Muddy Waters

Just when you think that interest rate policy decisions were going to become easier – they got muddy – and fast.

With the bombing of Iran’s nuclear assets in the last 24 hours, a whole host of things are about to change. While probably near the bottom of the list for many folks, it will have some potential impacts on Canadian interest rates. I will lay out some potential impacts you may see in the coming days and weeks. This is not an endorsement or opposition to what happened, only the fallout that we may see.

If you are over the legal voting age in Canada, then you should be aware that a lot of oil comes from Iran. Now, many people will think this couldn’t really make an impact on Canada because, well, Canada has the worlds second largest oil reserves in the world. However, due to complete government mismanagement for the last 15 years or so, we have never really been able to extract the oil and become energy independent. That is not the problem though. Even if Canada was energy independent, it wouldn’t solve the potential crisis coming down the pipe. Most of the of the world depends on crude oil from abroad ( Canada included ) and that oil is likely to get really really expensive. On top of just oil, the cost for insuring ships that pass through the Straight has ballooned in the last 2 weeks, with some ships now being charged 10 million in insurance premiums just to be insured for traversing the water of the Hormuz Straight. Those increased insurance premiums ( they used to cost around 2 Million per trip ) will certainly be added on to the cost of the freight.

On Sunday, Iran announced it was closing the Straight of Hormuz in retaliation for the US strikes on the weekend. 20% of the worlds oil transits through the Straight of Hormuz, and if it is to stay closed, you can look for oil prices to shoot up. Looking at pre market action, oil look to jump around 7% when futures markets open tonight. A lot can happen this week, and the situation is certainly fluid, but as things sit right now, oil is going up. We all know that almost everything we buy has some form of plastic, or chemical in it derived from oil. If oil shoots up, look for inflation to do the same.

So, we have oil that is going to make a big jump, and could easily add .5% to the inflation number in the coming 30 to 90 days. Not exactly great news for the average consumer.

But, we also have a deadline for Canada / US trade deals to be worked out, otherwise Mr. Carney has threatened to re implement retaliatory tariffs on US imports. I really thought we learned the last time that retaliatory tariffs only end up costing Canadians more, but apparently it is a hard lesson to learn. By July 21st there needs to be a deal, or Canada drops the hammer on counter tariffs. Oddly enough, Canada paid to run billboard ads here in Florida explaining that tariffs make life more expensive for people, but somehow the message didn’t sink in with Canadian politicians. DJT isn’t exactly the type of fellow that enjoys being given ultimatums, so we could see counter counter tariffs ( is that even a thing ) break out between Canada and the US in the coming 30 days. Unless there is a full out deal, tariffs go into effect on one side of the boarder or the other, and that will start making life potentially more expensive for people.

While the world falls apart at the seams, no one has really seemingly noticed that bond yields are slowly but surely ticking higher. It has been a slow grind up for the Canada 5 year, and it has risen from 2.50% in April to about 2.90% as of Fridays close, with an intra week high touching on the 3.00%. 3.00% seems to be resistance right now, as the yield has twice tried to break through 3% and failed. But, it hasn’t failed miserably, and slowly tries to re test the 3% line. If Canada 5’s break through and hold over 3%, yields could be away to the races, and the next resistance point is around 3.38% – 3.41%.

Now, with all the strife happening around the world, there is a lot going on economically within Canada. Unemployment keeps rising, real estate listings are at all time highs, sales are at all time lows, prices are taking the escalator down, and yet bond yields are climbing? Normally, a person would expect to see bond yields dropping on all of these problems, but they are climbing. Bond yields going up, mean bond prices are coming down, which means investors are avoiding Canadian bonds – or perhaps just bonds in general.

All of this – oil shooting up, a potential Canada / US trade war, Middle Eastern tensions, and a collapsing Canada economy tell me that we should be seeing bond yields drop, but they are slowly and surely climbing. Generally the only reason bond yields climb into so much uncertainty is that inflation is still a major concern. While I doubt that we will see a rise in the overnight rate on July 30, don’t be so sure we get the 25 basis point cut that everyone is counting on. There are a lot of building inflationary pressures right now, and while they may take a while to manifest themselves, the BOC knows they are coming.

The waters look muddy for the July 30th BOC meeting, and Uncle Tiff and Co. are going to have a lot of data to look at.