Canada: Risks brewing but fundamentals intact – BMO CM

Benjamin Reitzes, Canadian Rates & Macro Strategist at BMO Capital Markets, explains that it’s been a tough couple of weeks for Canada, with the alternative mortgage market turmoil striking first, followed by a rout in oil prices.

Key Quotes

“Before getting overly pessimistic about the domestic outlook, it’s important to take stock of what the hard data are still saying.”

“Following average GDP growth of 3.2% in 2016H2, we’re forecasting Q1 GDP growth of 3.5% (with upside risk). That would be the best three-quarter run of growth since 2013Q4… not bad. While there are some downside risks to our Q2 forecast— namely a shutdown of a Syncrude production facility in April—there’s nothing suggesting growth came to a sudden halt. The March trade figures were solid, and a firm ending to Q1 for the economy. And, for those pointing to the so-so April jobs report, recall that it comes after an absurdly strong string of gains in 7 of the prior 8 months. Note that the wage figures likely, in part, reflect the changing composition of jobs, rather than actual wage moves. Indeed, the other employment survey (SEPH) has wage growth in the 1.5%-to-2% range as it uses fixed weights for the sectors, which seems more reasonable.”

“While the data have yet to show signs of turning over, brewing risks are darkening the outlook. The mortgage market issues appear to be contained, but it will likely take a prolonged period of calm on that front to keep the bears at bay. There have been no new revelations this week, but the surge in Toronto new listings was enough to keep the chatter about a crash at a fever pitch. Read Sal’s Thought below for more on housing, but higher listings just normalize a crazy hot market, a welcome development. Oil prices are the other big concern, and that’s a much bigger wildcard. We continue to forecast rising prices over the coming two years, but U.S. production has proven to be much more resilient than thought—up 12 straight weeks for the first time since November 2012, with production at the best level since August 2015. OPEC meets later this month and anything short of a continuation of current cuts would likely weigh very heavily on oil, a clear negative for Canada. The question is at what level do oil prices start hitting confidence and oil firms’ outlook for spending/hiring? We’re not there yet, but that’s the risk, especially since a rebound in Alberta is a big part of the better 2017 growth picture.”

“Bottom Line: Risks are brewing, but fundamentals haven’t soured yet. Our base case remains for above-potential growth through the rest of 2017, with a BoC hike in April 2018.”