Cast your mind back to February 2023. Nvidia still had not recovered the ground it lost in 2022 and was trading just above $20. We were supposed to be in a recession. And the Bank of Canada target rate was 4.25%. Well, Nvidia has taken some knocks these past weeks, but still trades north of $100, there is still no indication of recession in North America, but this morning the Bank did chop its key rate by another 25 basis points to that level of 18 months ago. 

 

Following on its decision in July, the Bank has responded to a further moderation in inflationary pressures and it referenced the decline in the headline CPI inflation rate to 2.5% in July.  This has coincided with a weakening in the economy and the fact that Canada is now operating in an excess supply situation.  The actual policy statement was fairly brief, but the Bank maintained its language that it will continue to monitor the opposing forces of an overall moderation in inflation and persistently higher inflation in shelter costs and other services.

 

 

There are two policy meetings left this year - October 23rd and December 11th – and economists expect that there will be quarter-point cuts in each of them. That would take the overnight rate target to 3.75%, which is where it stood in December 2022. The government bond market has already priced these cuts in and more, as you can see from above chart, with the 23yr benchmark yield trading more than a full percent below the new Bank overnight rate. The last time we saw a gap this large was back in January of this year, which again coincided with a time when sentiment towards the economy was sour.

 

The spread between the Federal Reserve target rate (still at 5.5%) and the Bank’s is even wider now at 1.25%. There was concern that the Bank wouldn’t want to push this gap without seeing the Fed start to bring down its own rate, however, there is a broad consensus that the Fed will lower its target this month. Furthermore, the Canadian dollar has been on a bit of a tear in recent weeks, coming off a low near 72 US cents at the start of July and rising to above 74 cents last week.  It fell back yesterday alongside the sharp sell-off in risk assets, but we have actually seen the Loonie gain in the wake of the Bank’s decision.

 

This morning’s move is definitely supportive for Canadian fixed income but, as we indicated in Friday’s newsletter, investors that have been playing the short-term/GIC strategy will have to start thinking about what the environment is going to look like 18 months from now. This should be a positive for dividend stocks in the Canadian space, though we also need to be on watch for a more rapid deterioration in economic fundamentals – namely employment.

 

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.