PrefBlog

The Bank of Canada was first up this morning:

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

The evolving conflict in the Middle East is causing heightened volatility and US trade policy continues to reshape global trade patterns. Both are ongoing sources of uncertainty. The Bank’s April outlook assumes tariffs remain unchanged and the global benchmark price of oil declines to US$75 per barrel by mid 2027.

The Iran war has led to sharply higher energy prices and transportation disruptions, diminishing growth prospects in oil-importing countries and boosting inflation worldwide. In the United States, growth is still expected to be solid over the projection horizon, boosted by AI-related investment and consumption growth. China’s economy is being supported by robust exports. In the euro area, higher prices for oil and natural gas will weigh on economic activity.

Financial conditions have been volatile, reflecting daily developments in the Middle East and shifting market expectations for inflation and interest rates. Bond yields are modestly higher since January while equity markets, which weakened sharply at the outset of the war, have recovered. Since the start of the war, the US dollar has appreciated against most major currencies. The Canada-US exchange rate has been relatively stable.

Overall, the global economy is expected to grow by about 3% in 2026, 2027 and 2028. Projections for inflation over the next year are revised up because of the jump in energy prices.

The outlook for economic growth in Canada is little changed from the January Monetary Policy Report (MPR) projection. After a contraction in the fourth quarter of 2025, growth is forecast to have resumed in early 2026. Consumer and government spending are supporting economic activity, while tariffs and trade uncertainty are weighing on exports and business investment. Housing activity declined in the fourth quarter and is being held back by slow population growth, economic uncertainty and ongoing affordability issues. The labour market is soft, with subdued employment growth over the past year and job losses in sectors targeted by US tariffs. The unemployment rate remains in the 6½%‑7% range, reflecting both weak hiring and fewer job seekers.

The Bank’s April forecast projects GDP growth of 1.2% in 2026, rising to 1.6% in 2027 and 1.7% in 2028 as growth in exports and business investment resumes along a lower trajectory. With GDP growing slightly above potential, the current excess supply in the economy is gradually absorbed. While the war in Iran may alter its composition, overall GDP growth is little changed in the updated forecast: Since Canada is a large net exporter of oil, higher oil prices increase national income even as consumers are squeezed by higher gasoline prices.

CPI inflation climbed to 2.4% in March because of sharply higher gasoline prices. The March increase follows several months of slowing inflation data. Core inflation has been easing and held steady at just above 2% in the most recent inflation report. The proportion of components of the CPI basket rising above 3% has also declined in recent months. As expected, so far there is little evidence that oil prices have fed through more broadly to goods and services prices, but this warrants close attention in the months ahead. Near-term inflation expectations have moved up with higher gasoline prices and still-elevated food price inflation, but longer-term inflation expectations have remained anchored.

CPI inflation will likely rise further in April to about 3%. Based on the assumption that oil prices will ease, inflation is forecast to come down to the 2% target early next year and remain around 2% over the projection horizon.

Against this backdrop and taking into account the current projection, Governing Council decided to maintain the policy rate at 2.25%. We are closely monitoring the impact of the conflict in the Middle East and how the economy is responding to US tariffs and trade policy uncertainty. Governing Council is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation. As the outlook evolves, we stand ready to respond as needed. The Bank is committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.

Of interest was the Monetary Policy Report and its conclusion regarding the neutral rate of interest:

The neutral rate is the rate at which the policy interest rate would settle in the long run once output is sustainably at its potential and inflation is at target, after the effects of all cyclical shocks have faded.

Given that Canada is a small open economy, its neutral rate is affected by the global neutral rate. The Bank of Canada uses the US neutral rate as a proxy for the global neutral rate. The US neutral rate is estimated to be within a range from 2.5% to 3.5%, somewhat higher than the 2.25% to 3.25% range presented in the April 2025 Report. The main reason for the upward revision is the boost to US productivity from AI investment and adoption. Gains are partially offset by a downward revision to population growth.

The Canadian nominal neutral rate is estimated to be within the range of 2.25% to 3.25%, unchanged from that in the April 2025 Report. Developments since the April 2025 Report are judged to be broadly offsetting.

• Upward pressures arise from two areas. First are spillovers associated with a higher US neutral rate. The second is a modest increase in growth in trend labour productivity due to upward revisions to the historical data of Canadian GDP and capital stock, as well as the assumed positive impact of AI adoption.
• Downward pressures stem from slower‑than‑expected population growth in the long term.

Risks to Canada’s neutral rate are judged to be broadly balanced. On the upside, US tariffs could reduce overall demand for Canadian assets in US capital markets, necessitating a higher neutral rate to attract alternative investors. On the downside, heightened trade uncertainty could increase precautionary savings among Canadian households and businesses, exerting downward pressure on the Canadian neutral rate.

In the afternoon it was the Fed’s turn to state its views:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Philip N. Jefferson; Anna Paulson; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting; and Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.

Bryan Mena of CNN observed at 2:03pm:

The so-called easing bias is in this sentence in the policy statement: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate,” specifically the word “additional.”

… and, three minutes later:

I did not even know Fed officials could cast dissents that specific.

At 2:04 he stated:

It is the first time since October 1992 that there have been four dissents of any kind.

Despite all this standing pat and hints of an inclination to be dovish, bonds got hammered today, but this was due to oil, not policy:

Oil was at the centre of much of the market’s attention, spiking to multi-week highs and prompting money markets to price in a higher likelihood of rate hikes in the months ahead in both Canada and the U.S.

Traders are now ⁠pricing in 59 basis points of Bank of Canada rate hikes this year, up from 39 ​basis points a day earlier, swap market data showed. Rising energy prices have revived fears of broader inflation, ⁠even as the Federal Reserve concluded what is probably its last policy meeting of the Jerome Powell era ⁠by leaving its key interest rate unchanged, as expected.

Crude prices jumped after the White House confirmed reports that U.S. President Donald Trump told officials ​to prepare for a prolonged blockade of Iranian ports, which suggests ongoing supply pressures ‌due to restricted traffic in the crucial Strait of Hormuz.

The Canada 5-Year yield was up about 12bp to 3.26%.

Soon we will all have a chance to invest in Canada’s version of State Capitalism!

Ottawa plans to grow its new sovereign wealth fund through a combination of buy-in from retail investors and efforts to reallocate money that is tied up in airports and other federal assets.

On Monday, the Prime Minister Mark Carney announced a new $25-billion sovereign wealth fund, which will focus on investing in companies and infrastructure projects that are part of the government’s major projects agenda.

The spring economic update on Tuesday offered few additional details about how the fund will work in practice.

But it did say the government will look to grow the pool of capital beyond the initial $25-billion in seed funding by allowing Canadians to invest in the fund, and by what the government says is optimizing existing federal assets.

I’m busy warming up my cheque-book to get in on the ground floor of this opportunity … we can bring back the Avro Arrow! We can monetize our expertise in building large pay-roll systems! Most excitingly, we can build secure apps for mobile ‘phones! Apps are cool, right? We’ll sell millions of them!

The TXPR price index set a new 52-week high today of 702.72, eclipsing the old mark of 702.39 set Friday. That was in the morning … it eased to 700.67 at the close.

TXPR set a new 52-week high today of 702.39, eclipsing the old mark of 701.82 set yesterday. CPD also set a new 52-week high.

There’s been a development in the Powell affair:

The Trump administration’s extraordinary criminal investigation of Federal Reserve Chair Jerome Powell is over, removing significant uncertainty that had been clouding the future of the world’s most important central bank.

Jeanine Pirro, the US Attorney for the District of Columbia, announced on X Friday she is closing the probe. In the investigation’s place, the Fed’s inspector general has agreed to scrutinize the significant cost overruns at the central bank’s ongoing multibillion-dollar renovation project at its Washington, DC, headquarters.

After the inspector general completes his report, Pirro said her office will review it and could restart its criminal probe if warranted.

In the meantime, the end of the investigation clears the way for Kevin Warsh, President Donald Trump’s pick to succeed Powell, to get confirmed for the role. Powell’s term helming the central bank is set to expire on May 15, and Warsh appeared before the Senate Banking Committee for a confirmation hearing earlier this week.

I’m not quite sure what to make of this. I think it’s improper if there has been a straight, explicit trade-off of the IG’s report for the DOJ probe. And there’s no guarantee that the IG’s report will be given any credence if it doesn’t align with Trump’s wishes.

On the other hand, there is no doubt that there has, in fact, been a big cost overrun in the renovation. Big enough to warrant a probe by the IG, although certainly not a criminal probe without a little more grounds for suspicion. After all, that’s what IGs are for, which is presumably why Trump fired so many of them.

I don’t know. There will be wheels within wheels on this one and I won’t pretend to have any kind of inside story.

I learned a little while ago that “wheels within wheels” is a biblical expression – Ezekiel 1:16:

The appearance of the wheels and their work was like unto the colour of a beryl: and they four had one likeness: and their appearance and their work was as it were a wheel in the middle of a wheel.

TXPR set a new 52-week high today of 701.82, eclipsing the old mark of 700.90 set yesterday.
ZPR & CPD also set new 52-week highs.

The TXPR price index set a new 52-week high today of 700.90, eclipsing the old mark of 700.70 set yesterday.

PerpetualDiscounts now yield 5.71%, equivalent to 7.42% interest at the standard conversion factor of 1.3x. Long corporates yielded 4.99% on 2026-4-22. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 245bp from the 255bp reported April 15.

David Berman wrote a piece in the Globe today extolling preferred shares:

When you start constructing a portfolio that will generate cash in your retirement – or hey, you just like the idea of steady income today – preferred shares may be worth a look.

They beckon with yields north of 5 per cent, which is significantly better than current yields on government bonds and guaranteed investment certificates (GICs).

And when held in a taxable account, the distributions from preferred shares receive favourable treatment from the government.

Kevin Warsh had his confirmation hearing for the Fed chair today:

Kevin Warsh faced searching questions at his Senate confirmation hearing Tuesday. Democrats and even at times Republicans challenged his complicated finances, his relationship to President Donald Trump and what often seems like a wide-eyed endorsement of the promise of artificial intelligence. But one core issue for Warsh went all but unquestioned: his plan for what he calls “regime change” at the Federal Reserve.
…
Warsh would break that status quo. He declined at the hearing to commit to continuing with regular press conferences, which the Fed has held since the financial crisis. He would abandon forward guidance, the Fed’s way of signaling to the markets where it wants interest rates to go. He would even move away from the Fed’s preferred measure of inflation, the core personal consumption expenditure measure, which he dismissed as a “rough swag as to what was going on” with prices. “We don’t have to do a rough swag any more.”

These ideas aren’t just window dressing for Warsh. They are how he brings down the long-term interest rates that trouble Americans in the form of higher mortgage and credit-card rates. Warsh believes markets have driven those rates up in response to muddled policy from the Fed, including the recent spike in inflation after Covid — but going much further back, too. The Fed, he argues, has lost credibility.

Well, he’s entitled to his opinions. But when I think of my mental list of American institutions that have lost credibility over the past fifteen months … the Fed ain’t there.