BoC likely to remain cautious, emphasize uneven recovery – RBC CM

Research Team at RBC Capital Markets, suggests that last week was chocked full of releases set to provide some of the last major data ahead of both Wednesday’s BoC meeting and the Q1 National Accounts on May 31st.

Key Quotes

“In terms of implications for the BoC meeting, growth is set to be close to their 2.8% q/q annualized forecast for Q1. More broadly, there have been three key developments since the April 13th BoC meeting and Monetary Policy Report (MPR): non-energy goods exports at flat y/y in March after running at ~8% y/y in February, broadly weak investment intentions for 2016 from the annual capex survey and of course the devastating Alberta wildfires.

While the weaker recent indications on the first two developments will not be welcomed by the central bank, we do not expect them to be too ruffled by them either. The BoC, and specifically Governor Poloz, has been consistently warned that the ongoing complex adjustment to lower energy prices will be “uneven”, meaning that it will not overreact to a single (volatile) trade report, especially with their preferred CAD-sensitive non-energy exports measure set to be released as part of the Q1 National Accounts on May 31st. On 2016 investment intentions (overall -4.4%, private sector -9.3% both relative to 2015), the BoC had already downgraded the contribution of business fixed investment to GDP growth (from -0.5pp to -0.8pp) in their April MPR, though the composition (10.9% decline in manufacturing) may be more concerning to them.

Inflation readings have not been determinant in Canada as the BoC has consistently looked through the Canadian dollar and energy price impacts to see underlying inflation at ~1.7%. Therefore, slightly firmer core CPI reading (+2.2% y/y) should not move the needle for them. The BoC has also been consistent in seeing the Canadian dollar reflecting fundamentals, specifically referencing both rate expectations and commodity prices in the past two meeting statements, with recent moves (including CAD weakening this week on the back of a hawkish Fed) in line with this.

Looking ahead, Governor Poloz next speaks on (Saturday) June 4th, though he is usually loathe to give any hint of forecast adjustments between MPRs.”