Bank of Canada will cut interest rates this year due to a faster-than-expected US labor market loosening.
Why
U.S. Unemployment Rate Rises to 4.3%
- Markets anticipate deeper Federal Reserve cuts in 2024.
- Analysts anticipate two half-percentage point easing bouts.
Canada’s Bank of Canada’s Policy
- Governor Tiff Macklem may lower borrowing costs if Bank of Canada joins global interest rate cut trend.
“U.S.-Canada Economic Intertwined”
- U.S. economy’s weakness likely to affect Canada.
- Macklem can normalize borrowing costs without risking the loonie.
- Bank of Montreal’s Benjamin Reitzes suggests Bank of Canada pushes toward neutrality if U.S. economy slows.
Canadian Bonds Rally Post-U.S. Data Release
- Bonds rallied post-data release.
- Government five-year notes yields fell 13 basis points to 2.89%, lowest since May 2023.
- Overnight swap traders pricing three more rate cuts, increasing central bank easing expectations.
Bank of Montreal’s Policy Rate Cut
- Bloomberg survey predicts central bank to cut key policy rate from 4.5% to 3% by end of next year.
- Bank of Montreal predicts rate cut at each of next four meetings, reaching 3.5% by January and 3% by mid-2025.
- Bank of Montreal’s Doug Porter predicts the end point more than half a year earlier than expected.
Bank of Canada’s Interest Rate Cuts and Currency Concerns
- In June, the Bank of Canada led the Group of Seven countries into easing and cutting rates.
- Macklem’s decision to cut ahead of the Fed sparked currency worries.
- Concerns are now lessened as the spread between U.S. and Canada rates narrows.
- Taylor Schleich, a rates strategist with National Bank of Canada, suggests the Fed will support the Bank of Canada.
Global Bond Rally and Canada’s Inflation Risks
- Global bond rally could increase Canada’s inflation risks.
- Majority of fixed mortgages in Canada have terms of five years or less.
- Rates of these mortgages could decrease if yields continue to fall.
- This could lead to a sharp rebound in Canada’s housing market.
- The Bank of Canada’s June survey showed a rapid change in the outlook for 5-year yields.
Canada’s Unemployment Rate Rises
- Unemployment rate in Canada rose to 6.4% in June, 1.4 percentage points higher than in the U.S.
- Economists predict the rate to rise to 6.5% in July.
- The weaker U.S. data is expected to influence the BoC’s decision-making process.