BoC to retain cautious tone, emphasis on divergence with US – RBC CM

According to the analysts at RBC Capital Markets, heading into Wednesday’s BoC rate meeting (statement-only) most evidence suggests the Canadian economy is evolving about in line with the central bank’s January MPR forecast.

Key Quotes

“Q4 growth – released the day after the meeting – should come close to their 1.5% q/q annualized forecast from the MPR (we are slightly higher at 1.8%). The December wholesale and retail sales report released this week did not combine to change the narrative with the softness in the latter (1.0% m/m volume decline) coming after 0.5-0.7% monthly gains in the prior three months.”

“We expect the BoC to characterize the headline CPI increase similarly and reiterate that there remains persistent excess slack in the economy. Indeed, the BoC’s own 1.5% forecast for Q4 would match their estimate of the potential growth rate and leave the output gap unchanged (which they estimated to be ~1.25% in the January MPR).”

“Governor Poloz has frequently contrasted the slack in the Canadian economy with the lack of it in the US as the discussion south of the border is on the timing of the next US rate increase after a 25bp hike in December. This theme of policy divergence is likely to remain evident on Wednesday. In the labour market, while headline employment gains have been buoyant in Canada of late (239K over the past seven months, 141K of those in full-time), underlying wage pressures are non-existent (running at 1.0% y/y in January for permanent employees) and are the clearest sign that labour market slack remains.”

“The primary concern at the January meeting – expressed most clearly in the press conference – was on US trade protectionism. The uncertainty around what changes to US trade policy (Border Adjustment Tax, NAFTA re-negotiation) may look like meant it could not be included in any projection, but did lead Poloz to characterize it as a distinctly negative scenario. It is fair to say that this uncertainty has not been resolved in the intervening period. The export sector is already dealing with headwinds of its own as non-energy goods export volumes are running at -4.1% y/y, though increasing energy export volumes and improving terms of trade have been encouraging.”

“Just ahead of the BoC meeting, the annual capex survey will give an indication of whether any relief will be coming on the business investment side, with last year’s report generally disappointing, including an 11% decline in intentions for the manufacturing sector in 2016.”