Economic Update Q1

the beginning of the end by avery Shenfeld

To paraphrase Sir Winston, this is not the end of the pandemic, but it might be the beginning of the end, or at least the end of the beginning, and it’s time for monetary policymakers to give more weight to that fact in their forward guidance. The Bank of Canada has its opportunity to do so, but it faces a tricky task in balancing some good economic and vaccine news with a desire to avoid sounding overly hawkish just yet.

For 2021, and likely much of 2022, monetary stimulus will still be warranted. Experts are cautioning that we need to be wary of COVID variants that could spark an escalation of cases in the coming weeks. Unemployment remains highly elevated, the most heavily impacted sectors are still reeling, and many businesses and households are living off of temporary government assistance.

Even so, recent Canadian data have surprised to the upside, as we get more juice out of resource production, home building and other sectors that have stayed up and running through the second wave of the pandemic. The Bank of Canada doesn’t publish a new forecast until April, but it will have to acknowledge that its January projection now looks to have been too conservative, as was ours at that time. The Bank will reiterate that we’re a long way from closing the output gap and seeing sustained (not one-time) 2% inflation, but when it publishes a new forecast in April, it might have to move the timing of that into late 2022.

We’re in the last couple of months in which the Bank’s asset portfolio will see heavy maturities. That’s allowing the BoC to sustain a $4 bn per week pace of purchases without driving up its overall balance sheet, but the maturities will drop off sharply after April.

As a result, at its April announcement, we look for the Bank to cut its bond purchase program by $1 bn per week. Its March statement doesn’t have to give a warning about that post-April adjustment, but we can’t rule that out. Our rates strategist will have more to say in his report on Monday about how to trade along the curve given that context.

Despite these coming shifts in tone, the Bank of Canada can’t afford to get too hawkish, too soon, in a short March statement that doesn’t have a fully-fledged forecast. It has to weigh its words given that bond yields have backed up a fair bit, and the market is already pricing-in outright rate hikes a bit earlier than what we’re actually likely to see.

Moreover, the Fed is still talking very dovishly, unreasonably so in our view, about how long it can wait to hike. The US economy outperformed Canada in 2020 by a wide margin, has more stimulus coming, and is ahead on vaccines. Governor Macklem can’t afford to get too far ahead of Chair Powell, lest he send the Canadian dollar through the roof. If he can, before he spills the beans on a pre2023 rate hike, Macklem would like to wait until Powell gives his own Churchillian speech about the beginning of the end to the war on COVID, and the need to rethink the timetable for monetary policy adjustments. Continued next page.

CHARET CHAHAL, CFA

Prior to joining CIBC Wood Gundy, Charet worked in the oil and gas sector, developing a wealth of experience in energy markets. Charet also managed and led a start-up business venture to be listed on the public exchange. Charet is an avid supporter of the Calgary Children’s Hospital.

JAMES HOBSON, CFA

With over 10 years of experience at CIBC, James focuses on identifying major market themes, analyzing equity and fixed income securities, and monitoring client portfolios to ensure investment policy compliance. Among the numerous charities he assists, James is a long-time supporter and donor for the Kids Cancer Care Foundation of Alberta.

JAMES HOBSON, CFA, PM, First Vice-President, Portfolio Manager, Investment Advistor & Chairman’s Council Member 403-260-0574 james.hobson@cibc.ca

CHARET CHAHAL, CIM, Portfolio Manager, Investment Advisor & Chairman’s Council Memeber 403-260-0440 charet.chahal@cibc.ca

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2020. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. James Hobson and Charet Chahal are Investment Advisors with CIBC Wood Gundy in Calgary The views of James Hobson and Charet Chahal do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.