There were no major economic releases today.
The main economic event of this week will be Friday’s employment reports in the US and Canada. Markets are expecting US non-farm payrolls to plunge by 21 million positions in April and the unemployment rate is anticipated to jump from 4.4 percent in March to 16 percent in April. Canadian employment is expected to drop by 5 million lifting the unemployment rate to 20 percent in April.
Other key releases this week include: Canadian international trade for March to be released on Tuesday and Canadian housing starts for April on Friday. In the US, we will get the US ISM non-manufacturing index on Tuesday.
The G20, with Canada being member, announced The Coronavirus Global Response initiative, which is aimed at increasing global cooperation between scientists and regulators, industry and governments, international organizations, foundations, and health care professionals. It is hoping to raise more than US$8 billion to support the development of rapid coronavirus diagnostics, treatments, and vaccines. It will work with the WHO to coordinate and prioritize efforts to vulnerable countries. This is likely an important measure to help developing countries that have less resources than advance countries deal with the pandemic.
We remain concerned about the fiscal risks in the post-COVID-19 world. So, it is worth highlighting that over the past few weeks the European Central Bank (ECB) has focused its sovereign bond purchases on the countries hit hardest by the coronavirus pandemic, buying mostly Italian, French, and Spanish government bonds. The ECB’s €29.6bn of net purchases were mostly made up of €10.9bn of Italian bonds, €8.3bn of French bonds, and €4.3bn of Spanish bonds. The central bank’s sovereign bond purchases are meant to be carried out in proportion to the economic weight of its 19 individual member countries; but, the ECB has stressed that it has some flexibility in this rule.
I have had a lot of inquires about the appointment of Tiff Macklem to be the next Governor of the Bank of Canada. He will take the mantle on June 3. For the economist community, Governor Macklem is a known quantity. He has had a long and distinguished career, with much of it at the central bank. He also has very relevant experience at the Department of Finance. Indeed, as ADM Finance during the 2008/09 financial crisis, he was dealing with the greatest economic challenge since the Great Depression. Now, he will become the Governor of the Bank of Canada during the economic fallout of the Great Lockdown, which will be far worse than the 2008/09 recession.
Markets will be looking to assess how future Governor Macklem will approach policy differently than Governor Poloz. At the press conference, they didn’t get much direction. He did not answer questions about policy and stressed that there is only one Governor at a time, and that is Stephen Poloz until June 3.
In my mind, future Governor Macklem will be a steady hand on the tiller of monetary policy. I do not expect any dramatic changes. I suspect future Governor Macklem will be averse to adopting negative interest rates, as was Governor Poloz. It is unlikely that he will alter the current federal, provincial, and corporate debt purchase plans.
We know future Governor Macklem will face an exceptionally challenging environment. He will need to assess the stance of monetary policy relative to the downside risks to the economy and the risk of deflation in the near term. If the economy needs greater support, I would expect an expansion of the debt purchases, combined with other non-traditional policies, such as forward guidance on interest rates (i.e. a commitment not to raise rates for specific length of time). Later, he will need to assess the eventual recovery relative to the risks of future inflation. I suspect that the rebalancing of monetary policy will be very gradual, partly reflecting the challenge of even more indebted households and more leveraged businesses.
Under all future scenarios, I expect the future Governor Macklem will pursue independent monetary policy aimed at hitting the Bank of Canada’s mid-point inflation target of 2 percent, as defined by the inflation target range of 1 to 3 percent.
