Poloz Endorses North American Exceptionalism During Global Tumult

(Bloomberg) -- It’s like one of the old National Hockey League all-star games: North America versus the world.

Canada and the U.S. will keep performing so well that monetary stimulus is no longer needed in those two economies even as the rest of the world shines less brightly. That’s one takeaway from the Bank of Canada’s decision Wednesday to raise its policy rate to 1.75 percent.

Financial markets could use some reassurance. Much of 2018 has been marked by a divergence trade in which U.S. equities pulled away from the rest of the world. Many bourses in Asia are already in bear markets. And American stocks have recently appeared to lose their immunity to the malaise in risk assets amid swelling fears the global unease brought about by an escalating U.S. trade conflict with China would come home to roost.

The amount of tightening in 2019 implied by Eurodollar and Bankers’ Acceptances Futures for the U.S. and Canada, respectively, has dipped below two full hikes during the market rout. Interest-rate sensitive, cyclically-oriented sectors like homebuilders, regional banks, industrials, and autos have come under acute stress during the downdraft in major U.S. indexes, raising the prospect that investors are fretting the end to the long expansion.

Far from it, says the Bank of Canada, which attributes recent financial market volatility to U.S. strength and the withdrawal of monetary accommodation. The Ottawa-based central bank judges this tumult is more noise than a signal of a waning outlook for North America. Strength in investment and consumption stateside will continue, policy makers led by Governor Stephen Poloz said Wednesday, with positive implications for Canada.

“Exports are expected to be underpinned by solid foreign demand and increased export capacity, especially as the adverse effects of uncertainty on business investment have declined with the recently negotiated USMCA,’’ the Bank of Canada said in the monetary policy report that accompanied the rate statement.

There aren’t many central bankers in advanced economies predicting that the risks from abroad are fading. Trade tensions, political strife, and the ebbing of synchronized global growth have left the outlook for worldwide activity in flux.

“The U.S. economy has maintained its robust growth this year but the broader global economy cannot boast the same health,’’ analysts at Bespoke Investment Group said in a report Monday. “Among many others, indicators like Japanese exports, Swiss exports, and German industrial orders are all either in retreat or decelerating at a significant pace.’’

The JPMorgan Global Manufacturing purchasing managers’ index has moderated from 54.5 in December to 52.2 last month. Consensus growth forecasts for the European Union have been trimmed for months, with the Bank of Canada flagging weaker than projected first-half growth coupled with potential downside risks linked to Brexit as well as Italy.

To be sure, the Bank of Canada also downgraded its 2019 growth outlook for oil-importing emerging market economies, a group that accounts for one-third of global activity, by 0.3 percentage points to 3.9 percent. Downside risks in China have increased, policy makers added, and somewhat softer growth is expected in the years to come. The central bank also highlighted that worldwide trade and investment growth are off their recent peaks as synchronized global growth dissipates, partially because of continued tensions over international commerce that could ultimately “involve a difficult and lengthy reallocation of workers and resources across industries.’’

But Canada has the benefit of privileged access to an “especially robust” U.S. economy, while maintaining its status as a magnet for immigrants.

“While trade protectionism remains a threat globally, the proposed new trade agreement between Canada, the United States, and Mexico will reduce some of the trade policy uncertainty within North America,” the central bank concluded.

To contact the reporter on this story: Luke Kawa in Ottawa at lkawa@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary

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