If it seems like monetary policy shifts with the breeze these days, that should come as little surprise - we are, after all, in the era of central bank data-dependency. Markets, in the wake of the September hike, have been busily trying to figure out what's next.
As the song says, the answer is blowin' in the wind. Bank of Canada Governor Stephen Poloz recently said in a speech in St. John's, Newfoundland that "there is no predetermined path for interest rates from here." Yet when we wave our figurative finger in the air, we find a few reasons to think any further action by the Bank will be gradual and methodical.
- For one thing, the Bank should have known that raising rates so quickly would cause the dollar to rally, which is likely taking some steam out of exports. We already saw hints of that in the July data, which showed merchandise trade declining significantly in terms of both volume and dollar value.
- Second, higher interest rates will likely lead to slowing consumption. The Bank's storyline seems to be that the 50 bps of stimulus (now removed) was cultivating imbalances in the form of overheated housing markets and high consumer debt burdens. Canadian consumer debt to personal disposable income has soared to 167 per cent - an all-time high, made more problematic by the fact that home equity lines of credit (HELOC) comprised much of the increase. Since HELOC rates correspond with the floating rate, an increase in the overnight rate is going to bite the consumer.
- The main tailwind for Canada's economy is the synchronized global growth story, which remains intact, more or less. Europe seems to be picking up steam, and emerging markets are still expanding. The more immediate impact is in how the U.S. is doing. The unwinding of the Fed balance sheet, gradual as it may be, could be a net negative for U.S. growth.
On balance, then, we see more headwinds than tailwinds, and therefore more headwinds for the Bank of Canada's course toward rate normalization. As a result, we remain more constructive than not on fixed income markets.
This post originally appeared on the BlackRock Blog.