16 Apr

Bank of Canada Stands Ready To Do Whatever It Takes


Posted by: John Dunford

On the heels of a devastating decline in the Canadian economy, the Bank of Canada is taking unprecedented actions. With record job losses, plunging confidence and a shutdown of most businesses, this month’s newly released Monetary Policy Report (MPR) is a portrait of extreme financial stress and a sharp and sudden contraction across the globe. COVID-19 and the collapse in oil prices are having a never-before-seen economic impact and policy response.

The Bank’s MPR says, “Until the outbreak is contained, a substantial proportion of economic activity will be affected. The suddenness of these effects has created shockwaves in financial markets, leading to a general flight to safety, a sharp repricing of risky assets and a breakdown in the functioning of many markets.” It goes on to state, “While the global and Canadian economies are expected to rebound once the medical emergency ends, the timing and strength of the recovery will depend heavily on how the pandemic unfolds and what measures are required to contain it. The recovery will also depend on how households and businesses behave in response. None of these can be forecast with any degree of confidence.”

“The Canadian economy was in a solid position ahead of the COVID-19 outbreak but has since been hit by widespread shutdowns and lower oil prices. One early measure of the extent of the damage was an unprecedented drop in employment in March, with more than one million jobs lost across Canada. Many more workers reported shorter hours, and by early April, some six million Canadians had applied for the Canada Emergency Response Benefit.”

“The sudden halt in global activity will be followed by regional recoveries at different times, depending on the duration and severity of the outbreak in each region. This means that the global economic recovery, when it comes, could be protracted and uneven.”

Today’s MPR breaks with tradition. It does not provide a detailed economic forecast. Such forecasts are useless given the degree of uncertainty and the lack of former relevant precedents. However, Bank analysis of alternative scenarios suggests the level of real activity was down 1%-to-3% in the first quarter of this year and will be 15%-to-30% lower in the second quarter than in Q4 of 2019. Inflation is forecast at 0%, mainly owing to the fall in gasoline prices.

“Fiscal programs, designed to expand according to the magnitude of the shock, will help individuals and businesses weather this shutdown phase of the pandemic, and support incomes and confidence leading into the recovery. These programs have been complemented by actions taken by other federal agencies and provincial governments.”

The Bank of Canada, along with all other central banks, have taken measures to support the functioning of core financial markets and provide liquidity to financial institutions, including making large-scale asset purchases and sharply lowering interest rates. The Bank reduced overnight interest rates in three steps last month by 150 basis points to 0.25%, which the Bank considers its “effective lower bound”. It did not cut this policy rate again today, as promised, believing that negative interest rates are not the appropriate policy response. The Bank has also conducted lending operations to financial institutions and asset purchases in core funding markets, amounting to around $200 billion.

“These actions have served to ease market dysfunction and help keep credit channels open, although they remain strained. The next challenge for markets will be managing increased demand for near-term financing by federal and provincial governments, and businesses and households. The situation calls for special actions by the central bank.”

The Bank of Canada, in its efforts to provide liquidity to all strained financial markets, has, in essence, become the buyer of last resort. Under its previously-announced program, the Bank will continue to purchase at least $5 billion in Government of Canada securities per week in the secondary market. It will increase the level of purchases as required to maintain the proper functioning of the government bond market. Also, the Bank is temporarily increasing the amount of Treasury Bills it acquires at auctions to up to 40%, effective immediately.

The Bank announced new measures to provide additional support for Canada’s financial system. It will commence a new Provincial Bond Purchase Program of up to $50 billion, to supplement its Provincial Money Market Purchase Program. Further, the Bank is announcing a new Corporate Bond Purchase Program, in which the Bank will acquire up to a total of $10 billion in investment-grade corporate bonds in the secondary market. Both of these programs will be put in place in the coming weeks. Finally, the Bank is further enhancing its term repo facility to permit funding for up to 24 months.

The Bank will support all Canadian financial markets, with the exception of the stock market, and it “stands ready to adjust the scale or duration of its programs if necessary. All the Bank’s actions are aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.”

This is exactly what the central bank needs to do to instill confidence that Canadian financial markets will remain viable. These measures are a warranted offset to panic selling. Too many investors are prone to panic in times like these, which has a snowball effect that must be avoided. As long as people are confident that the Bank of Canada is a backstop, panic can be mitigated. The Bank of Canada deserves high marks for responding effectively to this crisis and remaining on guard. Governor Poloz and the Governing Council saw it early for what it is, a Black Swan of enormous proportions.

As a result, Canada will not only weather the pandemic storm better than many other countries, but we will come out of this economic and financial tsunami in better condition.

16 Apr

The Bank of Canada Will Maintain The Overnight Rate


Posted by: John Dunford

The Bank of Canada announced that it will maintain the overnight rate at 0.25%, which it considers its “effective lower bound.”

The BoC has lowered its target for the overnight rate an unprecedented three times in March to support an economy reeling from the impact of the COVID-19 pandemic.

“For its part, the Bank of Canada has taken measures to improve market function so that monetary policy actions have their intended effect on the economy,” the BoC said in a statement. “This helps ensure that households and businesses continue to have access to the credit they need to bridge this difficult time, and that lower interest rates find their way to ultimate borrowers.”

Read more: Big Six banks cut prime lending rates yet again

While the overnight rate was maintained, the BoC announced several new measures to ease the pressure on borrowers amid the pandemic – including the purchase at least $5 billion in Government of Canada securities per week in the secondary market, as well as increasing the level of purchases as required to “maintain proper functioning of the government bond market.” The BoC is also temporarily increasing the amount of treasury bills it acquires at auctions to up to 40% percent.

Additionally, the bank announced the development of a new provincial bond purchase program of up to $50 billion to supplement its provincial money market purchase program. A new corporate bond purchase program, in which the BoC will acquire up to a total of $10 billion in investment grade corporate bonds in the secondary market, was also revealed. Both of these programs will be put in place in the coming weeks.

The BoC also said that it is enhancing its term repo facility to permit funding for up to 24 months.

14 Apr

Canada Loses Over a Million Jobs in March


Posted by: John Dunford

Employment in Canada collapsed in March, with over one million jobs lost, wiping away over three years of job creation in a single month and highlighting the economic pain the coronavirus pandemic has swiftly delivered. The decline in jobs in Canada, on a proportional basis, was steeper than in the U.S. The record plunge was anticipated after officials here revealed that in the span of roughly a month, 5 million people, about 20% of the country’s labour force, have applied for emergency income support. This reflects Canada’s relatively rapid widespread implementation of social distancing.

The sharp increase in unemployment initially caught policymakers by surprise, prompting them to shift their response toward wage subsidies in order to prevent across-the-board layoffs. About 70% of direct stimulus spending is now targeted at keeping workers on payrolls.

The net number of new jobs plunged by 1.01 million from February, the largest decline in records dating back to 1976, Statistics Canada said Thursday in Ottawa. The jobless rate surged from 5.6% in February to 7.8% in March.

Actual hours worked declined by 14% from a year ago, and 15% from the previous month, both records.

The March Labour Force Survey (LFS) results reflect labour market conditions during the week of March 15 to 21. By then, a sequence of unprecedented government interventions related to COVID-19—including the closure of non-essential businesses, travel restrictions, and public health measures directing Canadians to limit public interactions—had been put in place. These interventions resulted in a dramatic slowdown in economic activity and a sudden shock to the Canadian labour market. Today’s data might just be a preview of even worse numbers ahead as the economy heads for its deepest downdraft since the Great Depression.

As bad as these numbers are, Statistics Canada said they do not fully measure the size and extent of the impact of COVOD-19 on Canadian workers and businesses. Additional measures are required to do that which include the number of Canadians who kept their job but worked reduced hours, and the number of people who did not look for work because of ongoing business closures. Of those who were employed in March, the number who did not work any hours during the reference week (March 15 to 21) increased by 1.3 million, while the number who worked less than half of their usual hours increased by 800,000. These increases in absences from work can be attributed to COVID-19 and bring the total number of Canadians who were affected by either job loss or reduced hours to 3.1 million.

Regionally, employment fell in all provinces, with Ontario (-403,000 or -5.3%), Quebec (-264,000 or -6.0%), British Columbia (-132,000 or -5.2%) and Alberta (-117,000 or -5.0%) the hardest hit.

The unemployment rate increased in all provinces except Newfoundland and Labrador and Prince Edward Island. The largest increases were in Quebec (+3.6 percentage points to 8.1%), British Columbia (+2.2 percentage points to 7.2%) and Ontario (+2.1 percentage points to 7.6%). See the table below for the jobless rate in each province.

In March, the number of people who were out of the labour force—that is, those who were neither employed nor unemployed—increased by 644,000. Of those not in the labour force, 219,000 had worked recently and wanted a job but did not search for one, an increase of 193,000 (+743%); because they had not looked for work and they were not temporarily laid off, these people are not counted as unemployed. Since historically the number of people in this group is generally very small and stable, the full monthly increase can be reasonably attributed to COVID-19.

Employment decreased more sharply in March among employees in the private sector (-830,200 or -6.7%) than in the public sector (-144,600 or -3.7%).

The number of self-employed workers decreased relatively little in March (-1.2% or -35,900) and was virtually unchanged compared with 12 months earlier. The number of own-account self-employed workers with no employees increased by 1.2% in March (not adjusted for seasonality). Most of this increase was due to an increase in the healthcare and social assistance industry (+16.7%), which offset declines in several other industries. At the onset of a sudden labour market shock, self-employed workers are likely to continue to report an attachment to their business, even as business conditions deteriorate.

The service sector was hardest hit, with almost all of the 1 million decline in employment concentrated in that category. The largest employment declines were recorded in industries that involve public-facing activities or limited ability to work from home. This includes accommodation and food services (-23.9%); information, culture and recreation (-13.3%); educational services (-9.1%); and wholesale and retail trade (-7.2%).

Smaller employment declines were observed in most other sectors, including those related to essential services, such as health care and social assistance (-4.0%). Employment was little changed in public administration; construction; and professional, scientific and technical services. Surprisingly, employment in natural resources rose despite the collapse of oil prices in March.

Females were also more likely to lose jobs than their male counterparts. Among core-aged workers, female employment dropped more than twice that of men, which might reflect the dominance of males in the construction industry, which was in large measure considered essential work in March. The private sector was responsible for a majority of the losses with employment dropping by 830,200.

Bottom Line: The chart below shows the unprecedented magnitude of the drop in employment last month compared to other recession periods, but this is not your typical recession. This was a government-induced work stoppage to protect us from COVID-19; to flatten the curve of new cases so that our healthcare system could better accommodate the onslaught of critically ill patients. While these are still early days, the data suggests that Canada’s early and dramatic nationwide response to the pandemic has been the right thing to do. We only need to look as near as the United States, where shutdowns were piecemeal, tentative and late. The number of COVID-19 cases is more than 22 times larger in the US than in Canada, while the population is only ten times the size.

To be sure, economic growth in the second quarter will be dismal. The economists at the Royal Bank have just posted a forecasted growth rate of an unprecedented -32% in Q2 and a jobless rate rising to 14.6%. They see a bounceback of +20% growth in the third quarter, although it will take until 2022 until Canadian GDP returns to its pre-pandemic level. Underpinning this forecast is the assumption that the economy will be in lock-down for about 12 weeks, with activity only gradually returning to normal after that.

According to the Royal Bank report, “Home resales are expected to fall 20% this year. Job losses, reduced work hours and income, as well as equity-market declines, will keep many buyers out of the market. Governments and banks have policies in place to help owners through this tough patch which should limit forced-selling and a glut of properties coming onto the market. But that doesn’t mean prices won’t come under downward pressure. As in many other industries, we expect the recovery in housing will be gradual. Low interest rates will be a stabilizing force, though it will take a rebound in the labour market as well as a pickup in immigration before sales really accelerate. Our view is that most of the recovery will occur in 2021.”

Policymakers have been extremely aggressive in providing income and wage supports. The central bank is unlikely to reduce interest rates below the current overnight rate of 0.25%, but the BoC will continue large-scale purchases of government bonds, mortgage-backed securities (along with CMHC), bankers’ acceptances and commercial paper–reducing the cost of funds for the banks and improving liquidity in all markets. “All told, the government support measures add up to 11.5% of GDP making the entire package one of the largest of the developed countries.”