Oil fell about 2% on Monday and Canadian bank shares rallied, yet the odds of a Bank of Canada hike on Wednesday rose, which means the market has priced the decision and not the path after it. The S&P/TSX Composite gained 155.98 points, or 0.44%, to 35,944.16 as WTI crude fell toward US$101 on hopes for Iran talks. LSEG data put the odds of a quarter-point increase to 2.50% at just over 83% on Monday afternoon, up from about 78% in the LSEG figures reported Friday.
Monday Ran Friday in Reverse, Except in the Rate Market
On Friday, energy was the only major sector to rise, and the TSX fell 185 points to 35,788.18, its second straight decline and 536.81 points below the October 21 close. Monday reversed the rotation: banks led the gain while crude retreated, with Brent near US$114.50 and WTI near US$101 against Friday settlements of US$116.72 and US$103.27.
Three markets read the same oil decline in three ways. Equities treated cheaper crude as relief, the Canadian dollar treated it as a hit to Canadian terms of trade and traded at 71.24 US cents late Monday morning against 71.46 on Friday, and the rate market added to its hike probability. A U.S. technology rebound also lifted risk appetite, with the Nasdaq up 0.82%, so oil was not the only driver.
The index recovered 155.98 of the 536.81 points lost on Thursday and Friday, 29% of the decline, and still closed 29.29 points below the Thursday close of 35,973.45.
The two-session decline from the October 21 close of 36,324.99 to the October 23 close of 35,788.18 totalled 536.81 points. The October 26 close of 35,944.16 recovered 155.98 of them.
The Economists Still Expect Two Hikes, Not One
The bank rally is consistent with investors assuming that cheaper oil shortens the hiking cycle. The economist consensus assumes otherwise. In a Reuters poll taken October 21 to 23, 19 of 34 economists expected a hike this week and 16 of 29 expected a second one, to 2.75%, by the end of March 2027.
RBC Economics expects the quarter-point increase but is not confident it arrives this week, and sees a meaningful chance of a move in December or January instead, the Canadian Press reported. The data support both readings. Headline CPI reached 3.1% in September on a 27.8% jump in gasoline, while CPI excluding gasoline eased to 2.2% from 2.4%. Canada lost 68,000 jobs in September and 110,000 across August and September.
The Monetary Policy Report on Wednesday has to say which signal wins. The decisions after it fall on December 9, January 27 and March 3.
Monday gain of 0.44% was smaller than the 25-session average absolute daily move of 0.70% and ranked ninth among the 14 advancing sessions in that span.
Average absolute daily change across the 25 sessions shown was 0.70%. The October 22 and October 23 sessions fell 0.97% and 0.52%, a combined 1.48% from the October 21 close.
The Oil Decline Rests on a Calendar, Not on Supply
Crude fell as Qatari mediators reached Tehran and, FXStreet reported, as President Trump ruled out new strikes on Iran before the November 3 midterm elections. Physical flows have recovered, with CENTCOM saying Gulf exports are near pre-war levels, yet Brent remains above US$114 and attacks on Saudi Arabian facilities continue to keep supply risk in view.
That makes the political calendar the variable. Geopolitical coverage this morning expected no Canada-U.S. trade deal before November 3, and FXStreet reported that markets expect the Fed to hold on Wednesday and price a second hike in December. USD/CAD moved back above 1.40, with FXStreet attributing the loonie weakness to lower oil.
Wednesday at 9:45 a.m. ET is the first fixed point, followed by the midterms on November 3 and the federal budget on November 5. Tuesday trading will show whether the bank gain holds without another leg down in crude.