Daily Commentary

MarketMinder’s View: The Bank of England (BoE) voted 8-1 so stand pat today, with economist Huw Pill the lone dissenter preferring a quarter-point hike. This article is a good recap of policymakers’ reasoning and reports, which indicate to us they made a wise decision for some wrong reasons. We guess that doesn’t totally matter for now, but it indicates flaws in the Bank’s thinking that could lead to errors later. Positively, it seems policymakers weren’t tempted to hike rates in direct response to higher energy costs, conceding monetary policy is powerless to solve. Right-o! Energy prices are set globally, and rate hikes can’t increase supply or solve transit bottlenecks. That happens more gradually and, again, globally, as producers adapt. Where we think the BoE runs aground is in its analysis of the second-order effects, the risk of higher energy and petrochemical feedstock prices filtering through to broader consumer goods and services prices. It determines this risk is minimal for now, which we agree with, but it cites a weak economy where firms have no pricing power and workers don’t have the clout to secure the wage hikes it deems necessary to drive broader inflation. It also draws a contrast between now and 2022, when energy prices’ spike coincided with hot inflation: “‘Relative to the previous energy shock of 2022 [after the start of the Russian-Ukrainian war], currents events were occurring from a starting point of lower inflation, weaker demand, a looser labour market, and a restrictive monetary policy,’ the Bank said.” So what is the problem with all of this? One, we have decades of data showing wage growth follows inflation—it doesn’t lead it. Wages were slow to catch up after 2022, then slowed well after inflation rates eased. Two, you can’t logically compare economic growth rates now with early 2022, considering the UK was still rebounding from COVID lockdowns at that point, with a depressed base skewing growth rates higher. Three, while money supply is indeed growing more slowly now than it was before 2022, today’s monetary environment doesn’t look restrictive to us. UK money supply grows at healthy prepandemic rates, and the yield curve is nice and steep. All this points to the UK economy likely growing better than expected. But without surging inflation, because of the aforementioned tame money supply growth. Absent surging money supply, higher costs force households to make substitutions, curbing demand for other goods and services and counterbalancing the price pressures from higher input costs.

MarketMinder’s View: We appreciate this fact-driven, analysis-light coverage of Canada’s February monthly GDP and preliminary March data, as it doesn’t inject much opinion. In all, the figures show the country grew for a fourth straight month in February. These data are the industry-based look, not expenditure-based, so read-throughs on things like March consumer spending are a stretch, featuring only retailers—which omits a lot of services spending. Interestingly, “The machinery subsector led growth in the month, followed by gains in transportation equipment manufacturing. … The wholesale trade and transportation and warehousing sectors also helped lift the economy in February, while a contraction in the public sector and a slowdown in the arts, entertainment and recreation industry weighed on growth.” With tariff fears still haunting many in Canada, the machinery and transport sectors’ growth should be a relief, as those are most exposed to tariffs. And the contraction in Arts, Entertainment and Recreation was really about the NHL postponing games for the Winter Olympics, as this notes. Seasonal adjustments can’t account for quadrennial one-offs. So all in all, February looks like a solid month for Canada’s economy. And while flat, “The agency's initial estimates for March suggest real GDP was essentially unchanged in the month, which would set up the first quarter for an annualized growth rate of 1.7 per cent.” This follows a contractionary Q4, so growth here would upend talk of a “technical recession” of two quarters of consecutive GDP contraction. This is backward looking, naturally, but still illustrates a better-than-feared economic environment in the Great White North.

MarketMinder’s View: This article bills the titular event as a “potent symbol of the fiscal stresses on the U.S.,” but we find it nothing of the sort. Why? Because Uncle Sam doesn’t service his debts using GDP. Scaling America’s debt load with its economic output—the debt-to-GDP ratio—compares apples to oranges or maybe even squirrels. Instead, assess creditworthiness like bond buyers do. Ask: How likely is a borrower to cover their debt payments? For that, it is best to consider whether their incoming cash flow covers interest costs. Per the Treasury, US federal receipts (mainly tax revenue) regularly exceed interest outlays by over five times. America can easily service its debt—which is why global investors (with the most to lose) routinely buy more and, per FactSet, 10-year Treasury yields at 4.4% today remain below their 5.9% average since 1970 (with inflation tame). Or look at it from another perspective: If debt-to-GDP mattered, would Japan be able to borrow at 2.5% for 10-year maturities—their current yield, per FactSet—with its government debt 2.4 times the size of its GDP (per the IMF)?