Veni, Vidi, Fifty - Views from the North

Ben Reitzes:

Welcome to Views from the North, a Canadian rates and macro podcast. This week, I'm joined by Joel Prussky, our Canada OIS and cross-currency trader. This week's episode is titled Veni, Vidi, 50.

I'm Ben Reitzes, and you're listening to Views from the North. In each episode, I'll be joined by members of BMO's FIC sales and trading team to bring you perspectives on the Canadian rates market and the macroeconomy. We strive to keep the show as interactive as possible by responding directly to questions submitted by our listeners and clients. We value your feedback, so please don't hesitate to reach out with any topics you'd like to hear about. I can be found on Bloomberg or via email at benjamin.reitzes@bmo.com. That's benjamin.R-E-I-T-Z-E-S@bmo.com. Your input is valued and greatly appreciated.

Joel, the ageless wonder, it's a pleasure to have you back on the show.

Joel Prussky:

And I can't express in words how happy I am to be here, Ben.

Ben Reitzes:

I feel there's some sarcasm there.

Joel Prussky:

There is not.

Ben Reitzes:

I'm going to be okay with that.

Joel Prussky:

There is not.

Ben Reitzes:

Before we get into things, I should apologize to the listeners out there. It's been a few weeks since I recorded. I was away for a bunch of weeks marketing with clients, and then I got sick when I got back. And then, here we are. So recording on Bank of Canada today is something I've never done before and try not to do, so I can take some sober second thoughts away and reevaluate my choices, life choices, Bank of Canada choices, all sorts of things. But today, we're just going to dive right in. Too bad, no second guessing. So Joel, again, thanks for coming on. Why don't you start with, what were your thoughts on the bank today?

Joel Prussky:

Well, first of all, I'm happy we're doing it today, because everything is still so fresh. And by, let's say, Friday at 3:00 we'll have had two more days of price action and rumors and odds on elections and everything else to cloud our judgment. So it's good that we're coming in fresh. I thought today's meeting was kind of boring in the sense of we got what we all expected, we got a 50 beeper, we got talk of more to come, but no firm commitment that 50 is the new 25. And we got a press conference that frankly was mind-numbingly boring and sounded like a politician was speaking as opposed to a governor of a central bank. But again, that's just my 2 cents.

Ben Reitzes:

So you said as we all expected.

Joel Prussky:

Oh well, maybe not all of us.

Ben Reitzes:

There it is.

Joel Prussky:

I believe there was one Canadian out there who's, two Canadians, okay, sorry.

Ben Reitzes:

At least. At least two.

Joel Prussky:

But one large Canadian, I guess, who's better known for their ability to wash and fold than they are for their economic forecasts.

Ben Reitzes:

They were at 25, yes. But looking forward, the fact that he didn't hint at another 50, there are at least two calling for another 50 basis points in December, if not more than two. And while that is certainly on the table, he did not seem in the least bit inclined to point us in that direction.

Joel Prussky:

And in all fairness, that's the right thing to do. I don't think he did last meeting, and the evolution of data between last meeting and this meeting was such that it made sense. I know Royal came out with a call, and everyone said, "Oh my God, Royal said this." But others had already been talking about, you in conversations with me and with some of the clients have been talking about this for a long time. So again, the evolution of data is going to dictate what the bank says. I don't think it's purely Canadian as well. I do think that there are global things at work here that could change whether it's 25 or 50 at the next time. I do think we can rule out the 75s and the outliers and the zeros.

Ben Reitzes:

Yes.

Joel Prussky:

I think there was some talk today among a few chattering classes that 75 is a possibility. I, for sure, put it in my commentary that it should have a non-zero possibility.

Ben Reitzes:

It's up 5%, but not zero. 5% or less.

Joel Prussky:

And the reasoning is, as we've talked about, if you believe you need to get to neutral sooner, then get it sooner. Get there and say, "Okay, we're at neutral, we're done. Now let's just chill." And I think that's the big question the market's kind of going to wrestle with now is, where is neutral really? We know what the bank thought was neutral before. But there's a lot of other things that might change their perception of that. And I think neutral is related to where US rates are, in my mind. I believe that.

Ben Reitzes:

That's exactly what I was going to say. If you read through their views and how they come to their opinion on neutral, the US plays a big role in that. And so if the US neutral rate is materially higher than we think, then the Canadian rate would also be materially higher than we think. How much higher? Maybe the spread's wider, maybe this, that, the next thing, but it is probably still higher.

I feel like the other aspect of this meeting and the decision they took today, that people, they're just too ensconced in the past 15 years where central bank moves that have been outsized, the 50s, the 75s, have all been driven by an emergency one way or the other, inflation taking off way higher out of control, or the world seemingly ending because the pandemic zombies are going to eat our faces off.

Joel Prussky:

The GFC.

Ben Reitzes:

Or the banking world is literally melting down. And in those experiences, in those times, 50s, 75, 100s, yes, you go back to back to back to back. You get as quickly as you can to the place you need to go because it is an emergency. Today is not an emergency, and I think that is the part that people don't understand. And when you're forecasting 50, 50, 50, 50, or two 50s even, you're kind of expecting that we're in an emergency world, and that's just not the case. The reality in Canada is as much as, honestly, we've sucked and we have as an economy for a while, we've hung in there at the same time. Canada should be way better, but it also hasn't been in a deep recession and we're not negative GDP growth quarter after quarter after quarter. There's still been growth every quarter. You still get job growth. There's no layoffs yet. The bank highlighted that as well in the monetary policy report.

And so there is no emergency here. What they did today was an adjustment, given their forecast was terrible and they missed. I don't know why they were so positive on the third quarter, but they were. They were wrong. They fixed it. They fixed their miss by cutting 50 instead of 25. And so, data dependent going forward, if they miss again, maybe they go 50 again. Great. Between now and December, what do they get? You get two GDPs, two monthly GDPs, one quarterly number. But they've already cut the third quarter, so you're probably not going to get much on that front. And you're not going to have a really good idea on the fourth quarter until January, or the end of December, I would argue, at least. You get two job reports. Those are probably the most impactful. Let me get back to the second. One CPI report.

Joel Prussky:

One CPI.

Ben Reitzes:

The one CPI, I really don't think is going to move the needle. We've already seen it.

Joel Prussky:

Well, to move the needle, it would have to be-

Ben Reitzes:

Huge.

Joel Prussky:

... like a big outlier on the low side. If it actually came out on the high side.

Ben Reitzes:

Exactly.

Joel Prussky:

That would be enough for them to say, "Wait a minute, 25 alone."

Ben Reitzes:

So you need a big downside surprise, which I'd be surprised if you get that. It's not where I am at the moment. The base effects are not favorable in the headline at all for October. The other way around. Anything's possible, but I don't necessarily see that. I guess the course could slow a ton. Maybe that's possible. But again, base effects not overly favorable in the next month.

So that brings me back to employment. You get two of those. So if you get the unemployment rate rising two-tenths a month or three-tenths out of the two months or something along those lines, then maybe that freaks them out enough that they'd be willing to be a bit more aggressive. But I think today highlighted that one jobs report does not matter, because we got the good job number in the latest print. And smack dab in the middle of the statement in his opening statement, he said, "The unemployment rate is 6/5% and the labor market's weak." That's it. Also known as, "I don't care about the latest number, because the trend is softer. Have a nice day." So unless things really fall out of bed and it looks like companies are firing people left, right, and center, which again, just, it hasn't happened yet.

Joel Prussky:

We haven't seen it yet.

Ben Reitzes:

Exactly. If it hasn't happened yet, I'm not sure why it's going to happen now. Same way with the economy. If it hasn't really fallen off a cliff yet, I'm not sure why it's going to now. There just isn't an emergency. And so, 25s until we get to where they need to be, and where that is the part that I don't know.

Joel Prussky:

Right. Well, but I think that's what we're all wrestling with now. We know rates were pushed up very high, because we were trying to slow things down. We know that. We realized now we've got to get back to neutral. What's neutral? We don't know. And then, do we need to get to similar? And I also think we've got 15 or 20 years of historical data that are kind of useless and that have a huge recency bias. 2%, to me, is the lowest that rates could go. I think that's ultra ultra stimulative, because we know that zero rates don't do anything.

Ben Reitzes:

Yep.

Joel Prussky:

Also, we have to let the business cycle do its job. We've been preventing the business cycle from working for two decades, in my opinion. And there's a reason the business cycle is a cycle. It comes up, it comes down, it clears out excesses. It's not the Bank of Canada's job to allow zombie companies to function. It's not the Fed's job to allow zombie companies to function. It's not. It's a huge misallocation of resources, and it's been going on forever and possibly one of the reasons why Canada's got such a productivity gap to begin with in the first place.

Ben Reitzes:

Oh, no. There's a great many other reasons that I wax eloquently over for far too long.

Joel Prussky:

Okay, but we could throw that one in addition to all yours. We have to let the cycle work its way out. So the bank, I don't think, answered a lot of questions today that people asked. I don't think they did a particularly good job of that.

Ben Reitzes:

On purpose.

Joel Prussky:

Which just means there's... And if you look at the curve, the curve's priced for 50, 50, for 50 come December. So it's hard to argue with that. It's like we'll be there, and I think on any given big data set, that can go from 50, 50, to 75, 25, or 25, 75, and that's kind of the range that we're going to deal with, I think, for the next six weeks until the meeting.

Ben Reitzes:

I would bet on 25, not 50 at the moment. That's me. I think that's the starting point, but I get that the data can move the needle. There's almost not enough data to get there, almost. You'd need a slew of bad data. So it's got to be consistently one way, just because there aren't that many data points. And the ones that matter most for them are growth, as that impacts inflation. And then, inflation.

Joel Prussky:

Model. Model.

Ben Reitzes:

Exactly. And then, inflation. And the inflation number, again, I just don't see it getting there. So we'll see. I think if they were to go 50 again, January's more likely than December.

Joel Prussky:

Because there'll be more data. There'll be more data.

Ben Reitzes:

Exactly. You get so much more data, you have way more information. And when you have more information, if you miss by a lot, then okay, you missed again. Oops.

Joel Prussky:

Not that the bank should care, but if they went 25 and then 50, they'd get a litany of whiners and complainers to them, "Why'd you go 25 and then 50? Oh, your policy error," all this crap. Not that the bank should care or does care.

Ben Reitzes:

I would be more than happy to defend them in that case. I am the first guy to attack anybody and everybody when they do bad policy, but if the data warrant them to go 50 in January, then that's fine. And if people can't deal with that, then they should get a new job. Or they should learn how to analyze the macro data and how the Bank of Canada reacts, and they don't understand the bank's reaction function.

Joel Prussky:

Listen, I don't disagree with you, I just know who sits across the table from us a lot and I think-

Ben Reitzes:

That's their problem, not ours.

Joel Prussky:

... I think a large part of what we do has just been a glambification. What used to be called speculation, now it's glambification. When the people don't win it gambling, they like to blame the person who controls the casino.

Ben Reitzes:

I see you have a lot of notes here for the podcast. I haven't taken notes in far too long for this podcast. I'm curious what you have.

Joel Prussky:

Well, because I listening to the press conference, so I was writing some things down. I liked that the bank said, "Canadians can now breathe a sigh of relief due to inflation." And then I wrote in brackets, "Two thumbs up." And then I noticed that Rogers went a long way to explaining the difference between inflation and the general level of prices, which is something that you and I have talked about for a lot. And I am 100% sure that that fell on deaf ears out there because the average person does not have a clue between the difference, even if the bank or I or you patiently explain it to them. All they know is their life costs more, therefore inflation is high. I think that is something that the bank still has to wrestle with because it's not a traditional input into their model or whatever. But people think that they're being screwed.

Ben Reitzes:

No, you're right.

Joel Prussky:

How does that manifest itself in terms of wage demands? Well again, yeah, if the economy starts losing 100,000 jobs a month or 50,000 jobs a month, it'll be, "Thank you sir. May I have another? I'm just happy to have my job. No, thank you sir. I needed a 10% raise this year because eggs are now an extra $1.50 a dozen."

Ben Reitzes:

Yes, I'm entirely with you there. I think that's a late 2025, 2026 story because one year of 2% inflation does not solve anybody's problems. Even if your wages are growing at 3% or 4% and you have 2% inflation so you get real wage growth of 1% or 2%, great. But you need five to 10 years of that to make up for the losses of the past couple of years.

Joel Prussky:

How about a little deflation? What's wrong with little de? Central banks are worried about inflation because of what happened 100 years ago.

Ben Reitzes:

They're worried about deflation because they don't know how to undo it.

Joel Prussky:

So the fiscal people know how to do it.

Ben Reitzes:

Fiscal people know how.

Joel Prussky:

Fiscal people know how to do it.

Ben Reitzes:

But central banks do not.

Joel Prussky:

But they're using a sample size of one from 100 years ago. This is not the same economy as it was 100 years ago. And if you believe that the general level of prices went up and it would be nice for them to go down, then if inflation was minus 1%, people aren't going to stop buying stuff because of that. They're not putting off potential purchases because they think it's going to get a lot cheaper later. They would welcome that. And I think that's where the whole idea of average, what was it?

Ben Reitzes:

Price level targeting.

Joel Prussky:

Price level targeting.

Ben Reitzes:

PLT.

Joel Prussky:

Yeah. Lasted what, six months, seven months?

Ben Reitzes:

It's not a good idea.

Joel Prussky:

No, they had a quick conversation about it and then inflation-

Ben Reitzes:

I'm happy to have long conversations.

Joel Prussky:

... blew to 8%.

Ben Reitzes:

It does not work.

Joel Prussky:

But my point is-

Ben Reitzes:

I understand your point.

Joel Prussky:

... I think the fear of deflation is well overblown. And if the bank is worried that we're going to 1%, which is below the midpoint of their target, they shouldn't be all that worried.

Ben Reitzes:

I think 1% they should not be concerned. On that I'd agree. I think deflation, negative numbers, and the uncertainty involved with that, I know you say that people will not stop buying things, but I'm pretty sure that on a durable goods basis, so cars, things that are expensive, people will hold off buying them if they are too expensive or if you think the price is going to fall. And so the best example of this for now even would be like cars. Car prices are wildly expensive. And I need a car. My wife is consistently like, "Let's get rid of the minivan." And I'm just like, "Well." Honestly it's not that old. It does not have that many kilometers. We really don't drive it. No one likes driving it. I hate driving it. I don't drive it. It's very uncomfortable. It's kind of weird. You'd think they'd make a comfortable driver's seat, but they don't. I know another guy on her desk also looking to get a new car and he saw the prices and he was just like, "This is out of control."

And so if I started to see prices, I'm waiting for prices to decline. If I knew they were going to decline, I would continue to wait as long as I possibly could until I couldn't think they were going any lower, or I had no choice but to make the purchase because my car was literally going to run into the ground and stop functioning. And so that's the kind of decision making that you propagate by inviting deflation. And maybe you can get out of it with fiscal spending, and you can, I think that's pretty much proven.

Joel Prussky:

We've proven that.

Ben Reitzes:

But the central bank authorities don't have control over the fiscal authorities.

Joel Prussky:

No, but they've proven that they can work very closely hand in hand.

Ben Reitzes:

Yes, they can.

Joel Prussky:

When push comes to shove, they can work closely hand in hand. But so tell me then, how is it when the US starts to onshore everything because Donald Trump is going to not let cheap Chinese cars in, et cetera, et cetera. How is that going to reduce the price of the expensive things we talk about like cars?

Ben Reitzes:

It's not.

Joel Prussky:

Because it's not just the price of the building the car, it's the price of financing the car that's also gone way up, right? I'm looking at replacing one of our cars, and the same car, even though the price hasn't really moved in six years, it's gone up a couple, maybe $2,000.

Ben Reitzes:

What kind of car is that?

Joel Prussky:

Prius.

Ben Reitzes:

Oh, okay. Yeah.

Joel Prussky:

The cost to finance it on the same lease is like another $200 bucks a month. 50% more.

Ben Reitzes:

That's a lot.

Joel Prussky:

And the price of the car is probably up 10%.

Ben Reitzes:

I need a bigger car than a Prius. Maybe in the future I'll keep that in mind. No, the financing rates matters well admittedly. I mean, the US election and the potential tariffs that Trump might impose on all of us are an additional layer of uncertainty. And maybe the bank was trying to get that in there.

Joel Prussky:

Before.

Ben Reitzes:

Their 50 in there just in case because you don't know what's coming down the pipe there at all.

Joel Prussky:

You have to assume the price of goods is going to go up to some extent. Because either you're going to tariff the hell out of the cheap goods coming in, or you think you're going to build them in North America or US.

Ben Reitzes:

Just in the US, which Canada gets destroyed.

Joel Prussky:

Well that's not good.

Ben Reitzes:

The Canadian dollar would get absolutely crushed. And so at that point, if you're still cutting rates when the dollar's already on the defensive, then you're just reinforcing a negative feedback loop for the Canadian dollar. Which is one of my concerns if they were to get more aggressive, and there's been plenty of chatter about Canada-US spreads and how negative they can get. How much further can the bank be through the Fed? We're at a hundred-ish now.

Joel Prussky:

Let's talk about that, because I put out a little-

Ben Reitzes:

How low can you go?

Joel Prussky:

... well, so let's talk about the Canadian dollar first. I think it confounded and shocked most people because we were up at 138. The bank started cutting. It went down to 134 and a half.

Ben Reitzes:

Man, I wish I bought more at 134 and a half.

Joel Prussky:

Which made no sense on the textbook stuff other than positioning of course. And then we round-trip right back to 138 and change. And even today, Canada did well on the crosses.

Ben Reitzes:

Yes.

Joel Prussky:

Even with the 50 and dove-ish, whatever. I mean look, the point is Oct/Dec didn't change, so there was no surprises. Doveish or hawkish, and the Canadian dollar did well in the crosses.

Ben Reitzes:

I wonder why that is. Because everyone's the same way.

Joel Prussky:

And also, I think that all currencies are trash. I mean, gold I think is telling you that to some extent.

Ben Reitzes:

That's fair.

Joel Prussky:

And the US dollar hangs in because of course it's the settlement currency of the world.

Ben Reitzes:

Numeraire.

Joel Prussky:

But I mean, it's telling you that everyone's trash. That's all there is. So now let's talk about Canada-US. So in terms of the front end today, we got up to COFER's at 110. I put out a recommendation just in my daily commentary. I think it's worth taking a stab at 110. You dip a toe, you get a little position on it, might get up to one 120. But I think at this moment we're kind of at max CAD pessimism and max US optimism in that way. And not that structurally I couldn't see them get to 150. I think that's kind of where they top out. But I just think now this negative feedback loop in the US rates market is getting kind of overdone, and the positive feedback loop in the Canada's getting kind of overdone. And if the economy's as crap as we think, the feds are going to have a little more debt issue, the profits are going to have a little more debt issue, there's going to be some more bonds going around.

So I think somewhere around here it's probably worth tactically, not-

Ben Reitzes:

Structurally.

Joel Prussky:

... long term macro structural trade, but tactically I think it's worth taking a stab. And I like the front end, because the back end, as we all know, is based on supply and demand. And guys like Sam who you've had on here are much smarter than me when it comes to pontificating about that. So whatever, they'll tell you.

But in terms of the front end, if the odds on these start to shift towards 25, that entire front strip could sell off 10 or 15 easily. And the US could all of a sudden... We've got North Koreans now helping Russians in Ukraine. We still have a potential dangerous situation in the Middle East. I think the Fed still is going to cut the next two meetings 25 only because they want to land the plane or what they think is land the plane easily after the next 25. I don't know what's going to happen the next two 25s. We'll just have to see how the economy evolves. Gee, just like Canada. That's funny. Central banks being data dependent. So I don't know. I think up around 110. I don't mind that trick.

Ben Reitzes:

I can't really argue with that. I'm pricing more into Canada. Again, it's going to take a lot more bad data and the pessimism, and pessimism is pretty extreme. And on the US side, yeah, I mean, we had a few good data points after a bunch of bad data points. The boat went one way and now it's completely the other way, and everyone's worried that they're not going to be cutting at all. And I thought all it takes is one more bad data point or something like that. And you have the Trump trade as well that's really pushing yields higher right across. And there's tons of caution about being long I think at this point anywhere around the US curve given what may or may not happen with the election, post-election, whatever. And I think that caution is, I mean, I get it. It's warranted I guess.

So that trade of 110 might be interesting today. It is the 23rd of October. But I don't know if it's going to move in the next two weeks until the election passes and you get people willing to dip the toe in the front.

Joel Prussky:

It could move 10 basis. It could trade 100 to 120. And right now I would use that as the broad range. If it got back to 10, it'd take it off if got to 120, kind of add on knowing that that's the range. But I also think if you believe in the fiscal responsibility of the US, and under Trump I think you are looking at a massive steepener in the US. Because I think the blurred lines between fiscal and monetary will be gone because he'll make Powell resign. You can't fire him, but he'll tell him that he's resigning and he'll put in someone friendly in their place. He's not going to take rates down to 2.5%, but he could easily knock them down to three something, and then you have your trust moment, right?

Ben Reitzes:

Scary. I don't like that.

Joel Prussky:

It's bad for everybody.

Ben Reitzes:

Yes.

Joel Prussky:

But the only way to ever fix what's going on, Canada lived through this in the '90s-

Ben Reitzes:

You need a crisis.

Joel Prussky:

... these things have to be so bad-

Ben Reitzes:

I agree.

Joel Prussky:

... that the adults in the room have to say, "We have got to do something about this." And whether it's raising retirement age or payroll taxes or income taxes.

Ben Reitzes:

VAT tax.

Joel Prussky:

VAT, how about a VAT? Sure. How about means testing for social security?

Ben Reitzes:

That works too.

Joel Prussky:

And Medicare? I mean there's lots of things that should be done and it's not. Maybe it's only $50 billion here or $50 billion there, but you've got a $2 trillion deficit. That's messed up.

Ben Reitzes:

Yeah, that's something that's consistently just kind of in the back of my mind. Whenever I look at anything US, I'm like, "You know they're running 6% of GDP and there's exactly no appetite to shrink that deficit at all?" And so what happens when the day that they do, you have this massive downside risk for growth just hanging over your head at all times. And I don't think you can grow your way out of that size deficit I don't think. I mean, anything's possible. I guess you can slay your way out.

Joel Prussky:

Inflate your way out of the curve.

Ben Reitzes:

You can inflate your way out of it.

Joel Prussky:

Inflate your way out.

Ben Reitzes:

That is possible, but that means you have to actually also restrain government spending when that inflation is happening, and that just has not been the case. And so it's not as simple as inflating your way of it, because it means you still need to have some kind of restraint. You can inflate with restraint

Joel Prussky:

Maybe if they ever get a Republican Party back again.

Ben Reitzes:

Yeah, we'll see.

Joel Prussky:

Well, I mean, that was the tenant of the Republican Party for many years. And now they call it a Republican Party, but it's really Donald Trump's party. But maybe at some point-

Ben Reitzes:

It flips back to fiscally conservative.

Joel Prussky:

... it goes back to that, it's fiscally responsible.

Ben Reitzes:

But when that day comes, you have big negative growth.

Joel Prussky:

Business cycle. Guess what? Got to deal with it.

Ben Reitzes:

It's going to hurt. All right, 26 minutes, 25 minutes in here. Other than the COFER front end, any low hanging food on the cross currency front?

Joel Prussky:

Not really. I mean, that market's kind of thinned out. The provinces haven't issued in a while.

Ben Reitzes:

And they're not going to.

Joel Prussky:

Well, unless the deficits are larger than expected. That could three months.

Ben Reitzes:

I mean, near term; next two weeks, three weeks, four weeks.

Joel Prussky:

The curve got really inverted in the back end. We did see interest from some smart money guys to do stuff like pay 25-year five-year or 20 or 10-year year versus receiving five-year, five-year. It's just a very stretched trade. You got positive carry on both sides, quite a bit of it. If you get the Telco's coming into issue in the US, that's a huge tailwind behind that trade. There's a lot of micro little trades that only the basis geeks out there care about. Call me if you want to hear them. You know where to find me. But nothing is that kind of out of whack. Canada's one of the steepest basis curves in the world, so we generally tend to see receiving forwards against paying in some of the other countries where the curve is inverted, which means it's the opposite. So they pick up on both. But no, it's really kind of been quiet that way. All the action's been in trading the OAS market.

Ben Reitzes:

So what do you like there?

Joel Prussky:

In OAS?

Ben Reitzes:

Yep.

Joel Prussky:

Well, I was looking at the curve today and I kind of think, look, if you're bullish on Canada in the sense that you think rates are going lower, I don't know why you'd mess around with December, which is already priced in 37 and change beeps. It makes no sense to me. I would just play the March outright. March is trading around three or three or whatever. If you think terminals 2.75 or 3.00 Or 2.50 even. I mean, March is a long way away. That's three meetings. It's three?

Ben Reitzes:

Yeah, December, January, March.

Joel Prussky:

December, January, March. 1, 2, 3. So if you really think that we're up the creek without a paddle and we do get a 50, maybe even followed by another 50, well, you're almost already there.

Ben Reitzes:

How far out can you go in that curve? Because I would say you just kind of want to push out as far as you possibly can.

Joel Prussky:

April.

Ben Reitzes:

So that's where we're at.

Joel Prussky:

It gets really flat after that.

Ben Reitzes:

Exactly.

Joel Prussky:

April's probably in the 2.80s, and then you get July and around 2.75.

Ben Reitzes:

Yeah. So if you hit terminals lower, then you want to kind of get out as far as you can.

Joel Prussky:

Yeah. But I mean, liquidity wise, April's kind of like the last thing. But my point kind of is if you're really bullish on the front end, I would just be involved in March. But the curve seems kind of fairly-ish priced. It's not as exciting. The turn from hikes to cutting or hikes to stopping hikes was exciting.

Ben Reitzes:

Turns are always more exciting.

Joel Prussky:

The turn from nothing to cutting was exciting. Now we're in the midst of this cutting cycle and it's not nearly.

Ben Reitzes:

It's mostly priced. Don't worry, it'll get exciting again.

Joel Prussky:

It will. It will.

Ben Reitzes:

Probably in the second half of next year when we start to maybe price in hikes into '26.

Joel Prussky:

That's a good point you make. I mean I think that people forget the hiking cycle has left not only scars but skid marks in many dealing desks across the world. And I think once we get to that trough in rates, forward guidance is gone. The central banks don't want to handcuff themselves like they did before. I remember, what was it?

Ben Reitzes:

2017.

Joel Prussky:

Well, 2017, but even 2022, wasn't it?

Ben Reitzes:

Yeah.

Joel Prussky:

When you'd walk in and everyone was kind of lazy, long received 25 or 50k in the front end because nothing was going anywhere and market gap 40 basis points on the open, and then rallied 10 and then got another 20 the other way. Well listen, I have those scars as well. So I think the curve will stay fairly steep because of that. And that idea of long forever, it won't be in the market.

Ben Reitzes:

How about the bigger curve? Last question before we wrap it up. Still steeper?

Joel Prussky:

I think the easy money, the fat pitch is gone on the steeper curve.

Ben Reitzes:

It's still pretty fine in Canada.

Joel Prussky:

It is. But that's a lack of supply driven thing. 10s, 30s at minus 20 to me was a no-brainer. And even the minute the bank started cutting and it went to only minus 10, it was like, "Are you nuts?"

Ben Reitzes:

We're only at 15 now.

Joel Prussky:

They're giving you the free money. Just take it. So now it's at 15. But again, I think that's supply dependent. So if you start to see a lot more term debt out there, more provinces who are willing to do term, the feds maybe have been hesitant in the past. There's always an excuse why they can't do it. But right now the curve's steep we'll say we don't want to do it. When longs are at 1%, they want to want to do it. They don't want to do it at three, whatever. There's a reason I don't work for the government, I guess.

So bigger picture, I think steeper curves are coming, yes. But look, the next 75 basis points, if two's 30 is steeper in Canada, could the next 15 be flatter? Absolutely. Or even 20 because now the front end is kind of super, everyone's in love with it. So I think you could see flatter curves temporarily. But when I watch the price action of the last two months, the curves flattened for at most a day and a half at most. Like today, US curve is flatter.

Ben Reitzes:

Yeah, and then it goes back the other way the next day.

Joel Prussky:

If it lasts more than until noon tomorrow, I would be shocked. And that's 36. Hours and then the steeper reasserts. But I don't know, I have no strong view. It's coming into the end of the ban year. I'm going on a marketing trip myself, Ben.

Ben Reitzes:

Look at you.

Joel Prussky:

I'm heading off to the Middle East to see my good friends in Dubai, Abu Dhabi, and Geneva on the way home to press the flesh and sell the most excellent services. And your name will be brought up multiple times, I'm sure.

Ben Reitzes:

Hopefully for the better. And I'll be in Montreal, so.

Joel Prussky:

Okay. My trip sounds like it'll be more fun.

Ben Reitzes:

All right, Joel. Thanks for coming on this week.

Joel Prussky:

Thanks, Ben. Always a pleasure.

Ben Reitzes:

I look forward to how the rest of the year will go, and we'll see what the bank does.

Joel Prussky:

Excellent. Thank you.

Ben Reitzes:

Thanks for listening to Views from the North, a Canadian rates and macro podcast. I hope you'll join me again for another episode.

Speaker 3:

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