Did We Mention Interest Rates Were Going Lower! (See July 9th and June 17th)

The Bank of Canada came out yesterday morning and announced a rate cut. Basically signaling that the Canadian economic landscape needs some help. In some sectors of the geographic economy, there is little pain being felt. Toronto, for example, has the highest number of residential building projects on the go and the Vancouver real estate market remains one of the hottest in the country. However, there remain many areas of the country that continue to struggle with lower commodity prices and lack of capital market activity. A recent conversation suggested that one of Canada’s major banks was in the process of cutting 10% of its staff. We checked the stats against last year, and that same bank added just over 2% to their head count in 2014.

Below, we have posted a graph of the overnight rate against the Royal Banks Prime Lending Rate. Yesterday morning, the first mover was TD, out with a 10 basis point cut against the comparable 25 basis point cut from the Bank of Canada. We can see historically that Prime Rates follow the Bank of Canada rate pretty closely. It will likely make sense to see more of the banks fall in line in the coming days.

The downside to this is it makes the bond universe even tighter than it has already been. New issues of bonds will have a low base rate to price their offering off of, and this will make it more difficult to get reasonable yields out of the Canadian bond environment without taking on additional risk.

The upside/downside for equity markets could be viewed as twofold: First, the upside is that lower rates are purposed to be stimulating for the economy. The Canadian Dollar, for example, took a beating yesterday morning, down about 1.4%. This should help Canadian exports and help bring more outside investment into Canada (get ready for Hollywood to show up more often to film a flick). The downside is that there must be a reason to stimulate, right? Things must be worse than the bubbles we are living in. Perhaps we are in a mild recession? A quick look at the TSX return this year shows the market is up 0.30%, and much of this modest move is on the back of a hand full of names.

So…what’s next?

We grind forward. The world seems focused on the second half of the game, and there is lots of chatter around recovery in the last 6 months. Time will tell, as Buffett has said a forecast tells you lots about the forecaster and little about the future.


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