Tags: US | Canada | rates | recession

Canada Enters Recession, US Not Far Behind

By    |   Wednesday, 04 February 2015 08:19 AM

Our northern neighbors are wonderful folks, but their economy is hurting. Will the U.S. be next?

Last month's barrage of central bank surprises hit closer to home than most Americans noticed. On Jan. 21, the Bank of Canada unexpectedly reduced its benchmark short-term interest rate from 1 percent, where it had been since 2010, to 0.75 percent.

Think about this for a moment. The U.S. and Canada have the two most intertwined economies on the globe. We share a long, undefended border and a deep trade relationship. Our fortunes ought to rise and fall together, more or less.

Yet right now, Canadian authorities are cutting interest rates while the Federal Reserve is on the brink of raising them. The two neighboring central banks hold polar opposite monetary policies.

The Bank of Canada kept rates steady for more than four years. Two weeks ago, it decided to change. Why? The bank itself answered that question, saying in a statement that lower crude oil prices were beginning to weigh on the economy.

I take everything central bankers say with several grains of salt, but in this case, I think they are being honest. Canada's economy, while more diversified than is Saudi Arabia or Venezuela, is still more resource-dependent than the United States is. That's one reason Canada recovered from the last recession faster than the U.S. did.

In other words, rising oil prices gave Canada a bigger boost because its economy is more energy-driven. Now the opposite is happening: lower oil prices are hitting Canada first — and they're hitting hard.

Canada's yield curve inverted on Jan. 21 and is still inverted today. Short-term interest rates are lower than long-term rates are. Bonds maturing in six months carry a higher yield than do those maturing in three years. This isn't normal.

An inverted yield curve is the classic sign of an impending recession. It means people are so worried about the immediate future that they discount long-term uncertainties. If Canada isn't already in recession, you can bet it will be soon.

The U.S. yield curve hasn't inverted, yet — but it could happen sooner than most people think. The strong greenback and low rates everywhere else are driving down our long-term bond yields. If they keep falling and the Fed hikes short-term rates this year, our yield curve could look just like Canada's inverted one.

Possibly the U.S. can run an inverted yield curve and still avoid recession. It wouldn't be the strangest economic event of this crazy century, but it would still make no sense.

The global bond market is telling us something that isn't good news for anyone. So go ahead, Canada, break the ice. We'll be following right behind.

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Our northern neighbors are wonderful folks, but their economy is hurting. Will the U.S. be next?
US, Canada, rates, recession
Wednesday, 04 February 2015 08:19 AM
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