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I recently had the privilege of watching the NCAA Women’s Final Four basketball tournament. It occurred to me while watching these extremely talented college athletes that each team is like a different economy, with its own strengths and weaknesses. Coaches build their game plans around their teams’ unique traits – and central bankers build their monetary policy plans around the inflation and growth conditions of their economies. And just as women’s college basketball has set new viewership records, all eyes are on which central bank will cut rates next. As each data point comes out (and central bankers comment on it), perceptions change about which central bank will begin to cut when.
Here’s an assessment of where I think the Canadian and U.S. central banks stand now:
Labour market: Canada’s jobs report for March1 showed an unexpected net loss of 2,200 jobs, largely in the services sector. In addition, the unemployment rate increased to a new 26-month high of 6.1%. This represented the largest monthly increase in unemployment since the summer of 2022.
Inflation: Disinflationary progress has been significant, with the February reading of inflation2 at 2.8% year-over-year – well below expectations. And year-over-year core inflation has fallen from 2.4% in January to 2.1% in February. The Bank of Canada forecasts inflation will reach 2% by next year, but there appears to be significant fear among policymakers that inflation could experience a resurgence.
Inflation expectations: The Canadian Survey of Consumer Expectations3 showed that while one-year ahead inflation expectations have eased very significantly in the last two years, they have recently stalled at a level well above historical norms. As the report explained, “Although they perceive inflation to be falling, consumers still expect near-term inflation to remain high.” In follow-up interviews, they said high interest rates are contributing to their expectations that inflation will remain elevated in the near term. One respondent explained, “It’s interest rates that Canada is imposing on us. That, for me, contributes to inflation.” Consumers perceive high inflation and high interest rates as twin evils: 61.7% of respondents said they are worse off because of higher inflation, and 36.07% say they are worse off because of high interest rates.
The Canadian economy is clearly under pressure as a result of higher interest rates, which ironically can contribute to higher inflation because of their impact on areas such as the cost of housing through higher mortgage rates. The good news is that fewer mortgage holders expect a major increase in their payments at renewal – presumably because they expect rate cuts. That seems to be filtering into improvement on consumer sentiment, although it is still poor: 52% of those surveyed expect economic activity in Canada to decline in the next 12 months (although that is down from 62% in the previous quarter).3
Bank of Canada speak: The summary of deliberations from the last Bank of Canada (BOC) meeting on March 6 show agreement on cutting rates this year if conditions continue to evolve as expected – although there are differing opinions on expected timing. We haven’t heard much in recent weeks in terms of BOC speak, although one speech stands out – from BOC Senior Deputy Governor Carolyn Rogers.
The BOC released a report showing that Canada is being plagued by relatively low productivity, and Rogers sounded the alarm: “I'm saying that it's an emergency – it’s time to break the glass.”4 She said that businesses urgently need to boost investment to increase productivity and that an added benefit to higher productivity is that it would help insulate the economy against the threat of inflation. One powerful catalyst for greater investment could be lowering rates. Low productivity is an important consideration that might be overlooked by those who anticipate a more hawkish BOC.
When might the BOC cut rates? I would anticipate a first rate cut on June 5, which would be the next meeting after this month’s meeting.
Labour market: It’s a different story south of the Canadian border. The March U.S. jobs report5 showed 303,000 jobs created, far more than expected, with February non-farm payrolls revised down just 5,000 to 270,000. In addition, the unemployment rate moved down slightly to 3.8%. The good news is that average hourly earnings were as expected: up 0.3% month-over-month and 4.1% year-over-year, which is down from 4.3% year-over-year in February. This was something of an ideal report; strong job growth and easing (albeit still-high) wage pressures.
Inflation: For March, core Personal Consumption Expenditures, the Federal Reserve’s (Fed) preferred measure of inflation, was 2.8% year-over-year, down slightly from 2.9% in February.6
Inflation expectations: The final University of Michigan Survey of Consumers for March showed five-year-ahead inflation expectations down to 2.8% and one-year-ahead inflation expectations down to 2.9%. As I have said before, inflation expectations appear well anchored.
Fedspeak: We got mixed messaging from Fed officials following its meeting this month. Fed Chair Jay Powell explained, “The recent data do not...materially change the overall picture which continues to be one of solid growth, a strong but rebalancing labour market, and inflation moving down toward 2% on a sometimes bumpy path.”7 We got similar messaging from Cleveland Fed President Loretta Mester in terms of recognizing that the disinflationary process can be very imperfect: “…the disinflation process won’t be a smooth path back to 2%.”8
However, we got more hawkish Fedspeak from other members of the Federal Open Market Committee (FOMC). Richmond Fed President Thomas Barkin and Atlanta Fed President Raphael Bostic urged caution, suggesting the Fed should maintain rates at current levels until they are very satisfied inflation has been vanquished. Similarly, Dallas Fed President Lorie Logan said it’s much too soon to be thinking about cutting rates. And Minneapolis Fed President Neel Kashkari suggested there might be no rate cuts this year. These comments were certainly not happily received by markets. However, I continue to dismiss this as “tough talk” intended to keep a lid on easing financial conditions.
When might the Fed cut rates? I still believe we will see the first U.S. rate cut in June.
So there you have it. My assessment on the state of Canadian and U.S. economies and when we are likely to see the first rate cut from each. Globally among developed markets, I believe even the strongest economy is likely to experience rate cuts in the near term – while the U.S. economy continues to positively surprise (the economic equivalent of sinking a 35-foot three pointer), I’d say monetary policy is still in restrictive territory and needs to be cut. While we may see a flurry of central bank cuts in a short period of time, I must stress it’s not because these central bankers are lemmings. They are just responding to the conditions in their respective economies, which I think will all point in the direction of rate cuts starting in coming months (although some, like the Bank of England, are likely to cut more than others).
Well, some central banks seem to be busy buying gold – a number of them have been increasing their gold reserves in recent months.
The rationale seems to be multi-fold.
Kristina Hooper is Chief Global Market Strategist at Invesco.
Notes
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
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The opinions referenced above are those of the author as of April 8, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
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All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
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