Call it a tale of two countries, or two central banks.  This morning, we saw an unpleasant U.S. CPI report, reinforcing the view that there may not be any cuts coming from the Fed this year. Yet, less than two hours later, the Bank of Canada policy meeting pointed to continuing improvement in inflation and left the door open to a potential rate cut in June. While that move is by no means certain, the inflation figures between Canada and the U.S. appear to be diverging.

 

The Bank’s decision to hold its overnight rate target at 5% for a 6th consecutive time was based on balance between economic growth that has come in firmer than expected and consumer price pressures that are ebbing. At the same time, labour force conditions in Canada are not looking as resilient as south of the border.  U.S. non-farm payrolls have grown by more than 250,000 in each of the past four months and the March gain was the strongest in the past year. Canada’s employment growth was negative in March and we have seen three drawdowns over the last 12 months.

 

 

 

While the Bank did lift its growth projections moderately, it also took down its inflation expectations. In the last statement, the projection now is for headline inflation to remain near 3% in the first half, but moving below 2.5% in the second half. It is going to look for further signs of deceleration in both headline and core inflation before making a decision to cut rates. Core inflation has fallen two months in a row from 3.7% in December to 3.2% in February. Next Tuesday, we get the March report and if shows further improvement, then the market will lean more towards a June rate cut, though the Bank will get one more report before deliberating on June 5th. 

 

Holding rates higher for longer has larger risks for the Canadian economy than the U.S., in my opinion, and we are already seeing signs of that in the numbers. Unless we get a remarkably good U.S. CPI print next week, the stage is set for a widening in the spread between the Fed’s key rate and the BoC. This should put even more pressure on the Canadian dollar vis a vis the greenback and see Canadian government bonds outperform their U.S. counterparts.

 

On behalf of the Pyle Wealth Advisory team, have a great rest of the week.

 

Andrew Pyle

 

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The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.

 

Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.