Accommodative Finance Amid Trade War Uncertainty

Canada's financial conditions remain modestly accommodative despite the trade war and energy shock, according to RSM Canada's Financial Conditions Index. The index is a composite measure of three financial markets - money, bond, and equity markets - as well as commodity market performance. Financial conditions have been decelerating due to uncertainty facing investors.

The resilience of the equity market has helped keep the index above zero, indicating less risk and a more investment-friendly climate. Rising oil prices are boosting Canada's nominal GDP, while inflation has increased to 3%, within the Bank of Canada's policy target range.

Forward markets anticipate that the Bank of Canada will tighten monetary policy in response to sustained energy shock and trade war effects on inflation. The bond market agrees with this sentiment, pricing in two 25-basis-point rate hikes. Long-term bond yields are increasing across major economies, threatening breakthroughs with each policy move.