While this summer has been anything but quiet, we haven’t heard from the Bank of Canada since its July 10 rate announcement. So we’re eagerly awaiting the central bank’s thoughts—to be revealed in Wednesday’s policy statement, and at greater length in Deputy Governor Schembri’s economic progress report the following day—on a number of key developments. That includes easing from a dozen or so of the BoC’s global counterparts (including the Fed), further escalation in US-China trade tensions, a number of other concerning geopolitical developments (like rising odds of a no-deal Brexit), and some worrying growth numbers abroad (both the UK and German economies contracted in Q2). This should be sufficient for the BoC’s statement to take on a dovish tone, especially after the bank voiced greater concern regarding trade tensions and global growth in July.
The bank’s current neutral bias is certainly at risk, though the BoC’s disdain for forward guidance could keep it from shifting to a clear easing bias (and it doesn’t exactly need to guide markets toward a future cut). Instead, we might simply get a more cautious policy statement and progress report hinting that the next move on rates is likely to be lower. Could we even see a surprise cut from the BoC next week? Certainly there’s precedent for both pre-emptive easing (January 2015’s cut) and a surprise move after a quiet summer (September 2017’s hike). But we think generally positive domestic data will keep the BoC from lowering rates on Wednesday. Strong Q2 GDP growth (a 3.7% gain handily beating the BoC’s 2.3% forecast, albeit with some sketchy details), surprisingly resilient manufacturing and exports, a still-solid labour market (with rising wages offsetting modest retracement of positive employment/unemployment trends), and steady core inflation should offset some of the BoC’s external worries and keep the central bank on hold for now.
So if not Wednesday, when should we expect a rate cut? Our current forecast is for a move in January, though odds of an earlier cut have only increased since we first made that call. Markets are currently pricing in a full cut by December, with appreciable odds of a move in October. The latest trade policy developments certainly point to an earlier cut, though domestic data will also influence the BoC’s timing. There are plenty of indicators to watch between now and the end of October, starting with next week’s trade and jobs data. For trade, it’s hard not to think the best is behind us—slowing global growth and trade flows and a softer US industrial sector will make it hard for Canadian exporters to match recent gains. We look for the trade balance to slip back to a modest deficit in August with a slight increase in exports being more than offset by a larger rebound in imports. On the employment side, we are assuming a return to hiring in August after a bit of give-back in the last two months (cumulative declines of 26,000 after a total of 250,000 jobs were added in the first five months of the year). A further decline wouldn’t be shocking given the strength of earlier gains, and we doubt the BoC will be citing jobs numbers when it eventually lowers rates. We look for the unemployment rate to hold steady at 5.7% (up 0.3 ppts from three months ago but down from last year) and as usual we’ll be watching wage growth, which has improved in recent months (our estimate of the BoC’s wage-common tracking 3% in Q2).