What Moved
The US Federal Reserve cut rates for the second consecutive time on September 18, reducing the benchmark to 1.75-2.00%. The move was widely expected, though the committee was split — three members dissented, two in favour of holding and one wanting a larger cut (Fed, Sep 18, 2019).
The Bank of Canada held at 1.75% on September 4, continuing to chart an independent course from the Fed. The Bank noted that the Canadian economy was performing near potential, even as global trade tensions posed risks (BoC, Sep 4, 2019).
Canadian housing markets showed improving momentum heading into fall. National home sales were up 0.9% month-over-month, with Toronto and Montreal leading the recovery. Vancouver remained soft but was showing signs of bottoming (CREA, Sep 2019).
In private markets, Q3 deal activity was moderate. Private debt investing remained a bright spot, as Canadian PE sponsors were selectively active with several mid-market transactions announced, and private credit conditions stayed favorable with low default rates and healthy origination volumes across the MIC sector.
What It Means
Two Fed cuts in two months confirmed that the global easing cycle was real. For Canadian private market investors, the implications were becoming clearer:
The yield premium from private credit was likely to persist. With global central banks cutting rates, the gap between risk-free returns and private credit yields was widening. Canadian MICs offering 7-8% were increasingly attractive relative to a 10-year Government of Canada bond yielding below 1.3%.
The improving housing market was also constructive for private lending. More transactions meant more origination opportunities for MIC managers, and rising prices supported existing loan collateral values. The combination of stable Canadian rates and improving housing activity was a favorable backdrop for private real estate credit.
For PE investors, the back-to-back Fed cuts were a tailwind for deal activity. Lower cost of capital supports valuations and makes financing more accessible. Canadian mid-market sponsors with dry powder were in a good position heading into Q4. The easing cycle was broadly supportive of Canadian alternative investments, reinforcing the case for diversified private market exposure.
What We're Watching
A third Fed cut at the October meeting was being priced in by markets. If delivered, it would bring the Fed funds rate to 1.50-1.75% — below the BoC's 1.75%. The resulting policy divergence could have implications for the Canadian dollar and cross-border investment flows.
The October federal election would bring political uncertainty to Canadian markets. Policy platforms on housing, taxation, and regulation could all affect private market dynamics, depending on the outcome.
Fall housing data would confirm whether the summer recovery had legs. A sustained improvement would be bullish for private lending volumes and real estate valuations.
Closing
September brought more evidence that the rate direction was down globally, while Canadian fundamentals remained solid. For private market investors, it was a favorable combination — stable domestic conditions with a global tailwind of easier money.
For the full quarterly analysis, see Q3 2019: The Fed Blinks First.
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