Bank of Canada business outlook survey says “demand is weak”

For me, this is a more-important report than today’s jobs data.

• Business Outlook Survey indicator remains negative, signaling widespread softness
• ” demand is weak, firms have excess capacity, and price growth continues to slow” but little deterioration since last quarter
• Firms reported weak past sales growth due to past inflation and interest
  rate increases continuing to weigh on the economy, particularly on
  consumers’ budgets
• Sales expectations remain softer than average but have improved slightly this quarter on rate cut hopes. Sales growth indicator to +13 from +1
• Labour shortages continue to ease, with few firms reporting challenges
• Investment and hiring intentions remain weak
• Investment spending +9 vs +11 prior
• Wage growth expected to moderate gradually
• Firms anticipate slower growth in input and selling prices
• Inflation expectations within BoC’s target range at all horizons

The Bank of Canada’s Q3 2024 Business Outlook Survey shows that Canadian firms are still facing headwinds, with the BOS indicator remaining in negative territory. While current business conditions remain subdued, there’s a glimmer of hope as future sales expectations showed some improvement.

Labour market pressures continue to ease, with the share of firms reporting labour shortages falling well below historical averages. This cooling in the job market is reflected in weak hiring intentions for the coming year.

On the inflation front, businesses expect wage growth to moderate gradually. They also anticipate slower growth in both input costs and selling prices compared to recent quarters. Importantly, inflation expectations have settled within the BoC’s 2-3% target range across all time horizons, with most firms expecting inflation between 2% and 3% over the next two years.

Given that CPI is already at 2%, there is no reason for Bank of Canada rates to be so high above neutral. The question for this month’s meeting is 25 bps or 50 bps and I see an overwhelming case for 50 bps. That said, the BOC has been slow to move and the slight uptick in future sales expectations could give the central bank pause before making any dramatic moves.

USD/CAD is up 21 pips to 1.3764 on the day and about 10 pips on this release.

Separately, the survey of consumers also showed deteriorating inflation expectations but that was coupled with improved sentiment around financial stress but worsening sentiment around the jobs market.

• Financial stress indicators show improvement
• 44% of consumers noticed interest rate cuts (up from 17% in Q2)
• Nearly half still expect a recession in the coming year

• Wage growth expectations soften for first time since Q2 2023
• Job-hopping likelihood decreases
• Youth report more pronounced labor market deterioration

• Home buying intentions unchanged at average levels
• Only 8% of non-buyers would consider purchasing if rates were lower

This article was written by Adam Button at www.forexlive.com.