The BoC meet on Wednesday this week, 11 July 2018

Here is a sneaky and extensive early preview

Comes via the folks at Bank of Montreal (bolding mine):

The Bank of Canada is widely expected to hike rates 25 bps at the July 11 policy meeting.

  • The uncertainty around the trade backdrop drove significant market volatility ahead of this meeting, but Governor Poloz reinforced the hawkish message from the May 30 policy statement last week, and the most recent data were better than expected.
  • Note that this is an MPR meeting and Governor Poloz will hold a press conference as well.

Leaving aside the trade rhetoric/uncertainty for a moment, the Canadian economic backdrop is fully consistent with higher policy rates.

  • The output gap is closed, inflation is close to target and growth is projected to be at or above potential. April GDP was nicely better than expected keeping the April MPR forecast for Q2 GDP growth of 2.5% on track. And, perhaps more importantly, the BoC's Business Outlook Survey was exceptionally strong. The caveat is that much of the survey was done before the U.S. imposed tariffs on Canadian steel and aluminum, but it's clear there was solid momentum in the lead-up.

Unfortunately, we can't ignore the trade uncertainty even if much of it is Twitter driven.

  • The U.S. tariffs and Canadian retaliation will dent growth, even if modestly, but more importantly reinforce that there's some risk of further U.S. action. Trump has frequently touted potential auto tariffs (mostly on Europe); and, even if the odds of such a move are small, the impact would be significant. Fortunately, there was no reaction (Twitter or otherwise) to the Canadian retaliatory tariffs, suggesting further escalation isn't likely in the near term. However, the U.S. is investigating whether auto imports are a national security threat, so we could still see the trade spat worsen.

From the BoC's perspective, Governor Poloz has made it clear that policy will not be shaped by trade rhetoric.

  • Rather, the Bank will take concrete actions into account and make its best effort on assessing the impact of uncertainty. The Bank has already done the latter twice due to NAFTA uncertainty, but we could see another trade uncertainty driven downgrade in this MPR. The latter would be in addition to the impact of tariffs already announced which will likely cut growth by a tick or two in 2018 and 2019.

The trade tensions are likely to be the main driver of forecast changes in the MPR.

  • We're not expecting much change to Q2 after April's decent GDP print, though some oil sands shutdowns could trim 2018 an extra tick (and weigh heavily on Q3), with the rebound coming in 2019.
  • Inflation could see a small downgrade after the soft May print, but nothing that would impact policy.

Meantime, the BoC's other notable risks-housing and household debt-have improved.

  • The housing market continues to show signs of stabilizing after a very weak start to the year.
  • And, household debt growth has slowed sharply (with housing), which should help bring debt ratios lower and improve the quality of the debt stock as incomes continue to rise.

Key Takeaway: All signs point to a July rate hike as the broader backdrop suggests the economy no longer needs the stimulus that's in place. Beyond next week, look for the BoC to keep a close eye on trade developments, but allow the data to determine the direction of rates absent another round of tariffs.