Will the Bank of Canada cut interest rates in 2024?

In the dynamic realm of global economics, the decisions made by central banks play a pivotal role in shaping the financial future. Recently, the Federal Reserve, following my earlier economic forecast, has maintained its key interest rates, signaling a future shift by announcing potential rate cuts in 2024. Concurrently, the Bank of Canada has taken a more cautious stance, emphasizing that it is premature to discuss rate cuts.

The intricacies of the relationship between the Federal Reserve and the Bank of Canada often echo the strong economic ties between the two nations. The Bank of Canada has traditionally aligned its interest rate policies with the Federal Reserve due to shared economic interests. However, the question arises: when should the Bank of Canada consider cutting rates in response to the Federal Reserve’s impending actions?

In contemplating this scenario, we can envision two distinct paths for the Bank of Canada.

Scenario 1: Managing Production Costs and Inflation

Suppose Canada aims to curtail production costs and combat inflation. In this case, a prudent strategy would involve initiating rate cuts approximately 2 to 3 months after the Federal Reserve takes similar actions. This delay allows for a strategic response to the market dynamics triggered by the initial rate cut.

As interest rates decline, the Canadian dollar’s (CAD) value relative to the U.S. dollar (USD) also decreases. Therefore, a delayed rate cut ensures that the CAD maintains a competitive edge, benefiting Canadian businesses by reducing the cost of production and fostering an environment conducive to tackling inflationary pressures.

Scenario 2: Facilitating Imports and Trade Expansion

Conversely, if the objective is to stimulate imports and enhance trade relationships, the Bank of Canada could contemplate a different timeline. In this scenario, the bank might consider cutting rates slightly ahead of the Federal Reserve, with a 2 to 3-month lead time.

By acting proactively, Canada can leverage the currency devaluation effect to make its imports more cost-effective. This approach is particularly beneficial when seeking to strengthen economic ties and maximize the benefits of favorable exchange rates, potentially boosting imports from strategic partners.

Corporate CFO Perspective: Strategic Planning for Exports

From the standpoint of a hypothetical Canadian corporation, timing becomes a critical factor in determining the most advantageous course of action. If I were the CFO, I would wait 2 to 3 months after the Federal Reserve’s rate cut. This strategic delay would enable the company to first benefit from reduced production costs and lower expenses on imported materials, subsequently positioning itself to capitalize on the favorable exchange rates for increased exports to the United States.

Last but not least, the intricate dance of interest rates between the Federal Reserve and the Bank of Canada reflects the nuanced economic strategies nations and corporations employ. The timing of rate cuts is a delicate balance, influenced by factors ranging from production costs and inflation to trade relationships and export ambitions. As the global economic landscape evolves, staying attuned to these intricacies is critical to making informed decisions in an ever-changing financial world.

What happens if the United States defaults on debt?

What happens if the U.S. defaults on its debt for the first time, and how will that affect Canada and Oil-rich Alberta?

The U.S. debt limit was reached in January 2021, but the Treasury Department used extraordinary measures to avoid a default until early June 2021. Then, however, Congress raised the debt limit by $2.5 trillion and extended it into 2023, averting a potential crisis. As a result, the debt limit could have been reached on December 15, 2021, but the government avoided default until early 2023.

Canada’s economy grew by 5.0% in 2021 after contracting by 5.1% in 2020 due to the COVID-19 pandemic. The recovery was driven by domestic demand, especially private consumption and fixed investment, as well as exports of goods and services. As a result, inflation dropped to 4.3% in March 2021 from 5.2% in February 2021 but remained above the Central Bank’s target range of 1.0–3.0%. In addition, Canada had a trade surplus of CAD 1.04 billion in March 2021, the highest since July 2014, as exports rose 6.6% month-on-month and imports increased by 4.3%.

Crude oil prices have been on a downtrend since October 2021, mainly due to the emergence of the Omicron variant of COVID-19, which raised concerns about global demand and travel restrictions. However, gasoline prices in the U.S. and Canada have risen to record highs due to the closures of six refineries in the U.S. The refining process comes at a cost. However, the operating oil refineries added 30% to 40% spread per gasoline barrel, the highest in 45 years. The spread currently sits at a record high as current north american demand stayed the same into a weakened refining capacity.

Based on this information, one possible scenario is that if the U.S. defaulted on its debt on June 1, 2023, it would hurt both the U.S. and Canadian economies and global financial markets and confidence. The U.S. dollar could depreciate against other currencies, making imports more expensive and exports more competitive. As a result, the U.S. government could face higher borrowing costs and reduced access to credit markets. However, I expect the Federal Reserve to start cutting interest rates by the end of 2023. As a result, U.S. consumers and businesses could face lower interest rates and spending power, which we call Deflation, like back in 1928. The U.S. trade deficit could widen as imports become more expensive and exports less attractive.

The Canadian economy could also suffer from the spillover effects of a U.S. default, as the US is Canada’s largest trading partner and source of foreign investment. The Canadian dollar could appreciate against the U.S. dollar, making exports less competitive and imports cheaper. The Canadian government could face lower borrowing costs and increased demand for its bonds as a haven asset. Canadian consumers and businesses could face lower interest rates and higher purchasing power. The Canadian trade surplus could narrow as exports become less attractive and imports more affordable.

A US default could also affect the oil and gas sector, depending on how it affects the global supply and demand for crude oil and gas. For example, if a U.S. default triggers a worldwide recession and reduces oil and gas consumption, prices could fall further, hurting producers’ revenues and profits. On the other hand, if a U.S. default disrupts the global supply chain and reduces oil and gas production or refining capacity, then prices could rise and benefit producers’ revenues and profits.

The oil and gas jobs could also be affected by a U.S. default, depending on how it affects oil and gas companies’ profitability and investment decisions. For example, if a U.S. default lowers oil and gas prices and reduces producers’ profits, they could minimize exploration, development, production, or refining activities, leading to job losses between 20% to 30%, especially in Alberta, Canada or possibly wage cuts 20% to 40% in exchange for keeping the job losses below 20%-15%. Conversely, if a U.S. default raises oil and gas prices and increases producers’ profits, they could expand their exploration, development, production, or refining activities, leading to job creation or wage increases, which will less likely happen, as history speaks for itself, whenever market correction happens like in 1928, 1987 and 2008 investors and consumers would panic which leads to less consumption and jobs losses.

Many other factors could also influence the outcome of a U.S. default on its debt on June 1, 2023, such as the duration and severity of the default, the policy responses of governments and central banks, the reactions of investors and consumers, and the geopolitical implications of a U.S. default.

Even if the U.S. didn’t default on June 1 and passed this time, there would be a market correction with a magnitude of 1987 and 2008 combined and up to 12 Million job losses in the U.S.

Moustafa Maher – Economist

Nordstrom is Closing in Canada!

Nordstrom, the American luxury department store chain, has recently decided to shut down all its 13 stores in Canada. This decision has surprised many as the stores were opened just seven years ago, which has left many Canadians wondering what went wrong and why the company failed to make a mark in the Canadian market. But I wasn’t surprised!

The opening of Nordstrom stores in Canada was seen as a positive sign for the Canadian economy, as it was expected to create jobs and boost consumer spending. However, the timing of the store openings could have been more favorable. In 2014, the Canadian economy was hit hard by the drop in oil prices, which affected the country’s GDP growth, and led to a decline in consumer confidence.

The macroeconomists within Nordstrom’s organization overlooked this fact and failed to factor in the impact of the oil price crash on the Canadian economy. Nordstrom in Calgary, for example, made over $400,000 on their Gala opening day alone, which might have sent the wrong signal to the corporate’s VPs and Economists. The company struggled to keep attracting customers and generate profits, leading to the closing all stores in Canada.

Another factor that contributed to the failure of Nordstrom in Canada was the competitive nature of the Canadian retail market. The market is dominated by well-established retailers, such as Hudson’s Bay Company, which has been around for over 100 years. However, the company also faces competition from other international retailers, such as Zara and H&M, which have a strong presence in Canada.

Moreover, the Canadian retail market is heavily regulated, which makes it difficult for foreign companies to navigate. The rules around foreign ownership and Taxation on start-ups, for example, can be quite different from those in the United States, making it challenging for foreign retailers to set up shop in Canada.

Nordstrom’s failure in Canada highlights the importance of conducting thorough market research and considering all macroeconomic factors before entering a new market. It also underscores the need for companies to adapt their business strategies to local market conditions and regulations.

The experience of Nordstrom should serve as a cautionary tale for other companies, like SAKS, looking to expand into the Canadian market. While the closure of Nordstrom can offer significant growth opportunities to SAKS for the time being, it requires careful planning and consideration of various factors that can impact a company’s success. SAKS might need to exit sooner than later.

Moustafa Maher – Economist.