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ON DECK FOR TUESDAY, MARCH 26
ON DECK FOR TUESDAY, MARCH 26

KEY POINTS:

  • Three things to monitor after a dull overnight market session
  • The BoC to speak on productivity today
  • Ontario to add to fiscal easing that negates monetary easing
  • Consumer confidence to headline light US data

After a dull overnight session there will be three things to monitor today.

THE BoC ON PRODUCTIVITY

Senior Deputy Governor Carolyn Rogers will deliver a speech on “the urgent need to improve productivity” this morning (8amET). There will be audience Q&A but no press conference which seems to be a recent pattern.

Productivity has been tumbling for an extended period now and it has underperformed the US for many years. Unit labour costs (ie: productivity-adjusted labour costs) started to accelerated after 2017 but really took off from 2021 onward (chart 1). Workers getting paid more than productivity justifies adds to inflation risk. See the Global Week Ahead for more charts and arguments on this.

Chart 1: Canada: Unit Labour Costs

Hopefully the BoC doesn’t bash immigrants, given the longstanding challenges and what I’ve long said to be the politicization of the narrative around the effects of immigration. I still maintain that it’s premature to judge the decline in real GDP per capita because a population shock unfolds in two or more stages and we’ve only seen part of the first stage so far. The second stage is about integrating new arrivals which may reveal a different picture for living standards. I would expect the speech to address the multiple drivers and also emphasize the implications for inflation if not addressed in an expeditious manner.

In any event, the BoC has misjudged productivity as illustrated by Governor Macklem’s past remarks that advanced the view that productivity would improve on the eve of what instead turned out to be an accelerated deterioration. In theory, tumbling productivity drags down potential GDP and limits the supply side’s ability to contain inflationary pressures at the margin.

LIGHT US DATA

Several US reports are on tap within about a 90 minute window this morning.

  • The consumer confidence reading for March (10amET) may be the most relevant to markets. Confidence has been largely moving sideways for an extended period with the reading fluctuating within a band from 100–110 since early 2022. That’s off the peak in 2019 but still relatively elevated.
  • US durable good orders for February (8:30amET) are expected to post a mild rebound after the 6.2% m/m drop in January. Still, the prior momentum in core capital goods orders (ex-defence and air) has been lost as appetite to invest has softened (chart 2).
Chart 2: US Core Capital Goods Orders Are Plateauing at a Record High
  • US repeat sale house prices for January are due at 9amET. House prices have been rising for 11 consecutive months.
  • The US Richmond Fed manufacturing index for March (10amET) will help to further inform momentum in overall US manufacturing activity. Recent signals have been conflicting. The Empire gauge fell sharply, and both the Dallas Fed’s measure and the Philly Fed’s gauge slipped a bit.

ONTARIO’S BUDGET

Expect more spending on housing and infrastructure plus measures to address cost of living pressures. The latter will include an extension of the cut to the gasoline tax but also watch for more transfers. This added spending on the heels of similarly expansionist budgets by Quebec, BC and Alberta will reduce the ability of the Bank of Canada to eventually ease monetary policy. Expansionist fiscal easing negates or lessens potential monetary easing which means that Ontarians will pay more to borrow money for longer than would otherwise be the case. Finance Minister Peter Bethlenfalvy will deliver the budget just after 4pmET when markets shut.

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