AMERICAS OIL: Baker Hughes Regional Update – Week of October 17th

There are 21bp of cuts priced through year-end, pretty much where pricing came into the rate decision, with the next cut only fully priced by around March – and no more than 2 cuts seen through the rest of the cycle.

• Key to the October decision will be one report each of labour force and inflation data (for September) and the quarterly BOC Business Outlook Survey in the interim. In the meantime, there’s only about a one-in-three market implied probability of a follow-up cut.

Sell-Side Analyst Reaction: There was only one sell-side analyst view change that we saw after the meeting:

• RBC came in expecting the BOC’s easing cycle to already be at an end (including a hold this week), but now appears to see an October cut: “unless there is a drastic turnaround in softening employment trends and easing core inflation in September, we think the likelihood for another cut in the October meeting is high.” Otherwise analysts remain roughly split between whether there will be one or two further cuts – similar to market pricing.

• +25,000 SFRX5 95.62/95.75 call spds, 1.0 vs. 96.325/0.05%

We've just published our review of the September Bank of Canada meeting - Download Full Report Here

• The Bank of Canada resumed easing on September 17 after a 3-meeting hold, with a 25bp rate cut to the overnight rate to 2.50%. There was limited market reaction on net to the decision and press conference, with the BOC as expected keeping the door open to further easing as soon as the next meeting in October, but falling short of any firm guidance to that effect.
• The future path of rates repriced slightly to reflect the implemented cut (which had not quite been fully priced going into the meeting, reflecting a slightly hawkish move going into the release).
• While rate cut expectations diminished slightly early in the press conference after headlines reported Gov Macklem saying that they considered holding rates, this didn’t appear to be a signal as he was merely citing a formality (“I there was a clear consensus to cut our policy rate by 25 basis points. You know we as we have for the last couple of meetings, we considered two alternatives, hold the policy rate where we are, or cut the policy rate.”)
• Otherwise, attention was on whether the BOC would signal further cuts. July’s guidance suggesting that there may be a “need” to cut rates in future was removed, but overall the BOC maintained its easing bias.
• Macklem entertained press questions about what would trigger a further cut, and the overall communications highlighted risks to growth and employment alongside what the BOC sees as better-contained inflationary pressures than had been feared in the summer.
• He continually mentioned the need for a balanced approach to future rate-setting, moving meeting-by-meeting and keeping the next decision in October live.
• This was summed up by his comment: “what we can do is help the economy adjust while maintaining well-controlled inflation. That's what we're focused on... it's going to be about balancing those risks. If the risks tilt, if the risks shift, we're prepared to take action, and if the risks tilt further, we're prepared to take more action, but we're going to take it one meeting at a time. We are taking a shorter horizon. We're being a little less forward looking than usual, and we'll make that risk assessment in October when we get there."