[sags]

Please forgive me for asking this but can someone explain to me how the "market" is pricing in a whatever percent chance of a whatever percent hike at the next BOC meeting? The market is volatile, up and down everyday sometimes with reason, often with no rhyme or reason. Where or how do I look to find this actual market pricing data and how can it be a predictor of what a flesh and blood person will actually do at that meeting Does it predict if he would chicken out like he did in January? I don't see how the "market" can be a predictable indicator of anything since investors seen to respond like sheep to ridiculous things at times. Hell, Elon Musk knows he can manipulate it with in any direction he wants with one press release. I've been hearing this so much of late and need it explained to me.

It is like when an election results in a minority government and the pundits say "the people decided they wanted a minority government".

I have yet to hear about the big meetings where voters get together and plot out the strategy to get a minority government.

 

[damian13ster]

I'm not convinced that interest rate increases would solve the inflation problem today when it's mainly a supply-side constraint problem instead of a demand growth problem...

There's still lots of bottlenecks in supply chains globally with Covid restrictions hampering production of goods, or making it more costly if not hampered.

There's also the lost capacity for production from all the small businesses that were crushed during covid and didn't come back. Existing large businesses and new small business (fewer than before though) need to accelerate their production capabilities to make up for those losses.

I think rate increases today will stifle production growth coming out of frail businesses, more than it will suppress consumer demand.

Yeah, it is a supply problem - money supply problem.
Check how many dollars were printed in last 3 years and you will see that supply of dollars is main factor in inflation.

 

[londoncalling]

I think rate increases today will stifle production growth coming out of frail businesses, more than it will suppress consumer demand.

This is a potential outcome from raising too fast. The BOC is trying to increase rates to reduce inflation as well as create some wiggle room for the next downturn. They are trying to cool inflation without cooling "the economy". Since the economy is many things this not an easy feat. Is the economy bay street, main street, regional, national or global? some industries do well in high interest rate environments while others suffer. As noted, changing the interest rate is supposed to help change the demand side of the equation but has little impact on the supply side in the short term. The BOC is either going to overcorrect or their efforts to shock the system will work. My perception is that they are being reactive not proactive. The reality is the people making the decisions are way more knowledgeable and experienced with these decisions than I am. The good news is if they increase now they have the ability to decrease later. With rates at 0 they can still go lower but negative rates send a bad message on the state of the economy.

 

[MrMatt]

It is like when an election results in a minority government and the pundits say "the people decided they wanted a minority government".

I have yet to hear about the big meetings where voters get together and plot out the strategy to get a minority government.

It's called "election day".

 

[Covariance]

Please forgive me for asking this but can someone explain to me how the "market" is pricing in a whatever percent chance of a whatever percent hike at the next BOC meeting?

I will give you the answer for the US Fed (equiv to BoC) which is more liquid and to which I am familiar. There are some technical and other nuances but the following is a high level understanding;

• Futures contracts trade on the Chicago Board of Trade with the underlying the Effective Fed Funds (FFE) rate on average for a specific month in the future. They are priced at 100-the simple annual rate as averaged over the month, and settled at the end of that month. So a contract price of 97 for the June futures contract means an implied annual rate of 3% on average for June.
• If you want the market expectations of a Fed increase (hike) at a future meeting: you would first look to the price of the futures contract for the month in the future in which the meeting is scheduled. Next you would determine the implied FFE rate from the price using the above formula.
• Finally you take the implied FFE and subtract the current Fed Funds Rate, divide by (Fed Funds Rate assuming a hike less Current Fed Funds rate) to obtain a % probability of said hike occurring as predicted by the futures market.
• Note; one determines the probability of different size hikes by insertion of your different hike estimates in the denominator.

Hope that helps.

 

[MrMatt]

Please forgive me for asking this but can someone explain to me how the "market" is pricing in a whatever percent chance of a whatever percent hike at the next BOC meeting?

Covariance has a good example.
Let me try a simpler one.

Thought exercise.

Lets say the Bank of Canada rate is 1%.
If you had money and a lot of short term government securities (1 month or so) lets assume you'd make about the Bank of Canada rate.


Now if you think they're going to cut rates to 0.75, you'd spend your money and buy up as much of the available securities so you'd make a bit more than the new rate of 0.75%.
Similarly if you think they're going to hike rates to 1.25% you'd sell off everything you can get until it's almost at that new rate.

You'd be trying to get ahead of the changes.
If you thought they were going to change by 0.5% you'd buy or sell to hit that new rate.

Now instead of it being "you" the individual, it's all the individual entities trying to do this, aka "the market"

 

[sags]

China reported their export numbers and they are horrible. The supply chains will be broken for awhile and inflation is going to rise due to lack of supply.

GIven the scenario, should the BOC abandon raising interest rates which will add to price inflation, or should they sit back and let inflation run ?

On one hand they risk very high inflation numbers and on the other they risk a recession or worse. It isn't good times for central bankers.

 

[londoncalling]

If supply chain issues continue people will just stop buying. I am not sure how much of our imports from China are essential for consumers to live as I haven't done a deep dive. We hear a lot about delays for semiconductors and yes they are in almost everything. But how much of our purchases need to be made today. We can control personal inflation to some extent but not entirely. If supply chain disruption remains through the year we could face a a significant slowdown in consumer spending and a recession and the layoffs and high unemployment. Unemployment rate is the number I am most concerned with these days as it pertains to the health of the economy. The narrative I hear is there is difficulty in finding workers in my day to day activity and on this forum. Unemployment rate would confirm this as well. That tells me there is a ways to go before the wheels fall off. Interest rates are a lever to push the economy this way and that. However the economy is a big machine and the lever's desired effect often takes more time for things to change course.

 

[damian13ster]

That's just a reason to raise interest rates even faster, to further limit demand and inflation expectation. Once inflation expectation is above actual inflation rate (and we are almost there - the game is over, double digit interest rate or hyperinflation). BoC is already at least 3-4% behind the curve and they are slow to catch up, because of government interference. 10 year bond yields just exceeded 3% and they are likely, and hopefully, going to continue rising rapidly

 

[londoncalling]

Latest Numbers : U.S. Bureau of Labor Statistics (bls.gov)

CPI Latest Numbers


CPI-U, US CITY AVERAGE, ALL ITEMS:
NSA +0.6%in Apr 2022
SA +0.3%in Apr 2022
NSA +8.3%since Apr 2021

 

[sags]

Interesting that "medical care" is 3.2% of the 8.3%.

 

[Ukrainiandude]

Fed Should Hike to 5% or Higher to Curb Inflation - Former Federal Reserve Bank of New York President Bill Dudley
The U.S. central bank should stop “sugarcoating” its message on how high interest rates need to go -- and how much pain that will cause -- to get inflation under control.

“I think it’s 4 to 5 (percent) or higher,” Dudley said in an interview with Bloomberg Surveillance on Wednesday on how high the Fed should raise interest rates to cool price pressures. “I was 3 to 4 (percent) maybe six months ago. Now I’m 4 to 5 and it wouldn’t shock me if I’m 5 to 6 a few months from now,” said Dudley.

 

[sags]

A rate hike of that magnitude would plunge the US into a deep recession, and that would be far worse than temporary higher prices.

Governments are receiving increased revenues due to taxes on inflated prices, full employment and other factors.

They should be redistributing the surplus back to people in need of financial help, to weather the storm.

They should also focus on getting the kinks out of supply chains. This is a supply issue.......not a demand issue.

They also need to ensure that "inflation" isn't being used to mask any "price gouging", at least in essential needs and services.

 

[londoncalling]

To the best of my knowledge there is no surplus. We have been running massive deficits for quite some time now. I think all countries are looking into how to be more self reliant. canada could produce a lot of its own goods if it wanted to do so. I am not sure if they can do it for cheaper even at the current inflation rate. Making the pivot back to being a producing economy takes time to implement. Factories and pipelines don't just fall from the sky. As long as companies can pass along costs to consumers they will not seriously explore cheaper options. A couple of questions that needs to be asked are how long will we see supply chain disruption? Is this the new norm?

 

[KaeJS]

They should be redistributing the surplus back to people in need of financial help, to weather the storm.

There is no surplus.

But even if there was, redistribution to the people would only exacerbate our inflation issues and kick the can down the road further. This is not a solution.

 

[MrMatt]

There is no surplus.

But even if there was, redistribution to the people would only exacerbate our inflation issues and kick the can down the road further. This is not a solution.

You don't understand the mindset of government interventionalists.

Take any problem.
Solution is more governmental intervention.. which causes more problems.. which necessitates more government intervention.

It doesn't solve the problems, but it gives control to the government, which is what the authoritarians want.

 

[sags]

Alberta Budget: Province to post $511M surplus on the back of higher oil and gas prices

The 2022-23 budget presented Thursday could be the province’s first balanced budget since 2014-15, but some projected spending increases, including in health…

edmontonjournal.com

 

[sags]

Tax cuts are a form of redistribution as well. Are you opposed to tax cuts ?

The Liberals may choose to retain the surplus revenues to lower the debt to GDP ratio at a faster pace than projected.

It would provide good commentary for them in future elections, and they have done it successfully in the past.

Chretien and Martin were masters of the "oh look, we are richer than you thought" election surprise, that blew up the Conservative election strategy.

It is a really old political trick, that in election years everything is blue skies and rainbows.

 

[MrMatt]

Tax cuts are a form of redistribution as well. Are you opposed to tax cuts ?

No they're not.
If you don't take from one person and give to another, it isn't redistribution.

Think about it, if you don't redistribute anything, how is it redistribution?

I am totally for tax cuts. The government already takes too much and wastes VAST quantities of money.

 

[MrBlackhill]

The government already takes too much

Have you ever seen the corporate taxes, income taxes and sales taxes of the happiest and best countries to live in the world? Denmark, Finland, Sweden, Norway, Netherlands, Germany, etc?

https://en.m.wikipedia.org/wiki/List_of_countries_by_tax_rates