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The Bank of Canada kept its key policy rate on hold at 5%. The central bank says it’s starting to see the economic conditions needed to lower rates, but that it’s looking for more evidence the momentum can be sustained. Hafiz Noordin, VP & Director, Active Fixed Income Portfolio Management, TD Asset Management, speaks with Greg Bonnell about the decision and the market implications.
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* Bank of Canada held its policy rate steady at 5%. But it is indicating they're getting closer to a rate cut, just need a little more evidence of slowing inflation. Joining me now with reaction, Hafiz Noordin, VP and director of Active Fixed Income Portfolio Management at TD Asset Management. Hafiz, always great to see you.
* It's great to be here.
* Right off the top, I want to ask you, how are you reading what we're getting today from the Bank of Canada? Are they setting us up for a cut as early as June or July?
* Yeah, I think they're trying to just keep their optionality that June is still on the table. But in Governor Macklem's words during the press conference-- he was asked, is it possible? Is June within the realm of possibilities? He said, yes, it is.
* So I think, from that perspective, compared to what's going on in the US, where June is now becoming less likely, that divergence seems to be opening up right now.
* Yeah. Right now, want to take a look at the statement in the prepared remarks. And obviously, that was a very intriguing question right off the top too. Is June on the table? Eh, it is a possibility. Need to be assured. It's not just a temporary dip in inflationary pressures. Progress needs to be sustained on this front.
* So we only have, like, several weeks, a couple months until the next time. What do they need to see? What keeps them on track?
* Well, I think the two trends that are helping them to guide towards starting their rate cut cycle is the disinflationary trend. So we've seen the year-over-year CPI come down now to just below 3%. We're up 2.8% year over year on a headline, core around 3.2%. But the key thing is that it's trending down. And if that continues, then by kind of the June meeting, we're at maybe around a 2 and 1/2%, which is fairly close to 2%.
* The other trend, though, is the labor market. So we've seen the unemployment number tick up to 6.1% now. So the trend is quite clear there. And so as long as we see unemployment where it is right now and not restrengthen back down below 6%, then I think they can have confidence that they can come off of this maximum restrictive policy level.
* Beyond the well-known risks that we live with, even as investors, apart from rate decisions, geopolitical conflict, what it could mean for shipping routes, I did find it interesting that the Bank of Canada said, we think the economy is going to get off on a stronger footing. But at the same time, as the economy grows, we will bring inflation back down. That seems to me like that's a bit of a balancing act, right?
* It is. And it almost feels like it's a bit of a Goldilocks environment that they're projecting. And it's interesting. They really upgraded the 2024 growth numbers. In January, they had projected about below 1%. Now they're expecting 1 and 1/2% GDP growth this year because of everything that we've talked about, in terms of global growth looking good.
* So it feels a bit Goldilocks, where we're upgrading growth numbers, but we're saying, yeah, inflation's still going to come down. And so I think that's where we'll have to see the data play out. Is Canada truly in this environment where we don't have as-strong demand as, say, the US does and can get towards target on inflation more easily?
* We have to always look at what's happening in the US as a guide. And it's really looking like it's more of a harder story there to see inflation coming down at the same time growth is staying resilient.
* Well, I'm glad you're bringing the US back into the conversation, because you hinted at it earlier. If it is within the realm of possibility in this country that we could get a cut in June or maybe in July, but getting less and less likely-- we're going to see that from the Fed when we start talking about central bank divergence-- what happens then?
* Well, it could become a reality. And some of that's priced in already. We see kind of a-- when you look at 10-year yields in Canada and the US, there's about an 85-basis-point differential now, which is at a historic wide differential. US yields are higher because of this idea that their growth is stronger there. And they may have to stay higher for longer, in terms of rates.
* And same thing-- you can look at the currency as a guide as well. We're seeing the US dollar strengthen today relative to the Canadian dollar, pointing to this idea that the Canadian economy, it won't be as strong and may have to cut while the Fed is still staying on hold.
* So I think this narrative of this divergence has been starting to play out but could accelerate with what we're seeing today.
* Let's talk about the currency trade, because off of what we had, the hotter-than-expected inflation print out of the United States and then a follow on from the Bank of Canada that June is within the realm of possibilities, we have a weaker loonie. Ultimately, if you get central bank divergence playing out through the year and a weaker loonie, are we in danger of then importing inflation? We get a lot of stuff from the States.
* That's a great point. And I think that's the balancing act that's really tough is that, on one hand, without worrying about inflation, weaker currencies tends to be a good thing because your exports become cheaper and that tends to stimulate domestic demand.
* But the key worry is still about inflation. And I think that's where the Bank of Canada can't just look at its own data in a standalone basis. It has to look at what's happening in the US. And even if they can start cutting looking at the timing and magnitude of that, they can't get too aggressive because then the currency can get really dislocated and cause a lot of financial market volatility.
* The last thing I want to ask you-- we have a federal budget less than a week away. I think the Bank of Canada, as far as that document is concerned, probably doesn't want to see any big spending that would stoke inflation. Is that the danger here? Or do we get a sense that this budget's not going to be a big spending one?
* Well, you always have to be worried when you're going into an election period, which we're looking at next year. And so the concern is that could we see spending that is inflationary but not in a productive way?
* It's OK to have spending that increases productive capacity in the economy. I think that's the main-- should be the main focus. But if the concern is that it's more stimulative, but without actually increasing the supply side of the economy, then that's when inflationary concerns could come into play.
* So I would think that the Bank of Canada, already expecting 1 and 1/2% GDP growth of this year, we shouldn't be seeing any-- there doesn't seem to be need for more stimulus from the fiscal side. But that's definitely a risk. And I think that's why they need that optionality. Let's get past next week and bake that into the Bank of Canada's numbers. And then they can have more confidence on the path forward.
* Hafiz, it's always great to get your insights. Thanks for joining us.
* Thanks very much.
* Hafiz Noordin of TD Asset Management.
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* Bank of Canada held its policy rate steady at 5%. But it is indicating they're getting closer to a rate cut, just need a little more evidence of slowing inflation. Joining me now with reaction, Hafiz Noordin, VP and director of Active Fixed Income Portfolio Management at TD Asset Management. Hafiz, always great to see you.
* It's great to be here.
* Right off the top, I want to ask you, how are you reading what we're getting today from the Bank of Canada? Are they setting us up for a cut as early as June or July?
* Yeah, I think they're trying to just keep their optionality that June is still on the table. But in Governor Macklem's words during the press conference-- he was asked, is it possible? Is June within the realm of possibilities? He said, yes, it is.
* So I think, from that perspective, compared to what's going on in the US, where June is now becoming less likely, that divergence seems to be opening up right now.
* Yeah. Right now, want to take a look at the statement in the prepared remarks. And obviously, that was a very intriguing question right off the top too. Is June on the table? Eh, it is a possibility. Need to be assured. It's not just a temporary dip in inflationary pressures. Progress needs to be sustained on this front.
* So we only have, like, several weeks, a couple months until the next time. What do they need to see? What keeps them on track?
* Well, I think the two trends that are helping them to guide towards starting their rate cut cycle is the disinflationary trend. So we've seen the year-over-year CPI come down now to just below 3%. We're up 2.8% year over year on a headline, core around 3.2%. But the key thing is that it's trending down. And if that continues, then by kind of the June meeting, we're at maybe around a 2 and 1/2%, which is fairly close to 2%.
* The other trend, though, is the labor market. So we've seen the unemployment number tick up to 6.1% now. So the trend is quite clear there. And so as long as we see unemployment where it is right now and not restrengthen back down below 6%, then I think they can have confidence that they can come off of this maximum restrictive policy level.
* Beyond the well-known risks that we live with, even as investors, apart from rate decisions, geopolitical conflict, what it could mean for shipping routes, I did find it interesting that the Bank of Canada said, we think the economy is going to get off on a stronger footing. But at the same time, as the economy grows, we will bring inflation back down. That seems to me like that's a bit of a balancing act, right?
* It is. And it almost feels like it's a bit of a Goldilocks environment that they're projecting. And it's interesting. They really upgraded the 2024 growth numbers. In January, they had projected about below 1%. Now they're expecting 1 and 1/2% GDP growth this year because of everything that we've talked about, in terms of global growth looking good.
* So it feels a bit Goldilocks, where we're upgrading growth numbers, but we're saying, yeah, inflation's still going to come down. And so I think that's where we'll have to see the data play out. Is Canada truly in this environment where we don't have as-strong demand as, say, the US does and can get towards target on inflation more easily?
* We have to always look at what's happening in the US as a guide. And it's really looking like it's more of a harder story there to see inflation coming down at the same time growth is staying resilient.
* Well, I'm glad you're bringing the US back into the conversation, because you hinted at it earlier. If it is within the realm of possibility in this country that we could get a cut in June or maybe in July, but getting less and less likely-- we're going to see that from the Fed when we start talking about central bank divergence-- what happens then?
* Well, it could become a reality. And some of that's priced in already. We see kind of a-- when you look at 10-year yields in Canada and the US, there's about an 85-basis-point differential now, which is at a historic wide differential. US yields are higher because of this idea that their growth is stronger there. And they may have to stay higher for longer, in terms of rates.
* And same thing-- you can look at the currency as a guide as well. We're seeing the US dollar strengthen today relative to the Canadian dollar, pointing to this idea that the Canadian economy, it won't be as strong and may have to cut while the Fed is still staying on hold.
* So I think this narrative of this divergence has been starting to play out but could accelerate with what we're seeing today.
* Let's talk about the currency trade, because off of what we had, the hotter-than-expected inflation print out of the United States and then a follow on from the Bank of Canada that June is within the realm of possibilities, we have a weaker loonie. Ultimately, if you get central bank divergence playing out through the year and a weaker loonie, are we in danger of then importing inflation? We get a lot of stuff from the States.
* That's a great point. And I think that's the balancing act that's really tough is that, on one hand, without worrying about inflation, weaker currencies tends to be a good thing because your exports become cheaper and that tends to stimulate domestic demand.
* But the key worry is still about inflation. And I think that's where the Bank of Canada can't just look at its own data in a standalone basis. It has to look at what's happening in the US. And even if they can start cutting looking at the timing and magnitude of that, they can't get too aggressive because then the currency can get really dislocated and cause a lot of financial market volatility.
* The last thing I want to ask you-- we have a federal budget less than a week away. I think the Bank of Canada, as far as that document is concerned, probably doesn't want to see any big spending that would stoke inflation. Is that the danger here? Or do we get a sense that this budget's not going to be a big spending one?
* Well, you always have to be worried when you're going into an election period, which we're looking at next year. And so the concern is that could we see spending that is inflationary but not in a productive way?
* It's OK to have spending that increases productive capacity in the economy. I think that's the main-- should be the main focus. But if the concern is that it's more stimulative, but without actually increasing the supply side of the economy, then that's when inflationary concerns could come into play.
* So I would think that the Bank of Canada, already expecting 1 and 1/2% GDP growth of this year, we shouldn't be seeing any-- there doesn't seem to be need for more stimulus from the fiscal side. But that's definitely a risk. And I think that's why they need that optionality. Let's get past next week and bake that into the Bank of Canada's numbers. And then they can have more confidence on the path forward.
* Hafiz, it's always great to get your insights. Thanks for joining us.
* Thanks very much.
* Hafiz Noordin of TD Asset Management.
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