Canada Q3 GDP still looking soft, larger cuts on the table

The rates market is evenly-divided on whether the Bank of Canada will cut by 50 or 25 basis points on October 23.

Today’s GDP report was slightly better than forecast at +0.2% versus +0.1% expected but the advance August reading was flat. That has RBC estimating Q3 GDP at 1.0% annualized, well below the Bank of Canada’s forecast of +2.8%.

BOC Governor Tiff Macklem has taken a more-dovish stance lately, saying he wants to see growth showing signs of picking up. The ‘positive’ growth in Canadian GDP comes with a massive population expansion and per-capita GDP has fallen for six straight quarters.

Moreover, government spending and hiring has driven a large part of the Canadian economy.

“Details behind the July GDP
increase were mixed – growth in direct government administration has
accounted for roughly a quarter of GDP growth over the last three months
(by our count), with a third consecutive 0.4% increase in public
administration in August propping up services output growth,” RBC reports.

They see the Bank of Canada cutting 25 bps in October but that could change.

“We continue to expect further gradual interest rate reductions (at a 25
basis point per meeting pace) down towards a 3% overnight rate with risks
tilted to larger/faster cuts should the economy deteriorate significantly
further,” they write.

USD/CAD is largely unchanged from where it was before the GDP data but the loonie got some help this week from China stimulus.

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