Bond vigilantes are a popular topic in financial media. Part of this is that most people find government bonds boring, and they would rather read about equities, which can have more exciting returns as well as more interesting company and sector specific stories. Bond market vigilantes who are about to discipline naughty governments creates a fun narrative hook to a market that is otherwise characterised by daily price changes of around 20 basis points.
Animal spirits have been soaring in the area of Artificial Intelligence (AI), and the surge in spending has shown up in the figure above. It shows the fixed investment in Information Technology Equipment and Software as a percentage of GDP (ends in 2026Q1). The last two quarters of data saw a surge of about 0.4% of GDP.
Although I have not been attempting to do economic forecasts, the current environment is surprising to me, at least with regards to inflation. The above figure shows the 5-year breakeven inflation rate as based on the U.S. inflation-indexed bond (TIPS) market.
The angle appears interesting in that we have a pro-free markets person arguing that we should not need to worry about the American government defaulting on its debt. Given that there is a Republican in the White House, it is perhaps timely for free marketeers to pivot away from debt worrying. The author has fun skewering the professional government debt worryers that dominate “serious” fiscal analysis in the United States.
So far, the gasoline price shock in Canada has not been as bad as what happened after the pandemic, but I am not incredibly optimistic about the medium-term outlook. The above figure is the national average cost for unleaded gasoline (at self-service stations if you want to get even more specific), but the data ends in March, so it is missing the price rise since then. In my neck of the woods in the Greater Montreal Area, the pump price has been around $2 per litre, although Montreal is normally higher than the national average series shown above.
The Carney government announced a temporary suspension of the excise tax on gasoline on April 14th, which dropped the price by about 11 cents per litre. This generated a lot of flak from economists, but I doubt that it will matter that much if the situation does not improve in the Middle East.
The Canadian CPI numbers for March were released today, and core inflation remains stuck at a level above the 2% target. This starting point makes it hard for the Bank of Canada to be too complacent in the face of commodity prices.
The diplomatic situation around the Strait of Hormuz seems muddled, but it is clear that that full traffic flow will not resume immediately. This means that oil and gas fields will be shut in for an extended period, and restarting them will take time. As such, it is clear that regions that are dependent upon the commodity flows from the Gulf are going to be hit hard. Canada is not directly affected, but it will see a lagged effect of slowing growth elsewhere. At the same time, the signals from the White House remain belligerent towards Canada, and an attack on the Canada/Mexico/United States trade pact may occur once attention is drawn again to that topic.
The Bank of Canada’s next scheduled policy rate announcement is April 29th, and I see no reason for them to switch from their last assessment that growth risks are skewed to the downside, while inflation risks are to the upside. In the absence of clear data, it seems unlikely that they will move in the near run.
Although the gasoline excise tax cut was unpopular with economists, it is still a limited measure that targets the fastest rising price in the economy. My uneducated guess is that fiscal policy is going to deviate much from already announced plans. There are currently no measurable growth risks that will cause panic loosening of policy. A global recession due to the commodity shock would take time to hit Canada (and as a commodity exporter, some sectors of the economy will benefit from higher commodity prices). A complete rupture of free trade with the United States is a scenario that might provoke a more rapid fiscal reaction.
Without accommodative fiscal policy, the commodity price hike will tend to squeeze consumers, and so there might not be second-round price effects. (Although Canadian commodity exports would benefit, the employment in primary industries is not large enough greatly push the overall labour market.)
As I believe I noted before, one of my “hobbies” in university was reading up on international relations theory and diplomatic history. The current situation appears somewhat bizarre from the perspective of that theory. The usual story from the Realist perspective was that diplomacy since the Peace of Westphalia was determined by national interests. Since nations’ interests are determined by material facts, we do not need to enquire too deeply into the inner workings of countries to understand their international behaviour. We have reverted to an earlier mode of affairs, as many key governments are acting as neo-Royalist entities, where the interests of the ruling clique determine national policy. (Neo-Royalism has been the term recently floated by a few academics to explain the dynamics of the Trump administration.)
In my previous article, I discussed (traditional) postal banking, in which the central government manages a deposit-taking bank (which historically used post offices as “bank branches”). Postal banks offered basic payments and savings services for poorer people who were ill-served by private banks.
In my view, the usefulness of such banks depends upon conditions in the country. It may be just as easy to mandate private banks to offer minimal standards of service without the challenges of attempting to replicate the information technology investments required. In countries where private banking has spotty coverage, such banks may be useful.
