruition. With reports of food inflation rising (primarily due to commodity price increases), the Bank may have to make an undesirable decision to raise interest rates to stem inflation, which would have an adverse effect on the economy and stock markets.

I stated earlier I do not expect the Bank of Canada to raise interest rates until 10-year government bonds go above 3.5%, and they are presently at 3.19%:

Notably, the Canadian 10-year bond is trading at a yield of 10bps less than the US 10-year note.

Questrade – Cash withdrawing is timely

Out of all the issues (1, 2) that Questrade has, cash management is not one of them. I have made several cash withdrawals through the course of late 2010 and 2011 as I have exited my debenture positions and they have been deposited via EFT to my bank account in a timely fashion.

I have been scouring the internet and have been reading nothing but trouble stories from people as they have done significant back-office migration since early February. It generally does not inspire confidence, which is why I entrust most of my idle cash balances to Ally (up to the CDIC limit!) and Interactive Brokers.

As long as you keep your transactions simple with Questrade, you should have no problem with them. If there is anything out of the ordinary or anything that could possibly warrant human interaction, then your mileage will vary – greatly.

Bank of Canada leaves rates at 1%

As predicted, the Bank of Canada leaves rates at 1%, citing:

The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand. While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes. Business investment continues to expand rapidly as companies take advantage of stimulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance.

While global inflationary pressures are rising, inflation in Canada has been consistent with the Bank’s expectations. Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy.

This language is similar to the previous release, and suggests that at the April 12th release that the Bank of Canada, barring any major events between now and then, will be keeping rates steady at 1% for that meeting.

BAX Futures are a shade higher, although it should be noted that the June future is at 98.545, implying a coin toss for a 0.25% rate hike at the May 31, 2011 announcement.