Intelligent Investment
Cut or Caution
Canada Monthly Market Commentary
May 30, 2024 2 Minute Read
Inflation in Canada has been trending downwards in recent months, an encouraging sign of progress on the Bank of Canada’s over two-year long fight against high inflation. Headline inflation has held within the central bank’s target range of 1% - 3% so far in 2024 and, more importantly, measures of core inflation have slowed for four consecutive months and are now also within the acceptable range. Furthermore, a weaker than expected Q1 2024 GDP result has lifted market-implied odds for an interest rate cut to over 80% for a 25-bps decrease by the Bank of Canada next week on June 5th.
This leaves the remaining 20% representing the possibility the central bank decides to hold interest rates at 5.00% next week and instead wait until their next meeting in late July to make their move. The strongest rationale for delaying would be if the Bank of Canada opts to be more cautious with monetary policy and wait for the next batch of economic datapoints to be absolutely certain that the inflation trend is persistent. However, waiting to make a more informed decision comes at the risk of adding further strain to an economy that is grappling with declining productivity, new tax rules weakening Canada’s competitiveness and households facing higher mortgage payments on renewal.
Overall, a 25-bps decrease to interest rates on its own does not immediately relieve pressures on the economy, but it would mark the turning point for the Canadian economy and be a catalyst for increased business and investment activity going forward.
Economic Highlights:
- Employment rises by 90,000 jobs in April 2024 while the unemployment rate holds steady at 6.1%.
- Headline inflation cools to 2.7% in April 2024 and core measures CPI-Trim and CPI-Median dropped to 2.9% and 2.6%, respectively.
- Advanced estimates indicate retail sales rose by 0.7% in April 2024 following a 0.2% decline in the month prior.
Viewpoints:
- Inflation data 'all clear' for Bank of Canada interest rate cut in June, economists say
- Bank of Canada could tilt to July rate cut to benefit from flood of data
- Canada’s per capita output drops 7% below trend, new Statscan report says
- Bank of Canada warns of steep jump in mortgage payments
- Money market bets for BoC rate cut next week spike to over 80% after soft GDP data
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