Talking Points
October 25, 2019 | 13:38
World Serious
Imagine if the Super Bowl, the World Series, the Stanley Cup, and Wimbledon finals were all scheduled in the same 24-hour period. Well, we pretty much have the economics equivalent of that in the coming week. For the first time since the Bank of Canada began fixing the date of its interest rate announcements in late 2000, we have rate decisions scheduled from the BoC and the Fed on the same day next Wednesday.* Both are important in their own right—the Fed is widely expected to cut for the third time in a row, but then somehow signal a halt, while the Bank is expected to stand pat, but will also be making its first extensive remarks on the economy in more than three months. If that wasn’t enough, we will also be reaching some kind of landmark for Brexit by Halloween; either an extension, and election, or a crash-out. We will also get the first reading on Q3 GDP for the U.S. economy on Wednesday, as well as important results for October on employment and the ISM on Friday as a denouement. For a two-point conversion, we also get GDP reports from Canada, and the Euro Area, as well as a BoJ meeting, all packed into the same 24-hour period. Economists, eat your Wheaties. |
Super Bowl: It may be a slight exaggeration comparing the FOMC meeting to the Super Bowl, but it is a biggie. Most expect the Fed to trim rates by 25 bps for the third consecutive meeting, but there is still a shadow of a doubt on that score (and that’s unusual). More important will be the message that the Statement, and Powell’s press conference, sends about future moves. If the Fed matches past mid-cycle adjustments (à la 1995 and 1998, when rates were trimmed three times by a total of 75 bps), then this will be the last cut for a while. That is what we are calling for, while markets still have more cuts after next week’s priced in by end-2020—with the timing vague. Powell has a large communications challenge, seeking to guide the market to the “no more cuts for now” world without causing blowback—from either equities, Treasuries or the White House. Stanley Cup: The Bank of Canada will emerge from a self-imposed cone of silence on Wednesday, with the rate decision and one of its quarterly MPRs. And, it is arguably the most important announcement of the year. While there isn’t too much debate about what it is going to do with rates—the market is currently priced for roughly a 98% chance of standing pat—there is a lot of debate about what happens next. Many believe that it simply is not sustainable for the Bank to carry the highest overnight rate (1.75%) in the advanced world, which is where it will find itself after the Fed trims. And, the loonie has been quietly firming in recent weeks, rising to 76.6 cents, or $1.306/US$—potentially poised to push through $1.30 for the first time in a year. Despite the rising currency, the Bank is likely to stay on hold for some time yet given: 1) a robust job market and percolating wages, 2) a reviving housing market, 3) core CPI running a snick above the 2% target; and, 4) the increased likelihood of serious fiscal stimulus arising from this week’s election result (see Focus Feature). World Series: First estimates of quarterly U.S. GDP are delivered four times a year (yes, the math has been double-checked on that fact). And Wednesday is one of those four occasions, with the first pass at Q3 arriving at 8:30 am. Sluggish capital spending and exports—courtesy of the trade war—will likely clip headline growth to below 2% in the quarter (we are now at 1.7%) compared with an average 2.3% pace over the past year. We look for growth to remain constrained below 2%, and thus below potential, over the next year as well. Wimbledon: Remember the 3-day marathon match between John Isner and Nicolas Mahut at Wimbledon in 2010, with the final set won by Isner 70-68? Yeah, well it’s got nothing on Brexit. This 3½-year drama always finds a way to extend the plot, and the former Halloween deadline will not resolve things. We, and the EU, will wait to see how Parliament votes Monday on PM Johnson’s request for a December 12 general election. At that point, the EU will decide for how long to grant this latest extension. For now, the default option remains a hard exit on October 31st. Spooky. Grey Cup: Canadian GDP is expected to struggle for any growth in August (yes August, the field and rules are different in the Canadian Financial League). Weak wholesale trade and moderate retail volumes will be only partly countered by solid housing activity and a sturdy gain in manufacturing sales. A small 0.1% rise in August GDP will follow a flat July, pointing to a notable cooldown in overall Q3 growth of just 1.4% after 3.7% in Q2. However, Q2 was far above what the BoC had expected when we last heard from them in July and Q3 is basically on target. We still look for GDP growth to come in at 1.5% for all of this year and 1.7% in 2020 (versus the BoC’s most recent estimates of 1.3% and 1.9%). As for the Grey Cup, the Ti-Cats are the early favourite with their most successful season ever—one of the best things to happen to Hamilton since its 2015 star-turn on Broadway. (Oh, different Hamilton?) UEFA Euro Cup: The Euro Area will also release its first estimate of Q3 GDP on Thursday morning. The world’s second largest economy is expected to eke out meagre growth of just 0.1% in the quarter (not annualized), the slowest in more than five years. The year-over-year pace is thus expected to ebb to just 1.0%, a touch below what’s expected for all of this year and next (1.1%). Freshly-minted ECB head, Christine Lagarde, has her work cut out. Still, it may be appropriate that the ECB is now led by someone from France, given that its FIFA world ranking of #2 is far above both Germany and Italy. (Belgium is actually now #1, but the head of its central bank, Pierre Wunsch, is a relative newcomer, appointed just at the start of 2019.) Rugby World Cup Finals: Not to be left out of the action, the Bank of Japan also has a meeting during the hectic 24-hour mid-week period. While Japan’s rugby squad acquitted itself quite well on home turf, the BoJ continues to grapple with negative rates and a close run with deflation—headline CPI is just 0.2% y/y. * The Bank has cut interest rates on the same day as the Fed a few times since 2000, but it was always on an emergency basis—i.e., out of the cycle of regularly planned meetings. The most recent case was the co-ordinated cuts on October 8, 2008.How should a former Montreal Expos fan feel about the Washington Nationals being on the verge of winning the World Series? A) Joyful, proud, and satisfied; or B) bitter, angry, and resentful; or, C) just disinterested? As background, a little less than 15 years ago, the Expos decamped from Montreal after 26 fun-filled seasons and relocated in Washington. After a run of frustrating near-misses in recent years, the Nationals have surprised many by advancing from a wild-card spot, and are up 2-0 versus the favoured Houston Astros in the Series. This, after its star player, Bryce Harper, walked out the door to free agency at the start of the season. With 15 years gone by and the roster completely changing over, guessing the answer is: C) just disinterested. How is this relevant to the topic at hand? If the World Series does somehow go to a seventh and deciding game, it will be played in Houston on—you guessed it—the night of Wednesday, October 30. |