The Bank Of Canada Forecast Two And A Half Percent. It Got Three. Twice. — Transcript

Full transcript

1. 0:00In July, the Bank of Canada published a
2. 0:01forecast. Not a guess from a bank
3. 0:03economist, the bank's own number in its
4. 0:06own quarterly report. It said inflation
5. 0:08would ease to about 2 and 1/2% over the
6. 0:11second half of this year.
7. 0:13July came in at three. August came in at
8. 0:15three. That is the first two months of
9. 0:17that second half, and the number is
10. 0:19running half a point above what the bank
11. 0:21projected.
12. 0:22On the 28th of October, the bank has to
13. 0:24publish a new one. I am Mark. I am 26, I
14. 0:27rent, and I own exactly one fund, XEQT.
15. 0:31I own no bonds and no GICs. So, you
16. 0:34might reasonably ask why a man with one
17. 0:36equity fund spent a week reading central
18. 0:38bank data. Because I kept seeing the
19. 0:40same headline. Canada might raise
20. 0:42interest rates this month. And when I
21. 0:44went looking for the number behind that
22. 0:45headline, I could not find one number. I
23. 0:48found six, and they did not agree with
24. 0:50each other. That turned out to be the
25. 0:51actual story, not the decision, the
26. 0:54disagreement. Two things before I start.
27. 0:56First, every figure in this video comes
28. 0:58from a named source with a date
29. 1:00attached, and I will say the date out
30. 1:01loud, because a market number without a
31. 1:03date is worthless three weeks later.
32. 1:05Where I have done arithmetic on somebody
33. 1:06else's numbers, I will say the words my
34. 1:08calculation out loud every time. Second,
35. 1:11and this one matters more, I'm not
36. 1:12predicting what the Bank of Canada does
37. 1:14on the 28th of October. I do not know.
38. 1:17Nobody in this video knows, including
39. 1:18the people paid to know. What I am
40. 1:20describing is exposure, not a forecast,
41. 1:22and those are different things. If you
42. 1:24came here for a prediction, I do not
43. 1:26have one. Let me start with where we
44. 1:27actually are. The Bank of Canada's
45. 1:29policy rate is 2.25%. It has been 2.25%
46. 1:33since the 29th of October last year,
47. 1:35when they cut it a quarter point. Since
48. 1:36that cut, there have been seven
49. 1:38decisions, seven holds in a row,
50. 1:40December, January, March, April, June,
51. 1:43July, and the 2nd of September. Here is
52. 1:46the part that surprised me. The last
53. 1:48time the Bank of Canada actually raised
54. 1:50rates was the 12th of July, 2023, over
55. 1:53three years ago. That was the last of 10
56. 1:55hikes in a row, and it took the rate to
57. 1:575%. Think about what that means for
58. 1:59anybody who started investing after
59. 2:01that. If you bought your first fund in
60. 2:022024, you have never once seen the Bank
61. 2:05of Canada raise rates, not once. Your
62. 2:07entire experience is cuts and holds.
63. 2:09Mine, too. So, what changed? Oil
64. 2:11changed. Headline inflation in August
65. 2:13was 3.0% year-over-year. That is the
66. 2:15number that makes the news, but
67. 2:16Statistics Canada publishes more than
68. 2:18one measure, and the others tell a
69. 2:20different story. Inflation excluding
70. 2:21gasoline was 2.4%. The bank's core
71. 2:24measures, designed to strip out the
72. 2:26noisy stuff, came in at 1.9% and 2.0%.
73. 2:29Read that again. The core measures are
74. 2:31at target, 1.9, 2.0. The Bank of Canada
75. 2:34aims for 2%, and on its own preferred
76. 2:36measures, it is there. The 3% headline
77. 2:38is a gasoline story. Gasoline was up
78. 2:40almost 23% year-over-year in August, and
79. 2:43the gap between the headline and the
80. 2:45ex-gasoline number is about 6/10 of a
81. 2:47point. That is my calculation from
82. 2:49Statistics Canada's own release. Roughly
83. 2:52a fifth of the headline is one item, and
84. 2:54gasoline is up because oil is up. West
85. 2:57Texas crude settled at about $91 a
86. 2:59barrel on the 2nd of October after a
87. 3:01supply shock in the Middle East. So,
88. 3:03this is not Canadians facing broad
89. 3:05runaway inflation. Groceries actually
90. 3:07came in below the headline, the first
91. 3:09time that has happened in over 2 years.
92. 3:11This is one commodity moving one line of
93. 3:14the index for reasons that have nothing
94. 3:16to do with the Canadian economy. The
95. 3:17bank said so itself. In its September
96. 3:20statement, it put the elevated headline
97. 3:22down to, in its words, "mainly because
98. 3:24of persistently higher gasoline prices."
99. 3:26And here's the thing people keep getting
100. 3:28wrong about that statement. It contains
101. 3:30no signal of a rate hike, none. I read
102. 3:32it twice looking for one. The strongest
103. 3:34thing on the record is in a separate
104. 3:36document, the summary of the Governing
105. 3:38Council's deliberations, where they
106. 3:39agreed that if higher energy prices
107. 3:41spilled over into other parts of the
108. 3:43index, it could require a monetary
109. 3:45policy response. Could, if. That is a
110. 3:48conditional sentence, not a warning.
111. 3:50Anybody telling you the Bank of Canada
112. 3:51has signaled a hike has not read the
113. 3:53document, which brings me to the part I
114. 3:55actually made this video for. If you go
115. 3:57looking for the odds of a rate hike on
116. 3:58the 28th of October, you will find
117. 4:00numbers that are wildly, almost
118. 4:02comically, far apart. On the 2nd of
119. 4:04October, one tracker built on overnight
120. 4:06swap pricing put it at 30%. A real money
121. 4:08prediction market was in the mid-30s.
122. 4:10Back on the 22nd of September, the
123. 4:12Montreal Exchange's own tool said about
124. 4:1441% while readings taken straight off
125. 4:16the futures without adjustment were
126. 4:18running up in the 70s. Same decision,
127. 4:20same market within about 2 weeks.
128. 4:22Numbers ranging from under a third to
129. 4:23roughly three in four. That is not a
130. 4:25rounding difference. Something
131. 4:27structural is going on, and when I
132. 4:28worked out what it was, it turned out to
133. 4:30be small, boring, and completely
134. 4:32knowable. Here is the mechanism. To work
135. 4:33out what the market expects, you look at
136. 4:35contracts tied to an overnight interest
137. 4:37rate benchmark. In Canada, that
138. 4:39benchmark is called CORRA, the Canadian
139. 4:40Overnight Repo Rate Average.
140. 4:43It is the rate at which banks actually
141. 4:44lend to each other overnight against
142. 4:46government collateral.
143. 4:47The assumption a lot of these trackers
144. 4:49make is that CORRA equals the Bank of
145. 4:51Canada's policy rate. It does not. It
146. 4:53trades a little above it. And if you
147. 4:55forget to adjust for that gap, every
148. 4:57probability you calculate comes out too
149. 4:59high because you read a funding spread
150. 5:01as if it were the market expecting a
151. 5:02rate increase.
152. 5:04I did not want to take anybody's word
153. 5:05for how big that gap is, so I pulled the
154. 5:07series from the Bank of Canada directly.
155. 5:09It is published, it is free, anyone can
156. 5:11download it. Here is what it says. From
157. 5:14the 10th of December last year through
158. 5:15the 1st of October this year, which
159. 5:17covers the whole stretch of seven holds,
160. 5:19there are 202 trading days. On 170 of
161. 5:23those days, CORRA traded above the
162. 5:25policy rate. That is 84% of the time. My
163. 5:28calculation from the bank's own series.
164. 5:31The average gap over that whole period
165. 5:33was about three basis points, 300ths of
166. 5:351%. And the most recent readings, the
167. 5:38ones going into this decision, are
168. 5:40running at five and six. So, that is
169. 5:42your answer. The trackers saying three
170. 5:43in four and the tracker saying one in
171. 5:45four are not looking at different
172. 5:46markets, They're looking at the same
173. 5:48market and some of them are subtracting
174. 5:50about 500 of a percentage point while
175. 5:52the others are not. A spread the width
176. 5:54of a rounding error is the entire
177. 5:56difference between Canada is probably
178. 5:57hiking and Canada is probably not. I
179. 6:00want to be careful here because this
180. 6:01cuts both ways. I am not telling you the
181. 6:04low numbers are right and the high ones
182. 6:05are wrong. The adjustment is a judgment
183. 6:07call and reasonable desks make it
184. 6:09differently. What I am telling you is
185. 6:11that when you see a confident percentage
186. 6:12in a headline, you're looking at a
187. 6:14modeling choice, not a fact. And nobody
188. 6:17quoting it will tell you which choice
189. 6:18they made. So, if the probability
190. 6:20numbers cannot settle it, is there
191. 6:21anything that can? There is one number I
192. 6:23trust more than any of them because it
193. 6:25is not a model, it is a price.
194. 6:27Government of Canada bond yields. As of
195. 6:29the 1st of October, the 2-year was at
196. 6:313.27%,
197. 6:33the 5-year at 3.62, the 10-year at 3.94.
198. 6:37Now, hold that 2-year against the policy
199. 6:39rate. 3.27%
200. 6:42against a policy rate of 2.25%.
201. 6:45The 2-year is sitting about a full
202. 6:46percentage point above the rate the Bank
203. 6:48of Canada is actually charging.
204. 6:50That is my calculation from the bank's
205. 6:52own published yields. And those yields
206. 6:54have moved. Since the 2nd of July, the
207. 6:572-year is up about half a point and the
208. 6:595-year slightly more.
209. 7:00That is real money taking a real
210. 7:02position with no methodology argument
211. 7:05attached.
212. 7:06Whatever the probability trackers say,
213. 7:08the bond market has already repriced.
214. 7:10That happened. It is not a forecast.
215. 7:13Now, let me put the other side of this
216. 7:14on the table because a video that only
217. 7:16showed you the scary half would be a
218. 7:17dishonest video. The Canadian stock
219. 7:19market is not falling apart. In
220. 7:21September, the index fell about 2.9% and
221. 7:23on the 1st of October, it closed at a
222. 7:2510-week low. Both true. But over the
223. 7:27same stretch, the index posted its ninth
224. 7:29straight quarter of gains. That is the
225. 7:30longest run on record and it is up more
226. 7:32than 16% over the past year. So, a bad
227. 7:35month inside a very good run. If
228. 7:37somebody shows you the month without the
229. 7:38run, ask yourself why. What does any of
230. 7:40this actually mean for you? I am 26 with
231. 7:42one equity fund, so let me be honest
232. 7:44about the limits of what I can tell a
233. 7:45person who is 60 with an income
234. 7:47portfolio. I am not your advisor and I
235. 7:49am not going to pretend the answer is
236. 7:50obvious, but I can tell you what is
237. 7:52already changed as of the first week of
238. 7:54October. Cash pays more than it did. The
239. 7:56best one-year GICs are somewhere around
240. 7:583.65 to 4% depending on whose survey you
241. 8:01read and the best five-year terms are a
242. 8:02little higher. I am giving you a range
243. 8:04on purpose because two reputable
244. 8:06comparison sites disagree and anybody
245. 8:08quoting one precise best rate is quoting
246. 8:10one survey on one day. High interest
247. 8:12savings ETFs are a different picture.
248. 8:14The largest one paid about 2% over the
249. 8:16trailing 12 months as of the 2nd of
250. 8:18October. That is a backward-looking
251. 8:19number. It describes the past year and
252. 8:21it is not a promise about the next one.
253. 8:23The honest summary is this. If rates go
254. 8:25up from here, money already sitting in
255. 8:27cash and short-term instruments earns
256. 8:29more and anything long-dated and
257. 8:31interest-sensitive gets repriced. If
258. 8:33rates hold, very little changes. If they
259. 8:35cut, the reverse. That is exposure. That
260. 8:37is the whole of what I am willing to
261. 8:39say. What I would actually watch on the
262. 8:4028th of October is not the rate. It is
263. 8:43the report that lands with it because
264. 8:44that same morning the bank publishes a
265. 8:46new quarterly forecast and it has to do
266. 8:48something it has not had to do yet. It
267. 8:50has to mark its own July projection
268. 8:52against what actually happened. It said
269. 8:53about 2 and 1/2% for the back half of
270. 8:55this year. It got three and three. The
271. 8:58rate decision is one line. The forecast
272. 9:00revision is the whole document and it
273. 9:02tells you what they think happens next
274. 9:04in their own words instead of somebody's
275. 9:05model of their words. That is the thing
276. 9:08worth reading and I will read it. If
277. 9:09this was useful, subscribing genuinely
278. 9:11helps and if you think I have got any of
279. 9:12this wrong, the comment section is where
280. 9:14my last three videos came from, so tell
281. 9:16me. This is Next Dollar and I'll see you
282. 9:17in the next one.