Now What?

Steve Saretsky -

I have long argued that a sell-off in Canadian housing will not be self-induced. In other words, policy makers are not going to willingly tank the market. If / when you have a downturn it will be due to something out of our control, likely a crisis in emerging markets that ripples through global financial system.

The recent turmoil developing across Ukraine and Russia is undoubtedly something I am watching closely. Western Governments, including Canada have moved to restrict select Russian Banks from using SWIFT, disconnecting Russia from the international financial system. I will not pretend to be a geopolitical expert, nor an expert on the plumbing of the global financial system. However, let’s take a look at what the experts are saying.

Zoltan Pozsar, Managing Director and Head of Short-Term Interest Rate Strategy at Credit Suisse, and perhaps the most respected in his field of expertise is warning that exclusion of various Russian lenders from the SWIFT messaging system could result in missed payments and giant overdrafts within the international banking system, and spur monetary authorities to reactivate daily operations to supply the market with dollars.

“Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” Pozsar wrote. “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

In simpler terms, central bankers could be forced to intervene into markets to supply liquidity once again. In other words, the US Federal Reserve could be forced to ramp up QE into an inflationary spike. The tightening cycle could be over before it even started.

Don’t forget the Bank of Canada largely takes their cues from the Fed and while the Bank of Canada is set to meet this week and raise rates by 25bps, the path forward after that has become extremely complicated.

Put yourself in Tiff Macklems shoes for a minute. You have a war escalating in Ukraine, a possible currency crisis in Russia, a rapidly strengthening US Dollar, all of which combined is threatening a liquidity crunch. Meanwhile, back home you have a 30 year high in inflation, house prices ripping, and a potential commodity price surge that could worsen inflation. So, what do you do?

Well, financial markets could likely do all the tightening for the Bank of Canada. Tiff might not have to lift a finger. There is a policy update coming March 02, and we will be watching for a potential change of tone from the Bank of Canada. There are signs housing is already beginning to slow from extremely frothy levels and growing uncertainties across the globe could add to that. Let’s watch.

Three Things I’m Watching:

1. The Russian Ruble is under immense pressure, dropping nearly 30% against the USD. (Source: Bloomberg, Ritesh Jain)

2. Central bank balance sheets still growing despite highest inflation in decades. Total assets at major central banks now above $31 Trillion. (Source: Yardeni)

3. Oil jumps to near $102 a barrel amid possible disruptions to flows from Russia, the world’s third largest oil producer. (Source: Bloomberg)

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