The Bank Of Canada Blinks–What’s Your Plan?

As we suspected it would, the Bank of Canada paused this morning in its rate-hiking aspirations, leaving the overnight rate at 1.75%, while noting in their press release slowing global demand, sharply lower oil prices, negative business investment, along with slowing household credit and weaker regional property markets. At the same time, consensus expectations for a hike at the next January 9th meeting have fallen to less than 50% this morning.

In response, the Canadian dollar slumped a further .93% against the US dollar–down 6.3% year to date–and Canadian government bonds are rallying.  With the Canadian 10-year yield backing down to 2.12%, there’s a scant .07% spread today between it and the 2-year treasury yield–a fresh cycle low, reflecting the slowing outlook for Canada.

With US markets closed for the day, the Canadian stock market is mildly positive, but negative year-to-date, and the global market mood is decidedly ‘risk off’.

As shown below since 1901, a record 90% of asset types have posted negative total returns in 2018 (including income), and this long overdue ‘correction’ phase is only just started. Speculation-gauge-cryptocurrencies continue melting, with pack-leader Bitcoin breaking to a fresh 2018-low below 3700 this afternoon.

 

Those with a proven value investment discipline have been tortoises in a race with QE-juiced-hares the past five years. But each full-cycle race is measured from trough to trough, not trough to peak. Only in the next market bottom, will we finally see who has what capital to show for the last decade of effort. The most historically relevant markers confirm that seemingly endless ‘easy money’ made hares extra reckless this time around.

As usual, perma-bulls hope that monetary magicians will save irresponsible risk-takers from just desserts. However, what I wrote in Bank of Canada ready to hike or blink? last September remains relevant to Canada, and most of the world today:

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