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Market Wire - Canadian Economy Performs Better Than Expected, Markets Refuse to Cheer Up

CalendarMarch 1, 2022
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Karl Schamotta - Chief Market Strategist, karl.schamotta@corpay.com

The Canadian economy expanded at a faster-than-expected 6.7 percent annualized pace in the fourth quarter, but growth flatlined in December as the Omicron wave hit and retail spending fell. Numbers released by Statistics Canada this morning show a 1.6 percent quarter-over-quarter expansion in real gross domestic product, with December seeing a +0.1 percent gain in the services sector offset by a -0.1 percent decline in goods-producing industries.

A preliminary estimate suggested that the economy could expand 0.2 percent in January, but the loonie remained weak as global events overshadowed domestic developments.

Markets remain firmly gripped by the Russia-Ukraine conflict, with oil prices soaring and bond yields plunging as room for negotiation disappears and positions harden.

Large columns of Russian armour have been spotted encircling Kyiv, and reports suggest that a pincer movement has cut off Ukraine’s access to the Sea of Azov. Both sides appear to be digging in for an extended occupation, raising the likelihood of prolonged disruptions in basic commodities and global energy supplies.

10-year Treasury yields fell another 8 basis points overnight to trade at 1.758 percent, and odds on a 50 basis point move at the Federal Reserve’s March meeting have plummeted toward zero. Gilt yields dropped by the most since the Brexit referendum, and - shrugging off a substantial fiscal expansion - the German bund tumbled back into negative territory.

Brent crude is trading above $102 a barrel, up more than 5 percent overnight, while German natural gas prices are up at least 7 percent.

In a terrible irony, surging oil and gas prices - paired with energy carveouts in Western sanctions - are delivering a windfall to the Putin regime, even as the population suffers a massive drop in purchasing power.

Currency traders are in sell-first, ask-questions-later mode. The yen and dollar are winning a ‘reverse beauty contest’, with funds flowing into the least-unattractive alternatives as the euro and pound tumble. With a 25 basis point increase fully priced in for tomorrow’s Bank of Canada meeting, the loonie is lacking strong support, and continues to shrug off potential terms of trade gains from the energy complex.

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