Market Watch: July 16

Turning to central banks, the BoC made no policy changes Wednesday leaving its key interest rate at 0.25 per cent. The bank did, however, reduce weekly bond purchases from $3 billion to $2 billion.

South of the border, Fed Chairman Powell presented the bank’s semi-annual policy report and testified before two separate committees Wednesday and Thursday. In remarks, Powell said the bank will continue to discuss the appropriate timing to reduce monthly bond purchases while re-iterating his stance the U.S. economy is “still a ways off” from fully recovering. Powell’s comments regarding inflation remained unchanged with him saying the upward move in prices is transitory. This despite yoy U.S. consumer prices rising faster-than-anticipated, up 5.4 per cent in June, the biggest 12-month jump since August 2008.

Turning to China, the world’s second-largest economy reported a Q2 GDP growth rate of 7.9 per cent Thursday compared to a year earlier. Monthly readings of industrial output, retail sales, fixed-asset investment and urban employment met or exceeded estimates in June. The readings, in combination with stronger-than-expected import and export data released earlier in the week, suggest China will meet its full-year growth target of 6 per cent or more.

Finally in commodities news, the door appears to be opening for OPEC+ to reach a deal to boost oil production. Last week, a tentative deal faltered due to objections from the United Arab Emirates which appear to have since been resolved.

N.A. markets were a mixed bag this week

For the four-day period covered in this report, the Dow added 117 pts. to close at 34,987, the S&P 500 fell 9 pts. to end at 4,360 and the Nasdaq gave back 158 pts. to finish Thursday at 14, 543. In Canada, the TSX lost 74 pts. to settle at 20,183.

Strategy

The BoC delivers expected asset purchase reduction and raises its outlook

The Bank of Canada (BoC) reduced the pace of its weekly asset purchases to $2 billion, as was widely expected, down from $3 billion, and revised its outlook for growth and inflation higher amid growing optimism about the recovery.

The Overnight Rate was left unchanged at 0.25 per cent. In the new forecasts compiled in the bank’s Monetary Policy Report, policymakers see the economy roaring back in the second half of this year after a more sluggish than expected start to 2021, as employment levels recover and households start unwinding cash stockpiles they have accumulated over the past year. Still, the central bank maintained plenty of caution in its forecasts, sticking to projections that the run up of inflation will be temporary in an economy that will continue to carry slack for some time.

The BoC is projecting growth of 6 per cent in 2021, down slightly from April’s 6.5 per cent estimate, accounting for the slow start to the year, but stronger growth in the forecast horizon. In 2022 and 2023, the bank sees output rising 3.6 per cent and 2.3 per cent, up from 2.8 per cent and 2.2 per cent, respectively. On balance, the level of output will be about 0.75 per cent higher at the end of 2022 and 2023 than what was projected in April.

On inflation, they see stronger price gains in 2021 (3.5 per cent vs. 2.0 per cent earlier), while 2022 and 2023 rates were unchanged at 2.0 per cent and 2.4 per cent, respectively. However, commentary suggests policymakers are becoming incrementally more uncertain: “The factors pushing up inflation are transitory, but their persistence and magnitude are uncertain and will be monitored closely.”

The bank’s decision to reduce its purchase pace at this time fits within the narrative of the recovery and advances the central bank’s gradual return to more normal policy, which has put the BoC among the leaders unwinding stimulus. We think the decision preserves flexibility in the back of the year, should it be needed. The bank reiterated guidance that it will not raise its benchmark rate until the recovery is complete and inflation is sustainable at 2 per cent. The new projections show that will not happen until the second half of next year, in line with its previous forecasts.

The bank gave an update on its balance sheet holdings, saying its ownership of Canadian government bonds is at about 44 per cent, up from 42 per cent in April. Its Balance sheet has shrunk to just under $485 billion. In other updates, the bank outlined that it expects housing market activity to moderate from historically high levels but still remain strong, driven by low interest rates, desire for space and high disposable incomes.

Lastly, immunity to COVID-19 is assumed to be achieved in the third quarter in Canada, ahead of the U.S. As of this writing, nearly 52 per cent of Canadians aged 12+ have received two vaccine doses.

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Market Watch: July 16

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