Given the cracks that have emerged in Canada’s economy, speculation had shifted towards a possible rate cut by the Bank of Canada today and Tiff Maklem and crew delivered.  The overnight rate target has now been lowered a quarter of a percentage point to 4.75%.  We have been speaking with clients for weeks that Canada would lead the U.S. and other central banks on pivoting and it’s clear that inflation metrics have cooled sufficiently for the Bank to take out some insurance against a more significant slowdown in the economy or recession in the second half. 

 

At the time of writing, we hadn’t heard from Governor Maklem, however, there was some useful guidance in the actual policy statement with respect to where rates might be heading in the coming months. The Bank does say that “recent data has increased our confidence that inflation will continue to move towards the 2% target.” It followed this up with a more cautionary note that it will continue to watch how core inflation evolves, as well as inflation expectations and corporate pricing power. The next policy meeting is July 24th, followed by September 4th and October 23rd.  Based on the language in the statement, if inflation continues to fall for May and June, then another rate cut for July is in play. 

 

This move was not a surprise and BAX futures were implying an 80% probability of a cut, however, the reaction in both the rates and forex markets suggest that there was still a small element of surprise in the decision.  The Loonie has fallen below 73 US cents this morning, and while it is still trading above the lows seen last month, the fact that we now have a negative spread against the Fed funds target of 0.75% could ultimately see a more bearish tone emerge. The response by the bond market has been more dramatic, with the 2yr Government of Canada yield dropped below 4% for the first time since early February.  The 10yr yield saw a more modest decline of about 5bps to 3.4% - the lowest in a couple of months. In terms of equities, the move lower in yields should support interest-sensitivities.

 

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

Andrew Pyle

 

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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. Andrew and his clients may own securities mentioned in this column. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.

 

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