April Showers

As the old saying goes ” April showers bring May flowers”. However this year, I don’t think there will be much on bloom….financially speaking anyways.

April 16th is a very special day this year. First and foremost it is my birthday, but EVEN more importantly it is the day that the Finance Minister has set to unveil the federal budget. This could cause some problems for the ” rates have to go down ” crowd.

As we all know, or at least should know, the BOC meets tomorrow. I will save you the suspense – Tiff ain’t cutting rates. There, just saved you a bunch of reading tomorrow. However, the next BOC meeting is scheduled for April 10th – 6 days before the Federal budget. Herein lies the problem.

I hate getting political, but I kinda have to here. The Liberals are tanking. There I said it!! If the Canadian Liberal Party were a horse, it would be at the back of the pack, and on its way to the glue factory. However, as we all know, things can change quickly. One of the easiest known ways to turn around a party in the polls is to spend money. And the current administration needs no lessons on how to spend money and rack up debt. So, if we are coming into a pre election period, look for Aunt Chrystia to turn on the taps of the federal government and spend, spend, spend. But, rest assured, I am sure they will still find ways to ” tax the rich” and make sure the wealthy pay their ” fair share”.

However, for every solution there is a problem. Tiff and Co. have made it more than clear that the Federal Government spending is a large part of the inflation problem. Tiff has done everything but beg the government to wean Canada off the deficit spending. Running deficits like Canada is currently running is very inflationary. Everyone knows this. So, we have a timing issue on our hands. No way in hell Tiff is going to cut rates 6 days before a potential spending orgy from the federal government. That would be akin to bringing an aphrodisiac to a swingers resort. So, March gets us no cut, April is probably wait and see what the Feds do, and then we don’t get another meeting until June 05.

If we do indeed see the Liberal Party announce a massive fiscal stimulus program, or start spending quicker than the printers can print dollars, Tiff is going to have some real concerns about lowering rates, or doing any kind of monetary easing. Monetary and fiscal policy are the Ying to each others Yang. If the Ying is spending like crazy on the fiscal side, no way the monetary side os going to add fuel to that fire. Someone has to be the adult in the room, and if push comes to shove, it will be Tiff. If the spending gets out of control in the federal budget, Tiff and Co have other tools than just the overnight rate to try and offset it. Things like quantitative tightening could be back on the table to try and restore some balance.

While I hate to admit it, the likelihood of rate drops will rest squarely on the shoulders of the governing party to restrain their spending, and try to right the economic ship. History tells me that may not be an easy task, but I guess time will tell.

After June 05, we won’t hear a rate decision until July 24th, and then into the fall. Short of some black swan event, a liquidity problem ( like we saw in the Spring of 2023 in the US ) , or a Lehman Brothers 2008 type of repeat, I think it is quite probable we won’t see the BOC helping out the household budget with rate cuts until September.

We all know bankruptcies are up, business bankruptcies are up, loan arrears are up, mortgage arrears are up, loan loss provisions from the Big 6 are up, extended amortizations are up, but that is in stark contrast to a ripping stock market, soaring bitcoin prices, and earnings season is halfway through and a lot of companies are simply blowing the doors off on earnings. As Dickens said ” It was the best of times, it was the worst of times”. The 2 realities are juxtaposing against each other, and muddying the waters for policy makers.

April rain will indeed come, but it is the thunder, lightning and wind that may be the problem.