Wilkins sets the record straight on Bank of Canada’s thinking on its rate hold
The Bank of Canada is pretty sure the economic slump is already over. The toughest people to convince will be the men and women who stare at Bloomberg terminals all day.
Canada’s central bank did two things this week that some on Bay Street and Wall Street have been unwilling to do: It embraced the recent streak of too-good-to-be-true hiring data as true, and it waved off bond prices that suggest traders are less optimistic about the future than are Governor Stephen Poloz and his deputies on the Governing Council.
“A fundamental change in the trend? Based on the data we see, we don’t see that happening,” Darcy Briggs, a portfolio manager at Franklin Bissett Investment Management in Calgary, told me in an interview after the Bank of Canada released a relatively upbeat policy statement on May 29.
Policymakers appear to have anticipated that they would have some convincing to do.
Carolyn Wilkins, the senior deputy governor, addressed both the bond market and the labour market in a speech in Calgary on May 30. The speech served as the economic update that the central bank now provides after policy announcements when no press conference is scheduled. The public has to wait a day, but there is now at least some prospect of having lingering questions answered before too much time passes.
Let’s start with jobs. Employers created more than 100,000 positions in April, according to Statistics Canada, the most ever in data that go back to the mid-1970s. That figure strikes a lot of people as incredible, in the purest sense of the word. Briggs said it would be as if the United States — where the economy is growing much faster than that of Canada’s — created one million jobs in a month. (It created about 260,000 in April, according to the Bureau of Labor Statistics payroll survey.) Even the trend feels high to skeptics, who assume measurement issues are skewing Statistics Canada’s results. The skeptics anticipate a big reversion.
No one would be surprised if StatCan’s volatile Labour Force Survey plunged back to Earth. Still, Wilkins had an explanation for why the labour market has remained strong even as economic growth essentially stalled over the fourth quarter of 2018 and the first few months of this year. The central bank dug into the data and found that construction and oil and gas companies have been reducing hours as their industries struggle, rather than fire people.
“This is consistent with firms believing that the economy has been going through a temporary soft patch, exacerbated by the brutal winter experienced in so many parts of Canada,” Wilkins said.
… inversions should be expected to occur more frequently and, unless large and persistent, should be regarded as less informative about future growth than they have in the past
Bank of Canada Senior Deputy Governor Carolyn Wilkins
And now the bond markets. Most yield curves are flat, meaning there is little difference between the yield on short-term bonds and ones that mature over longer terms. Some curves are even inverted, meaning it’s cheaper to borrow long than to borrow short.
This is odd. Lenders generally demand a risk premium before they hand over money for years at a time. In the past, there has been a correlation between flat yield curves and future recessions. Some investors think that’s the case now, which is why prices for assets linked to the Bank of Canada’s policy rate suggest that some market participants anticipate an interest-rate cut this year.
Poloz has been skeptical that inverted yield curves mean as much today as they have in the past. The bond-buying programs of the Federal Reserve and other big central banks have skewed prices. Demand from pension funds and other institutional investors also is putting downward pressure on long-term yields. “In this context, inversions should be expected to occur more frequently and, unless large and persistent, should be regarded as less informative about future growth than they have in the past,” the Bank of Canada said last month in its quarterly economic update.
Still, bond prices apparently have given Canada’s central bankers pause this week. “We talked about the signals that we should take, from a very flat, or, in some cases, inverted yield curve,” Wilkins said. The immediate conclusion was that prices reset to reflect the decisions of the Fed, the Bank of Canada and other central banks to put interest-rate increases on hold. And they determined that increased demand from pension funds for relatively safe, longer-term assets remained a factor. However, bond prices “nonetheless also reflect a concern about the prospects for growth that is not reflected across other asset classes,” Wilkins said. “We continue to be attentive to these signals.”
Those comments should dissuade anyone from thinking the Bank of Canada’s relative optimism means it is prepared to resume raising interest rates. And so should Wilkins’s assessment of global trade. The U.S.-China trade war remains the biggest threat to Canada’s economic prospects and there is little reason to expect higher interest rates until the world’s largest economies come up with a peace agreement.
“If the disputes were to worsen and become long lasting, the outlook would be quite different,” Wilkins said. “Obviously, this remains a major preoccupation for us.”