Investors are increasing their bets that the Bank of Canada will raise interest rates at least once more this summer and delay any rate cuts until next year on stronger-than-expected economic data.
“Overall I think the consensus up until 2023 and even in January was that inflation is slowing down and would continue on a nice trajectory down towards 2% into 2023. And I think markets and investors are now beginning to grapple with the fact that maybe going to 2% might not be as smooth as they initially thought,” said Taylor Schleich, director and rates strategist at National Bank Financial Markets Yahoo Finance Canada in an interview.
Aside from the more immediate impact of higher borrowing costs on the housing market, a number of data points including jobs reports on both sides of the border that have broader implications for the broader economy have beaten expectations lately.
“Most of the interest rate adjustments have been driven by global events, particularly in the US. You had jobs data that surprised sharply to the upside earlier in the month, and then for the last two weeks you just had data that could have come out stronger than consensus expectations across the spectrum, and that includes inflation,” Schleich said.
“We’ve also seen some revisions to inflation over the last year showing that it actually hasn’t slowed down as much as we thought it would.”
Overnight swap data shows significantly increased odds of a rate hike at the Bank of Canada’s July meeting, and cuts are not forecast until early next year. Earlier this month, data showed forecasts for rate cuts to begin as early as this fall.
“You get some data points, you get the Fed, which is very tightening, you get a skyrocketing jobs report. … The markets think maybe the economy is stronger than everyone thought. And that would force the Bank of Canada to stop pausing and hike again in the summer,” said James Orlando, senior economist at TD Economics.
He adds that strength in the labor market is “absolutely one of the factors that concerns people” as a strong labor market and wage increases usually equate to higher consumer spending.
“People think everything’s moving up, interest rates are going up, and they’re really just shifting that forecast a little bit more,” Orlando added.
High bar for further rate hikes
Bank of Canada Governor Tiff Macklem told investors the central bank was on a “conditional pause” late last month to assess the impact of higher interest rates on the economy after the bank raised interest rates to 4.50 percent had raised.
That sets a much higher bar for rate hikes in Canada, according to Schleich.
On the contrary, Macklem’s US counterpart, Fed Chair Jerome Powell, says he intends to hike rates further.
Despite the stronger data, both Schleich and Orlando aren’t ready to change their official predictions that interest rates have peaked, because they want to see how the economy fares in the coming months and higher borrowing costs work their way through the economy find.
“I don’t think the economic data we’ve seen since the Bank of Canada’s pause announcement has been enough to convince them to start moving higher yet. You need to see more than job pressure to convince them to change course,” Orlando said.
Michelle Zadikian is Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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