Canada: July GDP justifies cautious Poloz - TDS

With the Canadian economy flat lining in July and missing expectations for +.1% m/m, data-dependent Governor Poloz is likely more inclined to pause at upcoming meetings even though every decision is live and GDP growth remains above both the July MPR forecast and potential growth, according to the research team at TDS.

Key Quotes

“Despite the miss, the July GDP report contained some positive news for the service sector which maintained a healthy clip. Notably, the energy sector was responsible for miss, contracting 0.8% m/m, while a one-off correction in auto production is likely to correct in August. 11 of the 20 sectors were up in July, notably wholesale sales which benefited from motor vehicles, a sector which has been supported by both a strong labour market and ongoing wealth effects, and which also comes with debt financing.”

“As a result, we continue to believe the BoC remains on a path of normalization, albeit more gradual than we previously assumed. We look for the Bank of Canada to next hike rates in December, with risks skewed to January.”

“Rates: From the market's standpoint, this print effectively ends the conversation around an October BoC hike and given Governor Poloz's dovish tone on Wednesday we believe that the bull-steepening has further to run.”

“FX: Latest data delivered a significant blow to the CAD as it confirmed Poloz's cautiousness earlier last week. The path of least resistance leans lower for the CAD, particularly on the crosses.”