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October 21, 2016 | Canada Recession Signals: Retail Sales Unexpectedly Dip; Loonie Sinks; Bank of Canada Ponders Easing; Yield Curve Inversion

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Despite having a massive property bubble, the Bank of Canada discussed cutting rates on Wednesday to stimulate the economy.

A rate cutting move is even more likely now, as retail sales unexpectedly fell 0.1% in August vs. an expected gain of 0.3%.

In response, the Loonie Plunges to Lowest Level Since March.

The loonie is on pace for the biggest weekly decline since May as the data add to concern about Canada’s economy. The slump began Wednesday when Bank of Canada Governor Stephen Poloz said that officials “actively” discussed the possibility of adding more stimulus into the economy.’

“So now we know why the BOC considered easing,” said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. “Economic growth in the third quarter doesn’t look as good as expected, inflation is below target and it’s unclear where an acceleration would come from.”

The loonie fell 0.8 percent to C$1.3332 per U.S. dollar as of 10:06 a.m. in Toronto, reaching the weakest level since March 16. The Canadian dollar is down 1.5 percent this week, the worst performance among Group-of-10 currencies.

The yield on the country’s two-year federal government bond fell for the fifth day to 0.51 percent, heading for the steepest weekly decline since June.

The probability of a BOC interest-rate cut this year rose to 16 percent from 7 percent Thursday, overnight index swaps data compiled by Bloomberg shows.

Retail sales fell 0.1 percent in August, compared with forecasts for a 0.3 percent gain. Consumer inflation accelerated for the first time in five months in September to 1.3 percent, however the jump was below the 1.4 percent rate economists were forecasting.

Wild Rides in Loonie

loonie-2016-10-21

The Loonie soared from 1.60 to the US dollar to highs near 0.94 to the dollar from 2001 to 2007, and again in 2011.

Since February of 2011, the Loonie has declined 27.5% but is better than the end of 2015 wen it touched 1.469 per US dollar.

Those swings had a lot to do with Canadian exports to China and commodity prices. Now, with the Fed discussing hikes, the Bank of Canada discussing cuts, and Vancouver real estate finally slowing, the Loonie is again under pressure.

Canada Yield Curve Inversion

In Canada, as everywhere else, central banks lower rates at the first sign of trouble. But with the Canadian 2-Year bond at a mere 0.517% there is just not that much room for cuts.

canada-yield-curve-2026-10-21

The 3-Month bond yield is 0.49% and the 1-year yield is at 0.53%. This makes the yield curve partially inverted as the 2-year yield is less than the 1-year yield.

Combined, these are strong recession signals for Canada.

Mike “Mish” Shedlock

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October 21st, 2016

Posted In: Mish Talk

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