HIGHLIGHTS OF THE WEEK
- The Fed’s dots showed that it only expects to hike rates once more by the end of 2020, sending Treasury yields lowermid-week.
- On Friday, weakness in March manufacturing surveys in Europe, Japan, and the U.S. sent longer-term U.S. yields low enough to invert the yield curve. A yield curve inversion has historically preceded a recession by up to eight quarters.
- In a separate drama, the UK has earned a two-week extension on its Brexit deadline to April 12th.It remains to be seen if the UK’s parliament will pass the current deal reached with the EU, and so further cliffhangers are likely.
When The Dots Are Down
It was a busy week for Canadian data and financial markets. The S&P/TSX lost ground this week as oil prices gave up earlier gains in light of Friday’s manufacturing data that signalled a deteriorating global economic outlook. Meanwhile, the budget-heavy week was joined by data that did little to change the downbeat domestic economic story.
The big-ticket event was the Federal Government’s release of its FY2019-20 budget on Tuesday (see commentary). The government’s projected deficits for last year were lower than initial estimates, with the windfall used to finance new initiatives. Some of the measures include a focus on incentivizing education and job training, with new refundable tax credits and EI support, and reduced interest costs on Canada Student Loans. Other areas of focus included environmental initiatives, where the government is introducing a credit for electric vehicles and transferring $1 billion to municipalities for greening initiatives.
Arguably, the most attention-grabbing parts were its housing demand measures (see commentary). Specifically, its First Time Home Buyer’s Initiative includes a shared equity mortgage program and an increase in RRSP withdrawal limits. This may help increase home ownership rates, but the impact on sales and prices is likely to be minor. Indeed, we anticipate both to be only around 3% higher by the end of 2020 if implemented. Still, not all markets are expected to benefit, with some like Toronto and Vancouver likely not benefitting as much due to the price cap, and with tight markets potentially experiencing higher price impacts.
On the revenue side, the budget contained little change, with the most notable being a cap on the value of stock options subject to tax-preferred treatment. All told, the new budget’s measures are unlikely to have material implications on growth or monetary policy projections. Importantly, the deficit trajectory (Chart 1) is mostly unchanged.
Meanwhile, three provincial governments showcased a commitment to balanced budgets this week. New Brunswick’s decent starting point and planned spending restraint should help keep its books in the black within the projection horizon. Saskatchewan’s government also signaled a commitment to surpluses going forward, an encouraging feat given its outsized deficits following the 2014 oil price shock. Last but not least, Quebec’s new government tabled its first budget, introducing an array of new measures, with an intention to maintain surpluses of $2.5-$4 billion.
Budgets aside, two top-tier data releases capped the week. The CPI inflation print was unsurprising; with the headline coming in at 1.5% and the Bank of Canada’s core measures hovering slightly below its target, at an average of 1.8% (Chart 2). Retail sales disappointed for the third straight month, declining 0.3% and with volumes almost flat, consistent with expectations of a slowdown in consumer spending in Q1. Wholesale trade was decent, with a 0.6% uptick. Altogether, the data reinforce the expectation that the Bank of Canada will likely remain on the sidelines for a long period to come.
Omar Abdelrahman, Economist | 416-734-2873
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