News & Analysis

Canada’s economy grew by 0.5% MoM in January, raising the YoY growth rate to 3.0%. Both figures came in close to expectations, beating their estimates by a tenth of a percent, while the MoM figure was two tenths stronger than StatsCan’s advance reading.

Relative to December, the increases were more substantial. In December, the economy contracted mildly (-0.1%), and the YoY growth rate was considerably lower at 2.3%. The new advance reading for February points to another solid real GDP print of 0.3%. While the Bank of Canada is currently on a conditional pause as it awaits more data, the strength in the real economy, as measured by upward revisions from last month’s prelim figure and another probable above-potential reading in February, could tilt the central bank in a more hawkish direction. While it is still too early to call for another rate hike, the odds are shifting in that direction: BoC officials stated they are mostly worried about upside risks to inflation and have shown little panic about recent global banking troubles.

Stronger growth means the costs to another hike are falling, and it also puts upward pressure on inflation. Markets largely agree with our assessment, as they are now pricing only 35bps of rate cuts by year end, the fewest in nearly 3 weeks, and a far cry from the 90bps of cuts priced just a week ago.

On an industry basis, real GDP growth was driven by a rebound in mining, quarrying, and oil & gas extraction (+1.1%), manufacturing (+0.5%), and finance & insurance (+0.3%). The common thread between all of these industries is that they are all highly sensitive to changes in interest rates, which points to a resilient economy in the face of the 425bps of policy tightening delivered by the Bank of Canada over the past year. Statistics Canada confirmed that warm weather in January helped the rebound in economic activity, a trend we have highlighted for several months. Both goods and services-producing industries posted solid gains, with the former growing by 0.4% and the latter by 0.5%. Growth was incredibly broad, with 17 of 20 industries rising in January. In another sign of a robust economy, domestic air travel, restaurants, and recreation also rebounded, suggesting that the Canadian consumer still has dollars to spend on discretionary services. StatsCan also noted that government spending has been a consistent contributor to growth, as the public sector marked its 12th consecutive monthly gain with a 0.3% print. To the downside, the three industries that contracted in January were agriculture, forestry, fishing & hunting (-1.1%), utilities (-1.8%), and management of companies (-3.2%).

Nearly all Canadian industries grow in January

The loonie posted a knee-jerk rally off the back of the data, while the spread between Canadian and US government bond yields tightened by a few basis points. While for a moment, the rally in CAD was totally reversed, bullish traders fought back to restore all of the initial gains.

These market developments compound our assessment of the overnight swaps market’s pricing of Bank of Canada policy. It’s a clear-cut signal that the macroeconomic backdrop is shifting—while the bar for a resumption in the hiking cycle is still high, it just got lowered by a notch.




Jay Zhao-Murray, FX Market Analyst


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