Sal Guatieri, Senior Economist at BMO Capital Markets Economic Research released their North American Outlook (Nov 13, 2013) which included a forecast for an inflation pickup and an interest rate move up on 10 year Treasury Bonds.
If a major bank research group is getting ready for the beginning of the end of ZIRP, then forget about NIRP (Negative Interest Rate Policy) which has been trial ballooned on both sides of the Atlantic lately.
Here are a few odd bullet point quotes from the BMO report that makes me wonder if BMO is actually going to sell Treasuries (price down, yield up) or if they are in the market to buy a dip:
- U.S. sequestration held back government spending, and political uncertainty hurt confidence, slowing business and consumer spending, the latter to the lowest rate in two years.
- Caught off guard by cooler demand, U.S. businesses produced far more than they sold.
- U.S. GDP growth is expected to slip below 2% in Q4 as a result of the government shutdown.
- An improving global economy will support U.S. exports (???).
- Low U.S. inflation and distorted data imply just 30% odds of a December shift in QE (taper).
- The U.S. Fed funds rate could stay put until late 2015, possibly longer if the Fed extends its forward guidance to tamp down long-term rates.
- Canadian exports have gone nowhere in the past two years and factory output continues to contract in response to an overvalued currency and sluggish global demand.
- Canadian federal and provincial governments are tightening the purse strings.
- Canadian public sector layoffs have slowed job growth this year to a below normal pace.
- Canada will quadruple its rail-loading oil terminals, possibly increasing its U.S. bound oil exports by 20%. (??? the U.S. shale energy boom continues to ... reduce oil imports)
- In most Canadian regions, housing sales are higher now than when the mortgage rules where tightened in mid-2012. (??? Nope... sales are definitely down from mid-2012 see chart)
- Bank of Canada has stopped warning about future rate hikes and opens the door for possible rate cuts if growth falters or inflation slips below the 1% (currently 1.1%)
I think the metrics to watch to determine whether interest rates rise or not in the next 12 months will be unemployment, labour participation and household earnings. If earnings rise so will aggregate demand and general price inflation; but in both Canada and the U.S. politicians argue that government deficit spending must be reduced. If the government is not spending (investing) into the economy, will the private sector pick up the slack?