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Loonie Soars After Bank of Canada Ends QE Early, Accelerates Potential Timing Of Rate Hikes

Loonie Soars After Bank of Canada Ends QE Early, Accelerates Potential Timing Of Rate Hikes

Another day, another hawkish surprise from a developed…



This article was originally published by Zero Hedge

Loonie Soars After Bank of Canada Ends QE Early, Accelerates Potential Timing Of Rate Hikes

Another day, another hawkish surprise from a developed central bank.

While nobody expected the Bank of Canada to hike rates today despite soaring inflation, the BOC did surprise most most traders when it announced it is ending its bond buying stimulus program, and accelerated the potential timing of future interest rate increases amid worries that supply disruptions are driving up inflation.

In a policy statement on Wednesday, Canadian central bankers led by Governor Tiff Macklem announced they would stop growing holdings of Canadian government bonds, ending a quantitative easing program that has poured hundreds of billions into the financial system since the start of the Covid-19 pandemic, to wit: “The Bank is ending quantitative easing (QE) and moving into the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds.” Then again, one look at the BOC’s balance sheet makes one wonder just how long this QE halt will survive…

The Bank of Canada will release details of how it will implement the “reinvestment phase’’ of bond purchases in a market notice at 10:30 a.m. That will be a situation where it acquires bonds only to offset maturities, keeping overall holdings and stimulus constant. Most recently, weekly bond purchases had been C$2 billion. BOC head Macklem will also provide more insight into his policy decision at an 11 a.m. press conference.

In any case, the BOC also signaled it could be ready to hike borrowing costs as early as April, as supply constraints limit the economy’s ability to grow without fueling inflation.

Macklem maintained his pledge not to raise the benchmark overnight policy rate until the recovery is complete, but officials now believe that will happen in the “middle quarters’’ of 2022, bringing it forward from the second half of next year as previously thought.

We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022. In light of the progress made in the economic recovery, the Governing Council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant.

The language will reinforce market expectations the Bank of Canada is poised to quickly pivot to a tightening cycle amid growing price pressures. Investors are anticipating the Canadian central bank will start raising interest rates within the next six months, with markets pricing in four rate hikes next year.

The Bank of Canada has been using two major tools to keep borrowing costs low: maintaining its policy interest rate near zero and buying up Canadian government bonds from investors to keep longer-term borrowing costs in check. The benchmark interest rate was left unchanged at 0.25% on Wednesday. The central bank has increased its bond holdings by about C$350 billion since the start of the pandemic.

“Shortages of manufacturing inputs, transportation bottlenecks, and difficulties in matching jobs to workers are limiting the economy’s productive capacity,’’ the BOC said adding that “although the impact and persistence of these supply factors are hard to quantify, the output gap is likely to be narrower than the bank had forecast.’’

The more hawkish tone at the bank on Wednesday comes even amid a less rosy outlook for the economy. The central bank cut its growth estimates for both 2021 and 2022, but officials said much of that reflects worse-than-expected supply disruptions in the global economy.

Because of those disruptions, the Bank of Canada marked down estimates of “supply’’ by more than their downward revisions to output. That means the central bank now sees less excess capacity in the economy, and less reason to accommodate demand with cheap borrowing costs.  The build-up of inflationary pressures also appears to be testing the Bank of Canada’s patience. The Bank of Canada revised higher its forecasts for inflation — to 3.4% in both 2021 and 2022.

This means that the BOC is joining the Fed in tightening into a stagflation.

“The main forces pushing up prices — higher energy prices and pandemic-related supply bottlenecks — now appear to be stronger and more persistent than expected,’’ policy makers said. “The bank is closely watching inflation expectations and labor costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation.”

In the accompanying Monetary Policy Report that contains the Bank of Canada’s new forecasts, policy makers also said upside risks to inflation have become a greater concern because price increases are above the central bank’s 1% to 3% control range.

In response to the surprise announcement, the Canadian Dollar soared as much as 0.6%, rising to 1.2309 against the USD…

… while the Canadian 2Y yield spiked more than 24bps above 1.00%…

… in a day defined by violent treasury moves, first in the UK and now in Canada.

Tyler Durden
Wed, 10/27/2021 – 10:16

Author: Tyler Durden


Where Is China Going?

Where Is China Going?

Authored by Bill Blain via,

“When the winds of change blow, some build walls while others build…

Where Is China Going?

Authored by Bill Blain via,

“When the winds of change blow, some build walls while others build windmills..”

Evergrande will default, but the Chinese economy will probably avoid a property contagion crisis as the government becomes increasingly interventionist. Longer term, how will China evolve to cope with Covid, Growth and Demographics?

I’m going to go off on something of a tangent on China today. It can hardly come as much of a surprise to markets that S&P says Evergrande’s default is “inevitable”. (One of my highly coveted No Sh*t Sherlock awards is on its way to the US debt rating firm for stating the downright bleeding obvious).

Evergrande’s quietus will be a step towards China’s managed deflation of its property bubble, and it’s got massive implications for current and future investors in the economy. Let me stress I don’t believe China’s economy is about to vanish in a cloud of evaporating property dreams, or that a social revolution is around the corner on deflating consumer expectations. But, change will occur.

I expect China will successfully avoid Evergrande contagion destabilising the economy, and manage a soft-landing, but there is fundamental shift underway – a slowing economy, lethargic growth, and a shift away from capitalism towards a more interventionist state-controlled economy is underway.

Growth expectations are now around 5% – far below numbers we assumed were deemed necessary by the party just a few years ago. Even that number could be under pressure as the scale of the property effect on the economy comes into play, while China’s isolationist response to Covid means the fast spreading Omicron variant could play havoc with reopening the economy.

The Thoughts of Chairman Xi now absolutely dominate and set the internal debate – begging the question: just how will China emerge from the immediate uncertainties of a Property Wobble, Covid and Geopolitical Tension, and the long-term question of how China fits into an evolving global economy?

And, all the time, hiding in the background is the demographic reality:

Can China get rich before its aging demographic leaves it struggling?

It’s increasingly difficult to say where China is headed. There is an article in the WSJ: “China Increasingly Obscures True State of Its Economy to Outsiders” summing up how the economy is being shut to outsiders, and the lack of real intelligence available to anyone trying to figure out what’s rea going on. The best we can do is listen to comments around issues like “disorderly expansion” and “stability” – and figure what it means for investment opportunities in China. (Making barely educated guesses with little real information is stock in trade for any market strategist… )

What is clear is the CCP sees danger and has now embarked on economic stimulus to reinvigorate activity – easing policy in terms of lower Minimum Lending Requirements for banks, and lowering rates even as the global trend is towards tightening. Meanwhile, the economy is being reconstructed to away from free-enterprise towards greater state control and intervention, with regional governments given responsibility for sorting the property mess.

It all sounds fine in principal, but the history of China includes a critical sub-thread of pernicious regional corruption. That’s a sweeping charge to make, but the Chinese are remarkable traders and entreprenuers – give them space (as happened under Deng Xiaoping) and they thrive pursuing wealth, culminating in the success of China’s many billionaires. Close that door, and the road to riches is more likely to be perceived to be via the state bureaucracy.

There are close parallels between what’s happening in China and Soviet Russia’s economic history last century – after the revolution a period of chaos and civil war, near economic collapse, before a period of economic reform and liberation of free markets (the New Economic Policy period), before authoritarian figures seized back control of the economy to pre-empt political reform that might have seen them replaced. (In China, as I’ve written about before, it also a case of factions: What’s the Driving Force in China.)

The CCP is now trying to engineer a soft landing – a survivable property crash-landing, which will have internal and external effects.

  • Domestically, housing costs are unsustainably high, but a crash would devastate China’s middle classes.

  • Internationally, its going to be fascinating to see how defaulting property firms deal with offshore investors – do they ensure they are well treated in default to secure future engagement, or is China willing to risk long-term offshore disappointment by leaving foreign bond holders with the bulk of losses?

(Trading defaulted China property debt is going to be a fascinating market – how to play it when the rules are changing?)

However, the real issues aren’t just the tactical questions of how many other Chinese property developers will tumble, how it may impact local banks, or what local governments do, but the strategic issues determining what direction the Chinese Communist Party (CCP) takes next.

There are a number of key themes emerging:

How does the CCP replace Property as the core driver of the remarkable growth of China over the last decades? Property accounted for 33% of GDP growth – a massively distorting share. Growth was achieved by persuading Chinese consumers to leverage themselves into property – effectively their wealth is aligned with the success of Government avoiding a messy collapse. Call it Stockholm syndrome if you want – but its little wonder the Chinese middle classes are willing to go do the increasingly strident “patriotic” line pushed by the CCP on issues like Taiwan or the coming Winter Olympics.

I’ve read much about China becoming the world’s renewable energy builder – but frankly, solar panels and wind turbines are the easy options. China can do them, but hasn’t developed the more difficult technologies we need to diversify renewable energy – that really would be value added.

The past 30 years of spectacular China growth was not achieved on the back of home-grown technology innovation, productivity gains across Chinese industry, or a financial revolution propelling Chinese banks to the forefront of the global economy and financial system.

China remains a follower rather than leader in key technologies and industries. It has tried to address its perceived weakness with strategies like the Belt & Road project and debt-diplomacy – enthusiastically lending on infrastructure projects to promote growth likely to boost Chinese exports. These are perceived badly in the West – which is equally keen to protect markets it sees as theirs.

As the government flexes its increasing control of the economy you have to wonder where China’s private sector fits in – and thus its investibility. The big billionaire names have been “disciplined” and the stock prices of the big firms have suffered in line. The jury is out on how to invest in an increasingly closed China economy.

Tyler Durden
Wed, 12/08/2021 – 17:40

Author: Tyler Durden

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Precious Metals

Gold – Fed holds the key

Ranges may hold until the meeting next week Gold has been struggling for direction for a couple of weeks now, which is surprising as it’s one of the…

Ranges may hold until the meeting next week

Gold has been struggling for direction for a couple of weeks now, which is surprising as it’s one of the few instruments that hasn’t seen significant volatility since the Omicron announcement.

That may be because the outcome isn’t clear if the new variant does turn out to be as worrying as first feared. Central banks are in no position to just turn the taps on as they have in the past, they may even have no choice but to tighten monetary policy regardless or risk extreme levels of inflation that far exceeds their mandates.

At best, they may slow the pace of tightening and try and buy a few months in the hope that inflationary pressures show signs of easing, as they still expect. But even this would come with risks given how wrong they’ve been so far this year.

So where will gold move in the interim? The Fed next week may hold the key to that. Although there are a number of central bank meetings around the same time including the ECB and BoE so we should have a much better idea of how Omicron affects monetary policy soon enough.

In terms of technical levels, the yellow metal is currently stuck between resistance at $1,810 and support at $1,760. The lower end of this looks more vulnerable currently although overall, neither looks at massive risk. If one of these breaks, we could see momentum pick up quite quickly.

Author: Craig Erlam

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Bonds Bloodbath, Dollar Dumped As Omicron Anxiety Ebbs & Flows

Bonds Bloodbath, Dollar Dumped As Omicron Anxiety Ebbs & Flows

Anxiety over Omicron was higher overnight from South African data showing…

Bonds Bloodbath, Dollar Dumped As Omicron Anxiety Ebbs & Flows

Anxiety over Omicron was higher overnight from South African data showing Pfizer vaxx efficacy weakened against Omicron… but then the CEO of the company that makes billions from the vaccine – and is protected from any liabilities – said, all you need is a 3rd jab and that will save you all from Omicron… and the market rejoiced.

Small Caps outperformed today but traded in a truly chaotic manner. The Dow ended the day unchanged-ish and S&P and Nasdaq modestly higher…

Notably, the major US equity indices remain unable to extend gains above pre-Omicron levels…

‘Recovery’ stocks continue to charge higher relative to ‘Stay at Home’ stocks…

Source: Bloomberg

Despite all the jawboning, Pfizer, BioNtech and Moderna are all down on the week…

Source: Bloomberg

VIX plunged back below 20 today…

Bond yields exploded higher today (amid a very heavy calendar). 30Y Yields are up 20bps this week while 2Y is only up 8bps…

Source: Bloomberg

30Y Yields remain well below 2.00% (pre-Omicron) levels, but today was a decent squeeze to say the least as 30Y spiked over 13bps from low to high yield…

Source: Bloomberg

Or put another way… everything was beautiful for the bond bulls… and then it wasn’t…

The yield curve steepened dramatically today (2s30s’ biggest steepening day in 2 months), but remains notably flatter – and expecting a policy mistake – since Powell went hawktard…

Source: Bloomberg

The dollar dumped to its lowest close in 3 weeks…

Source: Bloomberg

Cryptos continued to tread water post the weekend plunge…

Source: Bloomberg

WTI managed modest gains today…

As Carbon Offset costs continued to soar

Source: Bloomberg

Finally, the number of U.S. job openings exceeded the number of unemployed Americans by the most on record in October

But we’re still printing 10s of billions a month and holding rates at ZIRP?

So what happens when Powell pulls the plug? Who knows but it’s worth noting that the real earnings yield for the S&P 500 Index hasn’t been so deep into negative territory since 1947… and BofA strategists warn that this portends downside risks for stocks.

There have been only four historical instances of negative real earnings yield, all of which resulted in bear markets, the strategists led by Savita Subramanian wrote in a note to clients, advising investors to seek refuge in inflation havens, such as energy, financials and real estate. Without continued earnings growth, stock investors will be losers in inflation-adjusted terms, undermining the so-called TINA argument that “there is no alternative” to equities right now.

Tyler Durden
Wed, 12/08/2021 – 16:01

Author: Tyler Durden

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