Tiff Macklem

We're not even two weeks into the 'omicron era' but we've already had two central banks weigh in. A third one is coming Wednesday at 1500 GMT with the Bank of Canada decision.

Yesterday, the RBA decision was surprisingly upbeat. The statement offered a nod to risks around omicron but on the whole was less concerned about covid than previously. In addition, it emphasized better household spending and business investment while teeing up an end to bond purchases in February.

The Fed hasn't met yet but Powell surprised markets in an appearance last week but indicating the plan was to speed up the taper. He also retired the phrase 'transitory'. He also added plenty of omicron caveats but the message was that tightening is coming.

Perhaps that's a nod to growing bottleneck risks around China and omicron but it may offer a hint at what's coming from the Bank of Canada.

In its latest decision, the BOC ended QE purchases in a move that was also a surprise to markets. On Friday, the economy added 153K jobs and unemployment sank to 6.0% from 6.7% in an extremely strong report. On Tuesday, Canada's trade surplus for October beat expectations and was the second-best report in a decade.

Layered into all BOC thinking is worry about the housing market. Canadian home prices rose more than 20% in the past year to cap off a moonshot over the past decade. The bubble in prices spread from the largest cities to nearly ever town in the country, offering an enormous boost to household net worth but also adding to dangerous levels of indebtedness.

I think the Bank of Canada bought itself some time with last month's hawkish surprise and the market is pricing in a decent chance of a hike as soon as January. I don't believe that's the BOC's plan but Macklem will want an option to hike as soon as March and eventually that will lead to Canadian dollar weakness.

For now though, there isn't a need to hit the panic button but watch this line in the statement:

The Bank now expects CPI inflation to be elevated into next year, and ease back to around the 2 percent target by late 2022. The Bank is closely watching inflation expectations and labour costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation.

Any hawkish change there would be a clear signal for the markets to price in a series of hikes beginning in March.