Peak macro?

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Nick Exarhos: I think that’s fair. Yeah, that’s fair.

Ian Pollick: But before we finish today, before we finish today. before if it’s today,

Nick Exarhos: I have one more question.

Ian Pollick: Ok. Ok, go on.

Nick Exarhos: Ok. CAD/U.S. 10/30s.

Ian Pollick: I was just going to say that I was just going to you with the long end.

Ian Pollick: All right, Nick, I want you to repeat after me. Ok?

Nick Exarhos: Ok. Peak peak macro macro.

Ian Pollick: Say it again.

Nick Exarhos: You know, it’s very risky any time you in particular, ask someone to repeat after you.

Ian Pollick: It’s true, you know, before we get into peak macro. And I think that’s going to be a big theme on the cast today. Yeah. You know, I was mad at you for about two minutes this weekend. You want to hear why?

Nick Exarhos: Uhhhh, Sure.

Ian Pollick: Ok, so not a lot of people know this, but those of you that do do the two things that make me the most anxious in life are driving on highways and heights. And I was taking my kids skiing this weekend and we were stuck on the chairlift for literally like an hour. So I started scrolling through my social media and I see there’s like this birthday party for Nick Exarhos and I’m like, Well, thanks for the show, man. Like, I thought we were buddies. We bled together at work, but then I realised it was for your dog. So I guess I guess the question is, how is your dog’s first birthday party?

Nick Exarhos: It’s phenomenal.

Ian Pollick: What do you do for a dog’s birthday party?

Nick Exarhos: Well, you let him go a little bit crazy at the dog park and you let him suck everyone’s attention away from you and leaving you pretty lonely, actually. So it’s fine. That’s fine. I’m not jealous of Charlie at all.

Ian Pollick: Ok, well, look, let’s let’s talk about peak macro for a second, because, you know, there’s a lot of developments last week, a lot of innovations that one could say we’re hawkish, particularly coming across the pond, so, you know, to start with. Did you think that the language coming out from either the Bank of England or the ECB was truly that unexpected?

Nick Exarhos: No, not really. What’s more, it’s not the language per say that’s unexpected because it is and you talked about this a lot. It’s the global nature, the global coordination amongst all these developed market central bankers that’s coming to fruition. What’s more interesting, at least from my point of view, was the asset runoff implications. And you nailed it. I got to tip my hat to you. You nailed the those CS approach to here. What’s interesting is the boys wind down of their corporate bond holdings. And then to what is the ECB going to do on their end? And does that have any implications for the BOC going forward? I know they’re taking a passive approach, but they own a lot of properties as well. Are they going to take a passive approach when the rubber meets the road here?

Ian Pollick: Listen, it’s a good question. I think when we say, well, what was the real hawkish innovation from the Bank of England? Other than the fact that you had the dissenters that were dissenting in, you know, for a larger non-standard size hike, it was that they’re implementing active cut a little bit earlier than most thought and you remember they own. I think it’s like 15 or 20 billion sterling of corporate bonds. They’re going to actively sell those down. Not before the end of twenty twenty three will they get to zero. But you know that that in of itself suggests that there’s a difference in terms of thinking about the different parts of their balance sheet. Now I think that there’s we can talk about this later. I think there is an implication for Canadian covered bonds because obviously Canadian covers do rely on the cross market quite a bit. But when we bring it back to the Bank of Canada, I think it’s indicative of what they could potentially do with their non government holdings and non-government. I mean, non federal government. Yeah. So I think that we will be talking about asset sales in the provincial portfolio. I don’t think it’s a twenty twenty two story, but I think it’s a good indication of where some of the thinking around quantitative tightening can go. It’s just like, do you want to take credit risk when there is a government risk or its corporate risk? Do you do you need that on the balance sheet? Is that really helping things all that much? And it’s just probably no.

Nick Exarhos: So OK, what’s your takeaway? I want to close the chapter I live about in Europe and talk a little get closer to home. Your net, take away from Europe was?

Ian Pollick: To me, the net takeaway was other than central banks being hawkish. And I think about the bond market interpretation. The UN gluing of bunds and gluing of gilts to a lesser degree just means more spill-over into treasuries, particularly bonds. And to me, that is the steepening risk globally, because if we are talking about U.K. or Germany 10 years starting to reprice, that’s going to feed back into the long range of the curve. And I know we’re spending a lot of time, rightly so on the front end, what it means, what’s fair value. But that spill-over implication is huge. So if you hit bonds to treasuries, then treasuries have to hit candidates like, I think it’s a pretty straight forward movement.

Nick Exarhos: And we’re seeing a little bit of steepening move as we speak right now. It is Monday afternoon. Ok, so let’s let’s switch gears. Let’s talk about Canada. The data was horrible Friday for Canada, not unexpectedly horrible, but pretty weak. I’m looking at the calendar even before the next confab for the bossy. I have CPI. Right, that’s a jam indicator, and I have all the high frequency data points for December or December, so that’s going to be we know that’s going to be bad. So everything is kind of hinging on CPI, right?

Ian Pollick: When it’s one of those things where correct me, if I’m wrong, but I’m pretty sure that the February Labour Force Survey comes out the Friday after the big meetings. I think the bank meetings on the 2nd.

Nick Exarhos: Yeah, the bank meets at the start of the month.

Ian Pollick: Yeah, yeah, exactly. So look, I think, you know, when I look at the Canadian data from last Friday, the jobs report, yeah, it was bad, but it was almost like a good bad in the sense. All the weakness was concentrated in the areas that we had hoped it would be concentrated in. It wasn’t very broad based, it was all food and accommodation services. So it was the reopening story, right? And or is the containment story and that’s going to turn into a reopening story. The thing that’s interesting here is that, you know, you looked at average hourly wages, right? And wages in the good sector had eclipsed the peak pre-pandemic back in November, and we just passed the peak in hourly wages in the service industry despite all of these job declines. And you know, there’s been a lot of talk about the divergent paths of wages in Canada versus wages in the U.S., with the latter growing much, much faster. But if you drill down a little bit, it’s because you had remember you had the minimum wage hike from Ontario last January. That was a very hard comparable to beat. So when I look at the next couple of months, you actually had negative month over month moves in wages. So I think, you know, even if we kept wages flat from where they were, we’re going to be a three and a half percent wage growth over the next two months. And that’s really important for those saying, well, why is Canada falling so far behind the U.S.?

Nick Exarhos: What I do find interesting is obviously Canada’s recovery from COVID has been a little bit more while a lot more, and we saw that in the data Friday actually stop start type scenario, right? Harsher on trying to get cases down and whatnot. Somehow, it seems like the response from the central banks will actually be moving in lockstep for most of this year. So I’m just wondering, from your point of view, what does that mean for? Does that have any implication on where we end up in terms of neutral rates, what the overall monetary policy setting will be at the end of this year into twenty three? Do you think that matters?

Ian Pollick: Well, I think I think it does, right, because I think, you know, if you do nothing and you just someone just showed you a chart of what was priced for the full cycle, how much that was supposed to be delivered in 2020 to be like, Well, why are we delivering 80 percent plus of the cycle this year? What is it about this recovery? And it’s just this concern about inflation? And remember, you know, policy is a very blunt tool. It can’t be all things to everybody. And I think the key difference in this hiking cycle is that tightening financial conditions is the input. It’s it’s not the output. And I think that means that regardless, if the data starts to weaken, at least initially, they’re going and they’re not going to stop, you know, and that’s why I pay a lot of attention to a Governor Macklem said two weeks ago in the Globe and Mail. Remember, he was asked about the various paths that policy tightening could take, and one of them said that they were looking at is delivering a series of hikes and then pausing to reassess. And I think it’s that reassessment phase that realigns the strength of the data or the weakness of the data to future policy moves. So it’s almost like there’s this inelastic reaction function for the first couple of hikes, maybe the first three hikes just to get off zero.

Nick Exarhos: It’s kind of interesting because we’ve kind of put data dependency on hold. Yeah, until we get to like twenty five basis points, 200 basis points and then we’re like, OK, now we’re data dependent again.

Ian Pollick: Well, that’s the key, right? And that’s why I think when we’re looking at where these terminal rates are priced, you know, it’s not necessarily a function of the pace. I’ve never had a problem with where the endpoint of policy has been priced, whether it was last year, this year. It’s just the path. Getting to that point has always looked a bit odd and you know, you could see it in the shape of the S curve. You’re very steep in the very near data, you’re very flat in the back dates. And I would still take fewer rather than more in terms of my calculus of risks for twenty twenty two. But you know, you mentioned a question and I wanted to touch upon it briefly. It’s that, well, why is Canada pricing in a terminal rate of two and a quarter in the U.S., one point seventy five, both being in opposite directions of the peak in their prior cycles? You know, we’ve talked a lot about this, and I think the speech from Governor Macklem this week is going to highlight this very nicely. Its productivity trends, you know, the U.S. is a highly productive economy. Canada is the opposite. And if anything, we see ours work continuing to improve. And yet we see GDP that’s still below its pre-pandemic trend. And on Wednesday, remember that Governor Macklem is giving a speech on the topic of productivity and business growth in a non inflationary way. And I think what the main message coming out of that is going to be is that, listen, there’s a lot of dead money in the system. Savings are really high. That savings has to be recycled into investment in order to juice up productivity, and if it’s not, then what that simply means is that you do need higher interest rates over time to stop that imbalance, whereas you don’t have that in the U.S. and that’s a deeply, deeply theoretical way of thinking about the terminal rate. But he’s going to start talking about it, and I think markets got to start paying attention to it.

Nick Exarhos: I feel like we’re still talking about, you know, I had that ended up being a dream of this very solitary rotation away from the consumer to business investment that never really materialised. The saving grace for Canada, could it come from the energy sector? I see crude prices now above 90 dollars, the strongest we’ve been in a very, very long time. Look, I mean, unequivocally a hugely productive Ian in terms of per worker GDP. Could that be kind of a saving grace?

Ian Pollick: I don’t know. I mean, the way that I look at it is that, yes, you know, higher energy prices, it’s unequivocally good for Canada. It’s a positive terms of trade shock. It feeds through to national income. The problem, though, is that when you talk about capital deepening, we’re talking about true capex. The reason the 20 15 oil price decline was so bad for Canada is that, you know, capex and oil and gas was something like 20 percent of the economy. Today, it’s closer to eight percent. So even if you have this re-acceleration of projects, it still represents a very small portion of overall capex intentions. So I don’t know. It’s not clear to me it’s yet to be seen. You have to be seen.

Nick Exarhos: Yeah. Is there anything on the on the macro side in Canada that’s that’s not being talked about that should be talked about in your opinion? Well, look, I think

Ian Pollick: I think we’re talking about everything. I think most people are talking about everything and covering their bases. I just think it’s this idea of how fast can we consume to offset any decline in fiscal spend? It’s probably a bigger story in the U.S., I think, than in Canada.

Nick Exarhos: Yeah. So that’s more of a U.S. thing. But yeah, we’re not talking a lot.

Ian Pollick: But, you know, I want to switch gears here a little bit because obviously the talk from the ECB, the Bank of England got people very excited about a 50 basis point move in March from the Fed. So talk to me, in your opinion, what needs to happen for a non-standard size hike to be delivered?

Nick Exarhos: Honestly, I think they got a message it. I think you touched upon it a little bit. They’re talking about a deliberate move higher and rates true, but they’re not trying to. What’s a what’s a good and out rattle the cage? I don’t think they’re trying to really like stomp on the market in doing so and and trying to get the rates setting higher, particularly when they haven’t really pushed back against terminal rates being a little bit sub two percent. So if you still if you’re thinking tomorrow could still be in that range. You know, going for a non-standard hike. I understand the data is very strong. You would have to really reassess that and I think that would have to come with the intelligentsia of the committee coming out and saying, Hey, look, we’re thinking about what the post-COVID cycle will look like. Are we talking about massive re-assuring? There could be a lot of topics that they can talk about that would necessitate a higher terminal setting. But before they come out and talk about that, I don’t think the data is going to be strong enough to suggest a 50 basis point move.

Ian Pollick: Well, you’re right. I mean, I think on the one hand, you’re right in what you said about that shock, and I would very much hurt cross assets, particularly, I think risk assets would get hurt with a 50 basis point move. But then you think about the currency and I think, you know, if we really are peak macro, then what is the driving force of a stronger secular U.S. dollar? It’s not clear to me, to be honest with you, but maybe a 50 basis point would be one of those things where you can actually get the dollar stronger in the near term.

Nick Exarhos: I think that’s fair. Yeah, that’s fair.

Ian Pollick: And before we finish today, Before we finish today before we finish today,

Nick Exarhos: I have one more question.

Ian Pollick: Ok, OK, go on.

Nick Exarhos: Ok. CAD/U.S. 10s/30s?

Ian Pollick: I was just going to say that I was just going to tell you with the long end, I was like, We can’t finish the podcast without talking about the long end.

Nick Exarhos: Ok. Talk to me.

Ian Pollick: Listen, it’s been exceptionally strong over the past, I guess a month to date, right? Like Candy was thirties as in nine basis points. The Canada U.S. 10s thirties box, however, is actually shown a bit of improvement. It’s starting to get a little bit stickier on that minus four and a half minus five level. Listen, I have a very peer review on the back end of the curve. I think that if you have any move in global duration, like we kind of talked about earlier on the show, it’s a high beta market in Canada, much higher than the U.S.. The reason for that is quantitative tightening is going to happen faster. We have more supply in the back end and net net when I kind of wrap it all together. I just don’t think that the real money community needs as many long bonds as people suspect that they do. You have a good relationship and a good understanding with a lot of those types of accounts that would traditionally buy long in duration. Am I off to base here or do you think we’re onto something?

Nick Exarhos: No, we talked about it the last time I was on, and you’ve since come crawling back, which is, oh, good. It takes a short character for you to do that. I appreciate and we talk about, you know, the silly metric is the 30 year rate above two percent. Okay, by them. Ok, there’s some of that going on, for sure, but there are people who are looking at it and looking at Canada. Well, looking at the research that you’re putting out and things that we’re talking about in terms of that cross market box and looking at Canada, especially on a day like today where global curves are really steepening out and kind of seeing really sticky and saying, OK, that doesn’t. I’m not sure that really makes sense right now, particularly when, tactically speaking, there’s a few issuers queuing up in the long end might see the move higher. And 10 year swap spreads has really deterred some of the buying that we’ve seen in that sector. And there’s tension has shifted over towards the long end. So there’s going to be some supply coming down there. I do think Arjun, who’s on your team, why can’t wait till he’s I think he’s going to be he’s going to be a rock star, did a lot of great work on not talking about the timing of the cycle, looking at that cross market box and looking at it as a bimodal distribution and how we can really push towards maybe the right or end of that second sort of hump in the curve. So I definitely think it’s topical and I would tend to agree with you that CAD longs as of right now do seem a little bit expensive.

Ian Pollick: Yeah, listen, I think it’s one of those things where you’ve got to look at the ranges like I can make the case. Why give them a price for Terminal CAD? Five years should look great. But then I look at the cross market move over the past really two months, and they’ve rich and aggressively. So, you know, I’m actually short them in my book, but there’s going to be a time that you want to in Canada. I just don’t think that time is right now, and that is the wolf of clock. That means that this podcast is done. Nick, thank you very much for joining us again. And remember, there are no bonds harmed in the making of this podcast.

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