- Bank of Canada’s QE cut signals the U.S. may not be as far away from QE tapering as the Fed claims
- U.S. initial unemployment claims expected to retrace a bit of last week’s plunge
- U.S. LEI expected to show a sharp gain as economy accelerates
- U.S. existing home sales expected to be undercut by lack of availability
Bank of Canada’s QE cut signals the U.S. may not be as far away from QE tapering as the Fed claims — The Bank of Canada yesterday was the first G-7 bank to start trimming its QE program. While the ECB and Bank of Japan will likely continue their QE programs indefinitely, the Bank of Canada’s move was a warning signal for the timing of QE tapering by the Fed.
The Bank of Canada yesterday trimmed its weekly bond purchases by 25% to CD$3 billion (US$2.4 billion) from CD$4 billion. The BOC also accelerated its guidance for its first rate hike by suggesting that the conditions for a rate hike could be met in the second half of 2022. However, the market is more hawkish and the swaps market indicates that the market is discounting a 50% chance of a rate hike by spring 2022 and three full rate hikes over the next two years.
The Canadian dollar on Wednesday rallied sharply by +0.9% on the BOC’s policy tightening since the Canadian central bank is well ahead of its peers on pulling back on pandemic stimulus.
The Bank of Canada tightened its policy due to a strong recovery in the Canadian economy. The BOC raised its forecast for 2021 GDP growth by 2 points to 6.5%. The BOC said that there would be no slack left in the Canadian economy by the second half of 2022. Canada’s labor market has already recovered 90% of the jobs lost during the pandemic, much better than the 60% recovery in the U.S.
The Fed’s QE view is that it is too early even to be thinking about tapering QE. Fed Chair Powell last week said that the Fed will not consider tapering its QE program until “we’ve made substantial further progress towards our goals” on inflation and employment. Fed Vice Chair Clarida has said that he doesn’t expect the thresholds for QE tapering to be met this year.
Mr. Powell said that QE tapering would “in all likelihood be before, well before, the time we consider raising interest rates.” Mr. Powell noted that the consensus among FOMC members is that the funds rate will remain at its current near-zero rate at least through the end of 2023.
The Fed wants to push inflation sustainably above 2% and wants the unemployment rate to drop back down near pre-pandemic levels before it starts raising interest rates. The U.S. economy still needs to recover another 8.4 million jobs before getting back to pre-pandemic job levels.
However, the markets have a more hawkish view and are expecting the Fed’s first +25 bp rate hike by late 2022 or early 2023. The markets are expecting an overall +250 bp rate hike to 2.5% by late 2027.
U.S. initial unemployment claims expected to retrace a bit of last week’s plunge — The consensus is for today’s weekly initial unemployment claims report to show an increase of +34,000 to 610,000, retracing a small part of last week’s plunge of -203,000 to a 13-month low of 576,000. While that -203,000 decline was huge progress for a single week, initial claims are still 360,000 higher than the pre-pandemic level of 216,000 seen at the end of Feb-2020.
Meanwhile, today’s weekly continuing claims report is expected to show a -91,000 decline to 3.640 million, more than reversing last week’s small +4,000 increase to 3.731 million. Continuing claims are still up by 2.02 million from the pre-pandemic level of 1.71 million.
U.S. LEI expected to show a sharp gain as economy accelerates –The consensus is for today’s March leading indicators report to show a sharp increase of +1.0% m/m, adding to Feb’s +0.2% increase. Today’s expected increase would put the LEI up +7.9% y/y, the first positive year-on-year reading since the pandemic began last March.
The LEI is likely to show even more strength in coming months. The consensus is for U.S. GDP growth to accelerate from an already strong +5.4% (q/q annualized) in Q1 to a stellar pace of +8.1% in Q2 and +7.0% in Q3. GDP growth is then expected to downshift to 4.7% in Q4. The consensus is for GDP growth of +6.3% for calendar 2021, more than reversing last year’s pandemic-induced decline of -3.5%.
U.S. existing home sales expected to be undercut by lack of availability — The consensus is for today’s March existing home sales report to show a decline of -1.4% m/m to 6.14 million, adding to February’s decline of -6.6% m/m to 6.22 million.
Demand for homes is still very strong, but sales have been hurt by the lack of homes on the market. The supply of homes on the market in February was only 1.9 months, just slightly above the record low of 1.8 months seen in December and January (data back to 1982). Even with the lack of availability, home sales remain historically strong at only 7.6% below last October’s 15-year high of 6.73 million units.
5-year TIPS auction — The Treasury today will sell $18 billion of 5-year TIPS. Today’s 5-year TIPS auction will be a new issue. The Treasury in the past two years has followed a pattern of selling new 5-year TIPS securities in April and October, and then doing respective reopenings of those securities in June and December.
The benchmark 5-year TIPS yesterday closed at -1.89%, near the middle of this year’s relatively narrow range. The 5-year TIPS is the second most popular security among foreign investors and central banks, behind the 30-year TIPS. Indirect bidders, a proxy for foreign buyers, have taken an average of 69.7% of the last twelve 5-year TIPS auctions, well above the median of 61.1% for all recent Treasury coupon auctions.