Markets are moving up calls for rate cuts
What’s driving this latest plunge in yields? In short, each new release of economic data is pointing to a weakening economy, and growing signs that no further rate hikes are on the horizon by both the Bank of Canada and the Federal Reserve.
In Canada, we’ve seen headline inflation continue to fall, a slowdown in consumer spending, household credit growth and housing activity, and most recently weakening employment data and a rise in unemployment rate.
This is all having an impact on rate forecasts. Following today’s release of October employment figures, markets went from pricing in a 10% chance of a rate hike at the December 6 Bank of Canada meeting to a 7% chance of a rate cut.
While most big bank forecasts don’t expect the Bank of Canada to begin cutting rates by the middle of 2024, markets are betting a weak economy will force the central bank’s hand a little sooner.
Bond markets are pricing in 83% odds of a quarter-point rate cut by March 2024, and 81% odds of 50 bps worth of cuts by June.
“There is no scenario priced in now that shows any rate hikes at all,” Sims notes. “It looks like it is straight downhill from here, although timing will be the issue.”
Earlier this week, Deputy BoC Governor Carolyn Rogers confirmed the central bank could start cutting interest rates before inflation reaches its target rate of 2%, which is officially expected by mid-2025, according to the Bank’s latest Monetry policy rate.
While testifying this week before the House of Commons finance committee with BoC Governor Tiff Macklem, Rogers said monetary policy is forward-looking and that “we don’t need to wait until inflation is all the way back to 2%.”
“If we get signs that we can be confident that inflation is coming down and will remain down, then we would start thinking about lowering interest rates, but we’re just not there yet,” she said.