The Canadian and US economies are no longer tightly integrated, with Canada's economy slowing and inflation rising, and the US outperforming expectations. This may lead to diverging monetary policy, with some banks predicting rate cuts.
Canadian inflation was cooler than expected in January, causing yields to drop. Headline inflation was just 2.9%, and the BoC-preferred Core CPI dropped 0.3 points. This decline is attributed to weak demand, unlike the US where headline CPI remains at 3.9%, significantly above the Federal Reserve's target rate. The economy is heading in the opposite direction.
Canada and the US are closely tied, with the Bank of Canada using the US neutral policy rate as its own. However, the market currently sees the two countries moving in the opposite direction, with Canadian bond markets bucking the upward trend in yields and Canadian fixed rate mortgage interest costs seeing pressure ease. This divergence leads to an ongoing debate on who would cut first, the Bank of Canada or the Fed. The market is estimating 50-50 odds for a BoC rate cut in June, with concerns about early rate cuts in Canada focusing on fanning a simmering housing market rather than stoking a flaming equity market. The divergence in trends adds to the ongoing debate on who would cut first.
