Michael Watkins
March 08, 2024
Weekly Market Update
As widely expected, the Bank of Canada (BoC) held its policy interest rate steady at its March meeting. This marked the fifth straight rate hold from Canada’s central bank as it seeks to bring inflation down further, while navigating the Canadian economy through a soft landing. While rate cuts appear to be on the horizon, the BoC noted it might be too soon to begin given ongoing inflationary risks.
- The BoC held its policy interest rate steady at 5.00%, which was its fifth consecutive rate hold. Based on a Bloomberg survey, economists expected Canada’s central bank to keep its key interest rate unchanged.
- The BoC expressed its belief that a rate of 5.00% is warranted given persistent inflationary pressures. The policy statement showed officials are still concerned about the outlook for inflation, suggesting the BoC’s work to bring down inflation isn’t over.
- Canada’s central bank noted it is still too soon to consider lowering interest rates. The BoC doesn’t appear certain inflation is on a smooth path to its 2% target. While inflation is expected to come down, it could be choppy in the months to come. As a result, the BoC’s policy rate of 5.00% is still needed.
- The BoC sees signs of the labour market slowing and wage pressures easing. This could help soften elevated inflationary pressures. Meanwhile, the economy is expanding, but at a relatively muted pace.
While the BoC is presenting a relatively cautious tone, signs point to rates being lowered later this year. The same narrative came out of the US yesterday. In testimony in front of the US government, US Federal Reserve Board (Fed) Chair Jerome Powell said the Fed will likely begin lowering interest rates later this year. For now, however, inflation remains a risk, so the Fed must stay at restrictive levels to bring inflation down to its 2% target.
Business activity in Canada, as measured by manufacturing and services sector activity, contracted in February. This marked the ninth consecutive month business activity has contracted, suggesting conditions are relatively weak amid tight financial conditions.
- The S&P Global Canada Composite Purchasing Managers Index rose to 47.1 in February from 46.3 in the previous month. This was Canada’s ninth straight contraction in business activity, but the slowest pace since September 2023. A reading below 50 signifies contractionary conditions.
- Services sector activity continued to contract in February, but this time at a slower pace compared to January. Services businesses lowered prices charged over the month. Furthermore, employment growth slowed in February.
- On Monday, S&P Global announced Canada’s manufacturing sector contracted in February. The sector continues to be negatively impacted by a drop in new orders, reflecting lower demand both domestically and from abroad. Output also contracted in February.
- South of the border, business activity in the US expanded in February at a slightly faster pace than in January. Business activity in the US continues to prove its resilience despite tight financial conditions. Still, it is at relatively lower levels on a historical basis, which is giving the US Federal Reserve Board an opening to begin lowering interest rates.
Looking at the bigger picture, the Organization for Economic Co-operation and Development (OECD) reported that global inflation softened in January. Inflation came down significantly in 2023, and that appears to have carried over into 2024, but inflationary pressures remain elevated. Major central banks have helped do their part by raising interest rates aggressively. Now, the conversation has shifted to when they can begin lowering rates.
- The OECD says the global inflation rate was 5.7% year-over-year in January, down from the 6.0% annual rate in December. Inflation fell in about 66% of OECD member countries in January. Falling energy prices contributed to January’s lower rate, as did a slowdown in the growth of food prices.
- Core inflation, which excludes more volatile items, remains at stubbornly high levels, suggesting price pressures continue to be broad-based. The OECD’s annual core inflation rate was 6.6% in January, largely unchanged from the 6.7% rate in December.
- Among G7 countries, the annual inflation rate was down to 2.9% in January. This was a slowdown from the 3.2% rate in December and the slowest pace since April 2021. The inflation rate declined in six of seven countries, including Canada and the US.
- Canada’s annual inflation rate fell to 2.9% in January, moderating from the 3.4% rate posted in December. While this moved inflation closer to the Bank of Canada’s (BoC) 2% target, there’s still a long way to go, with the BoC commenting the path could be choppy.
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Source: CIBC Morning Market Brief