Recap 4-17-12

Main Items:

· BoC kept policy unchanged, but the statement was hawkish:

1. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate

2. the economy is now expected to return to full capacity in the first half of 2013

3. the profile for inflation is expected to be somewhat firmer than anticipated in January. Total CPI inflation is expected, along with core inflation, to be around 2 per cent over the balance of the projection horizon

· US Housing Starts & Building Permits basically offset each other.

· Spain’s central government is threatening to take over budgetary control of regions that ignore deficit limits as early as next month.

· Spain’s Bill auction was oversubscribed, which helped periphery spreads tighten. There is a 2y & 10y bond auction this Thursday

· Rio Tinto guidance for FY12, particularly in the aluminium and copper divisions were somewhat weaker than expected


  • German ZEW increased to 23.4 in Apr vs 19 exp and 22.3 prev
  • EU CPI increased to 2.7% YoY vs 2.6% exp. The Core measure increased to 1.6% YoY vs 1.5% exp and prev
  • UK CPI rose 3.5% YoY in Mar vs 3.4% exp and prev. Core CPI increased to 2.5% YoY vs 2.4% exp and 2.3% prev

Upcoming Data:

  • Tues: UK CPI, EU CPI, German ZEW, US Housing Starts, BoC
  • Wed: BoC Minutes, UK Employment, Japan Trade
  • Thurs: US Jobless Claims, Philly Fed, Existing Home Sales, EU Cons Conf
  • Fri: German IFO, PPI, Canada CPI,


The BoC shift today has been expected for some time. The question now becomes, what’s the appropriate ‘neutral’ BoC rate? I think the answer is a function of both the inflation target rate, as well as the Fed Funds rate. Arguably, the BoC rate should be above the rate of inflation, but also fairly close to the Fed Funds rate. This suggests something around 2% by 3Q 2013, if the BoC forecast holds up. Given that Sept 2013 BA contracts are currently pricing in ~1.6%, and BA rates average ~25bps above the BoC rate, there is probably a bit more room for Canadian rates to reprice.

Separately, Goldman notes that
-As of Q4 2011, US student debt of $870 billion outweighed credit card debt ($700 billion), auto loans ($730 billion), and HELOCs ($630 billion).
-39% of undergraduates in the 2007-8 school year relied on loans
-delinquency rates on loans that have entered the repayment period appear to be substantial.

-because this debt burden is difficult to discharge and taken on early, there may be a substantial delaying effect on homeownership & household formation rates for student loan borrowers,