Week in Review: Poloz maintains neutral policy stance

Week in review

Canada – In a speech this week, Bank of Canada Governor Stephen Poloz talked about financial market volatility and credibility of central banks. He thought that the central bank’s credibility “is intact” and he referred to a BoC paper which showed that despite low interest rates, long term inflation expectations were well anchored close to 2%. He explained that long-term interest rates were low because of structural factors which had brought down the natural rate, and also because of central bank policy such as forward guidance that had lowered not only rates but also uncertainty about short rates (and hence the term premium). He said that QE programs by other central banks were also helping to pull down yields even in economies that had not undertaken QE, such as Canada.

The Governor said that financial market volatility shouldn’t be surprising as expectations shift towards normalization of policy rates. In any case, he thought the current volatility wasn’t abnormally high. Governor Poloz again explained why he didn’t think forward guidance was necessary at this point in Canada. While he acknowledged the usefulness of such a tool, he said this was “best reserved for extraordinary times”. That’s because costs of such a policy can be high, e.g. when the guidance is dropped, the subsequent unwinding of market positions can cause significant volatility.

He explained the BoC’s last couple of decisions, i.e. the January rate cut (i.e. downside risks brought by oil shock) and the pause in February. With regards to the latter, he explained the easing in financial conditions brought by the January cut “made us feel increasingly comfortable with the amount of insurance we had already taken out.”

Overall, the Governor’s speech was much in line with the BoC’s February statement. He gave himself a pat on the back for maintaining the central bank’s credibility, and highlighted the well-anchored inflation expectations and the easing in financial conditions brought by January’s surprise rate cut. The fact that he is “increasingly comfortable with the amount of insurance taken out” suggests another interest rate cut is unlikely at this point. But as we’ve seen before, the BoC’s comfort with the economic situation can change quickly in response to updated data such as oil prices or employment.

United States – The consumer price index rose 0.2% in February, allowing the annual inflation rate to climb to zero (from -0.1% in the prior month). The 1% increase in energy prices, the first increase in eight months, helped support the CPI, while food prices rose 0.2%. Excluding food and energy, prices also rose 0.2% thanks to gains for tobacco, apparel, which allowed the year-on-year core inflation rate to rise one tick to 1.7%. Both the headline and core CPI matched consensus expectations.

The durables goods report showed new orders falling 1.4% in February, after a downwardly revised 2% increase in the prior month. That was weaker than consensus which was looking for an increase. Transportation orders fell 3.5% due to declines for both autos/parts and civilian aircrafts. Excluding transportation, orders fell 0.4%, also below consensus, after a downwardly revised print of -0.7% in the prior month (initially reported as +0.3%). Total shipments of durable goods fell 0.2%, but those of non-defense capital goods ex-aircraft (a proxy for business investment spending) were up 0.2%. Both orders and shipments of non-defense capital goods ex-aircraft are now on track to contract in Q1, which suggests business investment spending growth may have softened a bit in the first quarter.

Existing home sales rose 1.2% to 4.88 million units in February, from an unrevised 4.82M print in the prior month. The gains were entirely due to single family units (+1.4%) while sales of multis were flat. The months supply of homes at current sales rate was unchanged at 4.6. The median resale price rose to $202,600 and is now 7.6% higher than year-ago levels. About 29% of February sales were made to cash buyers (roughly same share for the last three months), while the share of distressed sales in total sales was unchanged at 11%, also unchanged in the last three months.

New home sales unexpectedly soared to a seven-year high of 539K in February, up 7.8% from an upwardly revised 500K. The months supply of homes at current sales rate fell to just 4.7, the lowest since June 2013. The median sale price fell to $275,500, but is still 2.6% above year-ago levels.

Markit’s flash/preliminary estimate of the manufacturing purchasing managers index ended up at 55.3 in March, an increase from 55.1 in the prior month. A reading above 50 implies expansion in manufacturing activity. Production levels rose at the fastest pace since September last year, with survey respondents noting improving demand from domestic clients and a “catch-up effect following disruptions related to adverse weather earlier in the year.” New orders rose at the fastest pace in five months, while payrolls also accelerated.

Weekly jobless claims data for the week of March 21st showed initial claims falling to 282K. The more reliable 4-week moving average fell to 297K. Continuing claims for the prior week fell 6K to 2.42 million. Initial jobless claims are on track to average under 290K in March, and that for the first time since October last year. The low rate of layoffs is good news, although that’s no guarantee for massive gains in non farm payrolls ― recall that October’s NFP grew just 221K.

World – Flash manufacturing purchasing managers indices for the month of March were released by Markit for a range of countries. In China, the PMI fell to 49.2 (from 50.7 in the prior month), an 11-month low. The employment and new orders sub-indices were both in contraction mode, while output continued to expand, albeit at a slower pace than in the prior month. Japan’s PMI fell to 50.4 (from 51.6 in the prior month) as new orders contracted. Output and employment sub-indices showed expansion, but at a slower pace compared to the prior month. The eurozone’s PMI rose to 51.9 (from 51 in the prior month), a ten-month high. The output, new orders and employment sub-indices all soared to multi-month highs. The eurozone’s services PMI rose to a 46-month high of 54.3 in March thanks largely to new orders which rose at the fastest pace in four years.