Canadian GDP beat for all the wrong reasons. The market sees a chance of 50 bps next week

On the face of it, the Q2 Canadian GDP report looked good today at 2.1% annualized compared to 1.6% expected. It also handily beat the Bank of Canada’s forecast of 1.5%.

The problem is that the composition of growth was in all the wrong places. Consumer spending rose at just a 0.6% annualized rate while government consumption rose at 6.7% annualized rate and contributed 1.3 pp to GDP.

Business investment was a positive, rising at an 11.1% annualized rate but stripping it back shows aircraft and transportation driving the gain. Those are notoriously volatile components that don’t speak to underlying economic investment. Meanwhile, rates are biting with residential investment down at a 7.3% annualized rate and undoubtedly worsening as the rates bite.

The monthly numbers likely tell the tale that the Bank of Canada will be worried about. GDP was flat in June and the advance report for July was also flat. Both point to a worsening trajectory of growth and so far rate cuts have done little to boost activity in real estate.

By sector, manufacturing, construction and wholesale were the largest negatives to growth in June, while utilities was
the largest upward contributor: Again a poor signal.

The market is now pricing in a 20% chance of a 50 bps cut on Wednesday. The Bank of Canada also isn’t afraid to deliver a surprise, so don’t rule out a faster move. In any case, look for 25 bps cuts at every meeting from now through next year.

This article was written by Adam Button at www.forexlive.com. Source