Traders expect BoC to hold line on rates
After weak employment report, rate hikes are likely further away than previously thought.
bank of canada
BMO Capital Markets
TORONTO – The Bank of Canada will have the full attention of traders this week when it makes its next scheduled announcement on interest rates.
Part of the announcement this week is a foregone conclusion – the bank will leave its key interest rate unchanged at 1%, the same level it has been for two-and-a-half years because of economic weakness here and around the globe.
And after a weak employment report last week showing the economy lost about 52,000 jobs during March, interest rate hikes are likely further off then previously thought.
“The jobs report did make rate hikes even more of a distant prospect,” said Doug Porter, chief economost at BMO Capital Markets.
Most economists haven’t expected the bank to raise rates before the third quarter of 2014.
“And frankly even next year is a bit of a question mark, a lot depends on how the U.S. economy unfolds over the next six months or so,” he said.
As usual, traders will be anxious to see how the central bank views the economy unfolding.
“We have had a run now of quarters where growth has consistently come in below what the bank expected,” said Porter. “It will be interesting if they continue to look for the economy to pop back up to a better than 2.5% pace over the next year and a half. Frankly, I think that’s a heroic assumption to believe we can get back up to growth rates of above 2.5% anytime soon.”
Meanwhile, traders will be anxious to see if a dismal read on American retail sales during March could signal the end of a strong rally on US markets that has pushed key indexes to record highs.
They will also look to see if economic worries further punish commodities and push the TSX further into negative territory for the year.
Robert Gorman, chief portfolio strategist at TD Waterhouse, thinks this sign of economic weakness could be just the thing to trigger a retracement.
“We have been anticipating some kind of retracement which would put a bit of what I call healthy fear back into people and I think frankly this is the sort of thing that could very well do that,” he said, noting that his firm had a target for growth in the high single digits on US markets for the year.
Another trigger for a step back could be the first quarter earnings season, which has got off to a relatively weak start in the US.
“Heading into the earnings season, companies’ earnings guidance revisions were about four-to-one negative to positive, which is a very, very high ratio and not good,” said Gorman. “So, that would lead you to think that while earnings growth is still going to be OK, you’re going to have more companies coming in at the low end of expectations than perhaps we have seen.”
If such a retracement is in the cards, it would inflict further damage on the TSX.
“If the US market corrects due to concerns about the strength of the economic recovery… we can expect the more economically-sensitive sectors of the TSX to fall, dragging down our Composite Index quite sharply,” said Gorman. “If a US correction is more about a soft earnings season and profit-taking, reaction in Canada would likely be less pronounced as our market has not had the run to the upside we have seen in the States.”
In other economic news, traders will look to February manufacturing shipments data. Economists expect shipments rose by 0.5%.
BMO Capital Markets thinks the CPI could actually shrink by 0.1%, reflecting stabilizing fuel prices.
©The Canadian Press