Strong Canadian GDP data consolidates likelihood of 50bp by BoC

Canadian GDP beat expectations with a very solid February print at 1.1% MoM. That pulled year-over-year growth up to 4.5%, more than double the rate of growth in a typical year.

February GDP growth was stronger than the 0.8% advance estimate that Statistics Canada released last month. New advance estimates for March suggest real GDP increased by 0.5%, which would put Q1 growth at 1.4%, or 5.7% after annualisation. That’s much stronger than the Bank of Canada’s April forecast, which suggested Q1 GDP would reach 3.0% QoQ annualised. Strong underlying economic growth provides a buffer against the weakness in demand induced by higher interest rates. At the margin, this is a reassuring print for Bank of Canada officials as it should bolster their confidence that they can pursue a steady pace of interest rate hikes toward neutral.

Currently, money markets are mostly positioned for a 50 basis point hike at the Bank of Canada’s next meeting on June 1st, which is in line with our projected policy path.

Economic growth was broad-based in February, with goods-producing industries up 1.5% and services-producing industries up 0.9% MoM. Furthermore, 16 of the 20 industries in the report listed positive growth. The biggest contribution to growth came from the accommodation and food services sector, which rose 15% MoM. That confirms the picture we got from the labour force data in March, which showed accommodation and food services led the surge in re-employment after Omicron shutdowns caused job losses and diminished economic activity. Other major industry drivers of growth were mining, oil & gas (+3.4%) and construction (+2.7%).

Hospitality industry led Canada’s GDP growth in February, growing 15.1% MoM

In response to this morning’s data, the Canadian dollar rallied 0.12% with Canada 10Y government bond yields climbing 4bps higher amid a similar move in the US bond market.

In the grand scheme of broader market pricing, the reaction in Canadian assets was limited, owing to the fact that GDP data is produced with a substantial lag and that a 50bp hike by the BoC in June was already factored into market pricing.

Authors: 

Jay Zhao-Murray, FX Market Analyst

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