...(feat. BoC, excl. U.S. Administration)

You are hereby ordered to read this… or not. A highly anticipated Fed event was again upstaged on Friday by a dramatic trade announcement. An hour after Jay Powell’s Jackson Hole speech, which made only minor waves, President Trump created a tsunami when he tweeted that U.S. companies “are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA”. This unambiguous message was in response to China’s (entirely predictable) retaliation to earlier tariff hikes. Apparently, this means war. While markets were scrambling to determine just how serious this latest declaration is, the flight-to-safety trade cranked up as the week wound down.

In these late days of summer, many may be wishing for a bit more silence. After all, this latest trade salvo followed a cacophony of conflicting and confusing communications, on everything from tax cuts, to rate cuts, to trade talks, to Brexit, and even to Greenland. Through the din, it appeared that the August fever for bonds had finally broken, with Treasury yields actually rising for much of the week. Similarly, stocks were on course to snap a three-week losing skid, gold had receded a tad, and oil mostly held steady, in a tentative risk-on move prior to Friday’s bombshell. The temporary upswing in yields and stocks was washed away by the late-week rush of news. In quick succession, we learned that China will indeed proceed with tariff hikes on $75 billion of U.S. imports, followed by a fresh new cycle-low for the yuan. Fed Chair Powell’s eagerly anticipated comments from Wyoming slightly added to the suddenly dovish turn. And the coup-de-grace was delivered by the President, who first lashed out at the Fed, and then issued his edict to U.S. companies.

Perhaps the loudest message at Jackson Hole was delivered by a central banker who didn’t speak—the financial version of Sherlock Holmes’ dog that didn’t bark. Bank of Canada Governor Poloz attended the event, but purposely remained a low-key participant. We have raised this issue in summers past; but, by the next interest-rate decision on September 4, we will have gone eight long weeks with nary a peep from the Bank. This radio silence comes at a time when the trade war has kicked into high gear, bond yields have plunged globally, currency markets have been roiled by the yuan weakening, and recession chatter has reached a rolling boil.

Two years ago, when certain folks squawked loudly about this issue of a total absence of summer communications (okay, mostly me), the official response was, essentially, “it’s always been done this way”. Some others, not with the BoC, chimed in that markets should not be counting on being spoon-fed by the Bank. The comeback on the first point would be: times change, and summers are far from news-free these days. On the second point: absolutely no one is asking to be spoon-fed, but a general sense of direction would be nice—i.e., does the Bank believe we are now in the Northern or Southern Hemisphere?

To be perfectly fair, the BoC actually did fine-tune communications after that 2017 episode, by introducing speeches after every meeting. The aim here is to ward off any sustained market over-reaction, such as what unfolded two years ago amid the communications void. And, Deputy Governor Schembri will give a speech the day after the coming rate decision. Will he be explaining another September surprise for rates (i.e., a cut)? That seems extremely doubtful, after mostly decent domestic data this week and inflation holding remarkably steady at 2.0%. Markets have reeled back odds of a rate cut in two weeks to barely 15%.

However, the market is still fully anticipating a rate cut by the Bank of Canada at some point over the next three meetings, even if the near-term odds have been pulled back. In all frankness, we are grappling mightily with this issue, still maintaining our longstanding view that the Bank will stay patient—the equivalent of keeping its head, while all about them are losing theirs. Three things have reinforced our view on that front: 1) the Canadian dollar has actually weakened, not strengthened, since the Fed began cutting, removing one key potential pressure point on the Bank to respond; 2) core and headline inflation have actually been a bit hotter than the Bank (and others) expected, giving them no free pass to cut; and 3) the housing market has generally regained strength and household borrowing has ticked back up, again dimming any appetite to offer rate relief.

The comeback, of course, is that trade risks have exploded higher since the Bank last opined in mid-July. And, at that time, Governor Poloz indicated that “if we faced risks and we believed they were unbalanced” that would “lead to a discussion about whether it was time to adjust policy”. Investors clearly seem to believe that risks have become unbalanced, and are screaming for rate cuts, highlighted by the deep inversion in Canada’s yield curve. Even with a small back-up this week, 10-year GoC yields are still more than 50 bps below the overnight rate; little more than a year ago, they were more than 100 bps above the overnight rate. Plus, there’s the small matter that all the cool kids are doing it, i.e., many central banks are slashing rates with purpose. As we pointed out two weeks ago, if the Fed does indeed trim twice by October, it would leave the BoC with the highest overnight rate among all major central banks.

Overall, it appears that the real debate will centre on the Bank’s decision at the October 30 meeting. That’s one we have been circling for a long time. For trivia buffs, that will mark the first time in the 19 years of fixed announcement dates that the Bank and the Fed have scheduled a rate decision on the same day—the Bank announces at 10 am, the Fed at 2 pm. (The two have cut rates on the same day before, but that was always on an inter-meeting, emergency basis.) Moreover, it’s the week after the Federal Election, so politics won’t be in the way, and it’s the day before a potential hard Brexit. If the Bank is going to move on rates, that would seem to be the most logical choice of dates. Pity that there will be zero guidance on that front until after Labour Day.

And speaking of silence, sometimes it may be best to say nothing. To wit, this week brought a wave of potential quotes to be used as fodder in the future: While President Trump ping-ponged on possible tax cuts, he averred that “we are far from recession”. His Chief of Staff, Mick Mulvaney, suggested that “any recession would be moderate and short” (ironically, at a different event in Jackson Hole earlier this week). Economic Advisor Kudlow, who famously missed the 2008 meltdown, opined that “I sure don’t see a recession” on the horizon. And, finally, Trade Advisor Navarro later said that “the trade war does not mean the U.S. economy will slow” and that there is “no anxiety in the White House about the economy.” And if you fully believe all of that, I have an island for sale in the North Atlantic that you may be interested in… a very big island.

For the record, the most up-to-date U.S. indicators are not flashing red, even if the 10s/2s yield curve is again on the cusp of inverting. Weekly initial jobless claims dipped again last week to 209,000, and the 4-week moving average is at an unremarkable 214,500. The monthly leading indicator rose a hearty 0.5% (albeit for July), while home sales and mortgage applications rose in the summer. Of course, the trade war shadow looms over all these stats, and the omens are inauspicious to say the least as we head into the September 1^st tariff hikes.