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Potential weakness in the housing market and the drop in oil prices will test the Bank of Canada’s hawkish intentions.
Comment
Canadian existing home sales are due later this week and will be viewed as an early test for a surprisingly hawkish stance from the Bank of Canada. Stephen Poloz and his colleagues voiced their intent to continue raising interest rates toward a neutral rate between 2.5% and 3.5%. The statement marked a short-term peak in the hawkishness of words in Bank of Canada speeches. It may mark a larger inflection point in their policy stance.
The charts show a rolling sum of the mentions of hawkish (left) and dovish (center) words in officials’ remarks. References to economic strength and tighter policy have been trending higher while references to economic weakness and dovish remarks have trended lower. Stephen Poloz’s most recent speech on November 5 sent the spread between hawkish and dovish mentions (right) sharply lower from its highest point looking back to 2014.
Consumer borrowing was one of several risk factors we highlighted at the end of October as Canadian economic growth slipped further below its one-year average. Existing home sales will be one read on the borrowing interests of consumers. In the meantime, Google search trends in Canada point to weakness across a range of real estate related categories. Home financing searches have resumed their decline. Interest in home improvement and appliances is falling at its fastest pace since at least 2015. This echoes weakness in U.S. home improvement searches and threatens home improvement retailers after a strong summer.
But weakness in housing has been on the Bank of Canada’s radar. The charts below show the rolling sum of mentions for other keywords. References to financial stability, uncertainty and housing have all been trending higher this year. One key risk has been conspicuously absent from Bank of Canada speeches, references to energy and oil have been quite sparse.
We expect concern over the sharp drop in oil prices to become a much hotter topic. This would not be the first time a sharp drop in oil prices affect the Bank of Canada’s policy stance. The last chart shows the price of WTI crude oil (dark blue) and the Bank of Canada’s overnight policy rate (orange).
The response to the financial crisis was well underway before oil prices peaked in 2008. But drops in oil prices preceded the start of easing cycles in November 2000 and July 2014. They preceded pauses or the end of tightening cycles in March 2003, October 2004 and August 2006.
Supply bottlenecks in Western Canada are compounding the problem. The spread between WTI crude oil and Western Canada Select has widened to nearly $40. The key oil sands benchmark is now trading near $16 per barrel, the lowest since February 2016. Potential weakness in housing aside, the unexpected blow to the economy from falling oil prices may be sufficient for the Bank of Canada to moderate its policy stance.