It is not just rapid hikes in the overnight rate (525 basis points in 18 months by the US Fed and 475 basis points in Canada), which are contracting credit and slowing spending through the real economy. The drop in equity and bond prices, along with the jump in fossil fuel costs and the US dollar, have tightened financial conditions the equivalent of an additional 80 basis points in the last two months alone.

US third quarter GDP (first estimate released this Thursday) was boosted by war-time style government spending, but gridlock heading into an election year makes that less likely over the next several quarters.

Canadian GDP already contracted in the first half of 2023 (-.2% annualized), and with August data due on October 31, the second half is not looking up. If the US Fed has done enough with its tightening efforts to date, the case for the Bank of Canada to be done is stronger still. No wonder the loonie has weakened against the Greenback even as oil prices bounced over the past four months.

Indeed, with defaults and bankruptcy surging through the private sector, financial tightening has already been overkill. As central banks pause, the flight to safety and hedge funds covering their shorts on Treasuries will naturally boost the buying of government bonds. This will help ease interest rate pressures, but too late to rescue highly leveraged households and companies, especially in Canada.

The segment below discusses some of these factors.

DiMartino Booth and Charles Payne Break Down the Latest Action in Bond Yields. Here is a direct video link.