EconoFACTS

November 21, 2024 | 14:33

Stimulus...Just in Time for the Holidays!

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

The stimulus announced by Ottawa today is meaningful. The ~$6bn package is about 0.2% of GDP; and, with Ontario already sending about $3 bn in stimulus cheques early in the new year, that puts total early 2025 stimulus at ~0.3% of GDP. The federal government is providing a GST/HST holiday from December 14, 2024 to February 15, 2025 on a variety of items (the highlights are restaurant meals, children's clothing, video games, some alcohol and Christmas trees). In addition, the government will send $250 to working individuals that earned $150,000 or less in 2023, with payments sent out in the "early spring 2025".

We're assuming a good chunk of the stimulus cheques will be saved, but the GST/HST rebate will drive additional spending. BMO Economics is boosting Q1 GDP growth from 1.7% to 2.5%, with 2024Q4 and 2025Q2 seeing a smaller upward move, while Q3 was trimmed as the impact fades.

The inflation impact is likely temporary with a steep deceleration in headline CPI expected in December and January (since the GST/HST move starts/ends mid-month) and a re-acceleration in February/March. Lots of noise coming on headline inflation, and a touch likely for the cores as well.

For the Bank of Canada, the combination of the new stimulus, a more cautious Fed, upside inflation miss, along with an anticipated upward revision to GDP, should solidify expectations for a 25 bp rate cut in December, all but taking a 50 bp cut off the table. The Bank remains on a path to neutral, but there's heightened uncertainty on where that is given the U.S. neutral rate is a significant input (and also very uncertain at the moment).

Government of Canada bonds have been on the defensive since CPI, and this announcement only reinforces that direction of travel. There's room for further underperformance vs USTs, as the bearish case on the Canadian economy is fading. The early December index extension and coupon flows will be a potentially big speed bump, but there will likely be plenty of investors lined up to fade any relative strength.