How the Turntables….

As Michael Scott said in the show The Office ” Well, well, how the turntables…….have turned”. For the last 6 months I have watched people hammer away at the BLS and the US employment reports and the revisions. I have watched as people claim that interest rates should be lower than they are based on the revisions to the employment data. I have watched as people call into question the reliability of the employment reports, the entire BLS methodology, and the archaic system of tabulating results.

Well, today it was Canada’s turn to play Revision Economics, and boy was it a doozy. Statistics Canada revised Canadian GDP, and all I can say is WOW!!!!!. Basically, Statistics Canada under reported GDP growth in Canada by almost an ENTIRE YEAR OF GDP!!!!! The revision was a full 1.3%. 2023 GDP went from 1.2% to 1.5%, 2022 went all the way up to 4.2% from 3.8%, and 2021 went to a whopper of a 6.0% output from 5.2%.

All of this means the Canadian economy was actually a whole hell of a lot stronger than previously reported, and calls into question whether we need ” jumbo sized 50 bp rate cuts “. In fact, based on that level of GDP we actually needed higher rates than we had from 2022 all the way through 2024. It also leads one to wonder if we can trust the GDP numbers that are released in the future. Of course, Statistics Canada also puts out the employment report and the inflation report, so if the methodology they use leads to a GDP revision to the upside, perhaps the employment and inflation numbers get the same treatment?

Now, naturally I haven’t heard sweet diddly shit from all the people who were faulting higher rates on faulty initial jobless claims numbers that were revised lower later. Amazing how people tend to cry foul only when it fits their agenda, isn’t it? So, I do have a few things to think about:

If Stats Canada missed effectively an entire year of GDP growth over the last 3 years, what else have they missed? Should we expect inflation and employment to be revised by a large margin as well?

Why was the data miss so large? Why did Stats Can miss all of this growth? Is is something that can be attributed to work from home, is it a flaw in the data, is it a flaw in the calculating, or was it a flaw in measuring the population? We already know that Stats Canada last year announced the mis counted the population by a MILLION PEOPLE!!!!

Canada has always had a fairly good track record in terms of the quality of the data. Does that get called into question now by international investors and markets? We mis counted a million people in 2023, and now we missed a years worth of GDP growth. Can the numbers be trusted going forward? Do investors start to pull back on government bond buying if they cannot trust the data that is given to them to analyze and make their decision?

Am I over reacting to one number? Probably. But this miss is one of the largest misses ever on a GDP report. That is huge.

But the problem for me was that even following this massive upward revision to GDP, the Canadian dollar still dropped. Normally, you would expect to see the CAD rally on the prospects of higher bond yields based on a higher GDP. Well, the Canada 5 year did in fact creep up 2 bps today, but somehow the CAD still lost ground to the USD. Even with a piece of data that should be massively bullish for the CAD, it still dropped lower. The CAD is approaching the lowest level in 4 years, the same line it held during the initial COVID volatility. If CAD breaks below the low from 2020, there isn’t much support below for another 3 or 4 cents. If we cannot get the currency to go up on great news like an upward GSDP revision, I am not sure what moves it up.

And let’s add some insult to injury here on this mornings US inflation numbers. Yes, inflation came in as expected, and the reaction was muted. That is the good news. It is usually good for markets when the actual number matches the consensus of estimates in the market. It means everyone is hedged correctly, and you typically avoid a lot of volatility. However, even though the number matched market expectations, those expectations were elevated. Inflation actually crept up. Inflation was at 2.6% in October from a 2.4% rate in September. This increase happened even though energy prices were lower ( oil ).

The reason I mention all of this is that if you put all of these things together, it is continually backing the BOC into a corner. Inflation going back up stateside, a dropping currency, and lack of confidence in the data.

The only fix for all 3 of those is to raise interest rates. Higher rates start to drop inflation, they definitely prop up the currency, and higher rates can help offset the fear of the unknown in the data as investors get paid a higher rate for the expected higher risk in not knowing if the data is correct. While everyone is banking on lower rates in the coming months, that may not be the case.

If you have had conversations with clients about taking a shorter term with the hopes of renewing to a lower rate, you may also find out that the turntables have turned…….