Surprises

As Trudeau’s former fixer/fluffer fudged and fidgeted for MPs on Wednesday, the dollar plopped. Of course that could also have been the Bank of Canada’s fault. At the same time Gerry Butts was saying everything’s cool in Ottawa (“just normal government ops”) the central bank was sending a different message.

For the record, the bank rate did not change this week. As expected. Stuck at 1.75% since last October. Could be there for some time.

Also for the record, Butts says his boss (Mr. Socks) and others did not tell JWR to go light on Lavalin, thus sparing it from a criminal trial. Yeah, he admits, they all talked about the engineering firm which stands accused of bribery etc. but nothing improper or illegal took place. He denied the Minister of Justice was punted downstairs to the Veterans portfolio as a result of her refusal to play nice. And he says Treasury Board president Jane Philpott’s resignation was, like, regrettable. So have a nice day. Nothing to see here.

But, facts are facts. The government’s lost three key ministers – Scott Brison, Jody Wilson-Raybould and Jane Philpott. The prime minister’s right-hand guy (Butts) also left in the night. Our ambassador to China was abruptly fired. Now that country’s retaliated. And Trump doesn’t even talk to us anymore.

But it gets worse. The economy, stupid.

The message from the central bank was crystal. Things have changed markedly since January when we were told rates would be “rising over time” during the course of 2019 and the economy was moving towards full capacity. Well, forget that.

The statement this week was peppered with phrases like “increased uncertainty”, a “sharper and more broadly-based slowdown”, business investment that’s “short of expectations” and this: “It now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.”

That’s why the dollar fell, and bond yields followed. Look at the chart below for a depiction of what’s transpired. The yield on a 10-year GoC bond has plunged from 2.5% last autumn to just 1.67% now – a decline of about a third. Because this heavily influences the cost of fixed-rate residential mortgages, expect cheaper money (as detailed here yesterday).

Down she goes... 10-yr gov't bonds plop 33%

So the expectation of rate increases has turned into the certainty of none. Overnight swaps indicate a 0% chance of bank tightening this year. If the economy gets worse, Governor Poloz might consider a cut. Ouch. Just in time for the October federal election. Would you have imagined, one year ago, that this would happen?

Well, the economy basically shuddered to zero at the end of 2018 in a slowdown that took economists by surprise. Now we have the prospect of economic reprisals from China and our industry is still suffering from tariff-man Trump’s duties on aluminum and steel. The geniuses in Ottawa have not yet built one foot of new pipeline, despite spending $4.5 billion in tax money and the real estate market – a cornerstone of the GDP – is wonky. The central bank is worried about exports, expansion and investment. Soon that will extend to jobs.

Well, this story’s still being written. The year might bring a recovery or a recession. Rates might stay put, or fall a little. The election could be dramatic or another moister love-in for T2. The feds might allow housing to correct and prices fall, or intervene to curry votes. Be ready for surprises.

Meanwhile the year should also bring a US-China trade deal, a solution to Brexit and new peaks for equity markets. Global growth will chug higher and scores of little beaver-investors will wish they’d not listened to TNL@TB and put all their faith in maple.