In this week’s The Seven…

• Release the doves - Two rate cuts, and more to come
• Coming soon - Jobs report
• Fixed or floating - implications of the rate cut
• Wildfires spread - monitoring impacts 
• Green light - Carbon capture projects proceeding
• Hangin’ tight - Alberta home sales steady, but prices rising
• Interesting Fact: Summer Olympics kick off in Paris
• Chart of the Week:  Wildfires hit Jasper during peak visitor season

In the last week, U.S. President Joe Biden stepped down from his presidential campaign, endorsing Vice President Kamala Harris; wildfires have spread, leading to evacuations and extensive property damage in Jasper; and the Bank of Canada lowered its policy rate for the second straight month.

Dovish pivot - Bank of Canada seems less worried about inflation

On the surface, Wednesday’s Bank of Canada announcement was a sleeper. The markets had baked in a cut, and we were expecting one as well. The updated forecasts in the new Monetary Policy Report weren’t much to get excited about either, with a few tweaks here and there relative to April.

But after reading and reflecting further (if you missed our instant reaction, see our Twenty-Four sent Wednesday AM), this announcement actually packs a lot of punch with a serious dose of summertime dovishness.

When was the last time you heard Governor Tiff Macklem talk so much about the risk of inflation falling “too much”? The opening press conference had a full paragraph on these downside risks. Of course, these were balanced with concerns about wages and service costs, etc. But, overall, it’s fair to say there is way less inflation fear coming out of the statements and reports.

Bottom line: The inflation battle is still not done, but the Bank seems less worried than before. In fact, an emerging concern appears to be the fragility of the economy and the risk of keeping rates too high for too long.

With this dovish pivot, we should be watching closely for any more signs of cracks in the economy. We are now leaning towards four cuts in total this year (in our June outlook we had three), bringing the policy rate to 4% by year end and to 3-3.25% by the end of 2025.

For more insight, check out the “QuickTake” from the rates desk at ATB Capital Markets.

Coming soon - Canada jobs report

In the economics calendar, the monthly inflation report has been in the spotlight.

Will the jobs report on August 9 get top billing again? Maybe. The Bank of Canada is more actively talking about downside risks. That means we should be closely watching the labour market and GDP data. The Bank doesn’t publish an unemployment rate forecast, but its projections point to sluggish economic growth this year, picking up in 2025. There is also plenty of talk in the Monetary Policy Report about per capita GDP—highlighting how it’s been declining in Canada and contributing to ‘excess supply’.

To recap, the Canadian unemployment rate rose to 6.4% in June and jobs were flat.  Alberta saw an 8K gain, partly reversing April’s decline, and the unemployment rate ticked down to 7.1%.

Fixed or floating? Implications of the rate cut

Interest rate cuts will provide welcome relief for many borrowers. That’s the big picture. But, like most things, it’s more complicated than that.

Rate cuts more immediately help those with variable rate loans (about 16% of Canadian mortgage balances in May).

For longer-term fixed rates, not as much. Consider five-year mortgages, which tend to move off bond yields of the same maturity. These yields have been falling since October in expectation that the policy rate will decline (see chart).

Wildfires spread, destroying property and threatening oil production

Wildfires have spread in Alberta, reaching Jasper this week. The most immediate concern is the safety and well being of those impacted by the evacuation. Our thoughts are with those affected. (On a personal note, Jasper is one of my family’s favorite destinations. Learning about the losses this week in this iconic mountain town has been heartbreaking.)

As noted yesterday, we are closely monitoring potential economic impacts.  Jasper is a major tourist destination and the wildfire hit the town at peak season, as shown in our Chart of the Week. One (somewhat dated) study estimated the annual impact of visitor spending (value added) to Jasper’s economy at $246 million in 2015. The ultimate impact of the disruption will ultimately depend on the duration of the evacuation and extent of the damage. Recent reports indicate the impact to buildings is severe, requiring extensive rebuilding in the coming months and years.

Energy production is also at risk from wildfire activity. So far the impact to production has been minimal, but fires are threatening up to 400 thousand barrels/day of crude oil equivalent production. We are watching closely for any impacts given that energy products account for roughly three-quarters of Alberta’s goods exports. In 2016, oil sands disruptions from the Wood Buffalo fires led to significant economic impacts.

Carbon capture and storage projects proceeding

In our June forecast, we highlighted new carbon capture and storage (CCS)* projects as an emerging growth area, providing some upside to Alberta’s economic outlook.

In May, Capital Power indicated it will not be proceeding on its CCS project at Genesee. However, there has been some positive momentum in the last two months, with final investment decision (FID) on a number of projects:

• Shell’s Polaris project will capture 650,000 tonnes of carbon from Shell’s Scotford refinery and chemicals complex. Scheduled for the end of 2028.
• Atlas Storage Hub, a partnership between ATCO EnPower and Shell Canada Limited, will store industrial emissions from the Alberta Industrial Heartland region and is also scheduled to be operational in 2028.
• Entropy is proceeding with a CCS project at Glacier Phase 2, a $127 million investment with an onstream date expected in the second quarter of 2026.

Other recent announcements include: 

• Strathcona Resources has announced an up to $2 billion carbon capture partnership with Canada Growth Fund for its SAGD oil sands facilities in Alberta and Saskatchewan. A final investment decision is expected mid-2025.
• Methanax and Entropy are conducting a preliminary front-end engineering and design (pre-FEED) study to evaluate the merits of carbon capture and storage at Methanax’s methanol plant in Grande Prairie. If approved, the $100M project would target 400 tonnes of carbon dioxide per day.

In the Industrial Heartland, Dow’s Path2Zero project and Air Products hydrogen plant—both under construction—will also be deploying CCS technology.

The largest project awaiting FID is Pathways Alliance’s proposed CCS project with an estimated cost of $16.5 billion.

Carbon capture utilization and storage is not new to Alberta. The Quest Project and Alberta Carbon Trunk Line have captured and stored a total of more than 11.5 million tonnes of carbon dioxide since 2015 according to the province.

The province has introduced a grant program to support CCS and more details of the federal tax credit have been released. Further, some projects will use carbon contracts for differences to secure a carbon price from the Canada Growth Fund.

*CCS involves the capture of carbon dioxide emissions from industrial processes or burning of fossil fuels and transporting and storing these emissions underground in geological formations.

Interesting Fact… This week sprinter Andre Degrasse and weightlifter Maude Charron  were named Canada’s flag-bearers for the Summer Olympics in Paris. This is the second time Canada will have two flag-bearers. Canada is sending 337 athletes to the Games, including 34 athletes from Alberta. Go Canada!

Chart of the Week:  Wildfires hit Jasper National Park at peak season

The wildfires have devastated the town of Jasper, disrupting lives and livelihoods and destroying extensive property. Jasper is a popular tourist destination, with incredible outdoor activities, scenery and dining. It’s a friendly, iconic mountain town. As a frequent visitor, I can attest to this.

The wildfires have hit during peak visitor season, as shown in our Chart of the Week. Attendance is highly seasonal, spiking in the summer months. Last year, Parks Canada reports there were 2.48 million visitors to Jasper National Park—a record high. This includes over 535,000 campers. In July 2023 alone, attendance to the park was 475,000.   Visitation levels have increased about 2% per year over the last decade, with major disruptions during COVID.

Answer to the previous trivia question: The first Calgary Folk Music Festival was held in 1980.

Today’s trivia question: How many times has Paris hosted the Summer Olympics?