In the wake of the Bank of Canada’s unexpected rate increase, the focus now shifts to the U.S. Fed’s next move. Maria Solovieva, economist at TD, discusses the economic conditions in the U.S., how they differ from Canada, and the possibility of a rate pause at the Fed’s next meeting.
Print Transcript
Central banks are weighing a wide range of economic indicators, trying to assess whether they're doing enough to return inflation to target or if they need to take further action. Of course, with the Bank of Canada rate hike behind us, attention now turns to this week's Fed rate decision. Joining us now with more, Maria Solovieva, an economist with TD. Maria, welcome to the show. It's your first time here. Really excited to have you here.
Thank you for having me here.
So we're going to talk central banks. Let's start with the Bank of Canada. Obviously, it was a bit of a surprise for the market last week. They gave us a hike and saying they obviously they felt like they needed to do more. And then you got the jobs report on Friday. That's a that's a bit soft. How should we be thinking about all that?
You know, it definitely last week was a was a bit of a surprise. Not always do you have macroeconomic news from Canada making the headlines and really making other markets stop and think about what's going on. So if you remember, the Bank of Canada decided to take a kind of a pause, step back and look at whether or not the number of hikes that they had before is enough to cool the economy. And the expectations were that, yes, you know, we're going to have a slowdown in consumption, inflation is going to turn the corner and we're going to see continuous cooling. However, that didn't transpire and as we saw, inflation was actually started to accelerate, even though it was just a by a small margin in April but that's not exactly what the Bank of Canada wanted to see. Similarly, consumer was very strong for the first quarter we had 5.7% growth annualized and we also saw a bit of a spill over into the second quarter. If you look at the retail sales, for example, there was it was indicative of our continuing strength for the month of April. So those things made Bank of Canada really think about, as you know, do we have we done enough? And obviously this the decision to hike is indicative of the fact that they haven't. And at this point, even with with their decision last week, we're expecting one more hike. So that's just suggestive of the fact that too many excesses in the economy right now and they need to go on and continue hiking.
And that soft jobs report that we got on Friday.
That was I wouldn't change their minds. They couldn't have foreseen it, of course, You know, and that was a surprise, of course. I would say it was more of in the in the timing than in principle as well, similarly to the Bank of Canada hike. The employment report is definitely showing that there are, you know, potentially weaknesses, but we have to take it with a grain of salt because it's the first decline that we have seen so far. We did see the slowdown in employment in Canada, but it was not at such, you know, such a level of decline, so such weakness that we didn't expect. Another thing that, you know, kind of makes economists think about is seasonality factor. So we saw the decline very much concentrated in the specific age cohort of 16 to 25 years old. So this if you remove this this decline, there was actually there were gains in employment for the for the month of May. So technically and we have to say that those seasonal factors might be affecting the headline number. So if if that's the case, we could see some revisions. We would like to see more of a cool down in employment and continuous cool down, and that's probably going to happen, but notwithstanding some revisions potentially in the future. All of it to say is that, yes, in the labor market we're seeing the cool down happening, which is a great thing for the economy because we want to see that cooling continue. That helps also bring down wage growth or, you know, slow the wage growth that will feed into the inflation as well and help help cool inflation down the road.
Is there anything in what the Bank of Canada did last week and the factors that they were weighing that would weigh on the Fed as it heads into its two day meeting tomorrow, comes out on Wednesday, it has its rate decision. Is the American economy dealing with the same factors? I imagine the Fed's asking itself the same question Have we done enough up to this point? Can we ease off or do we need to keep going?
I think it's if if you look at prior to last week, the Fed was very much conformist to the point that they wanted to pause this time around. And we are of the same opinion that they will actually pause. If you look at the market, their pricing also applies at this point. They are they haven't made the same decision that the Bank of Canada did before. They had more, stronger inflationary factors playing out as well. So there were reasons for that. Employment is much stronger as well in the U.S. So there were reasons to to keep on going and continue to to hike. But at this point, I think they wanted to take a step back and reassess what's happening with the economy, especially because we saw this mini banking crisis as well. So there were some factors that suggesting that there is potentially a credit crunch. So for them, it makes more sense. But there will be you know, there is a risk. Obviously, tomorrow we have the CPI report.
They're going to have a bit of an advantage, maybe because of Macklem probably want to walk into that meeting with a labor report. They're going to walk into their meeting with an inflation report.
Yes, exactly. So tomorrow will be a very decisive moment for them as well. I'm pretty sure that inflationary numbers would be will have a strong bearing on the decision as well. So, yes, we think that they are ready to pause. But if there is very strong indication that the inflation is accelerating, they may reconfigure their decision as well for and hike one more time.
What is the read on that inflation report? I mean, ahead of the inflation, we don't know exactly what it's going to say, but obviously economists in the street will get a feel of where it's headed. What kind of report do you think we might get in the morning?
Well, we are we're thinking that is still going to is it will show, you know, growth, especially in the core number, months on months. So there will still be indications of strength in inflation year on year. But what we are hoping for is to see, you know, some of these factors to cool off already, to see some indication that inflation is on the path of the slowdown without acceleration. So obviously, we're not expecting a dramatic cool down in inflation over one month, but it would be nice to see some of those, especially core inflation factors to see a significant slowdown.
Central banks are weighing a wide range of economic indicators, trying to assess whether they're doing enough to return inflation to target or if they need to take further action. Of course, with the Bank of Canada rate hike behind us, attention now turns to this week's Fed rate decision. Joining us now with more, Maria Solovieva, an economist with TD. Maria, welcome to the show. It's your first time here. Really excited to have you here.
Thank you for having me here.
So we're going to talk central banks. Let's start with the Bank of Canada. Obviously, it was a bit of a surprise for the market last week. They gave us a hike and saying they obviously they felt like they needed to do more. And then you got the jobs report on Friday. That's a that's a bit soft. How should we be thinking about all that?
You know, it definitely last week was a was a bit of a surprise. Not always do you have macroeconomic news from Canada making the headlines and really making other markets stop and think about what's going on. So if you remember, the Bank of Canada decided to take a kind of a pause, step back and look at whether or not the number of hikes that they had before is enough to cool the economy. And the expectations were that, yes, you know, we're going to have a slowdown in consumption, inflation is going to turn the corner and we're going to see continuous cooling. However, that didn't transpire and as we saw, inflation was actually started to accelerate, even though it was just a by a small margin in April but that's not exactly what the Bank of Canada wanted to see. Similarly, consumer was very strong for the first quarter we had 5.7% growth annualized and we also saw a bit of a spill over into the second quarter. If you look at the retail sales, for example, there was it was indicative of our continuing strength for the month of April. So those things made Bank of Canada really think about, as you know, do we have we done enough? And obviously this the decision to hike is indicative of the fact that they haven't. And at this point, even with with their decision last week, we're expecting one more hike. So that's just suggestive of the fact that too many excesses in the economy right now and they need to go on and continue hiking.
And that soft jobs report that we got on Friday.
That was I wouldn't change their minds. They couldn't have foreseen it, of course, You know, and that was a surprise, of course. I would say it was more of in the in the timing than in principle as well, similarly to the Bank of Canada hike. The employment report is definitely showing that there are, you know, potentially weaknesses, but we have to take it with a grain of salt because it's the first decline that we have seen so far. We did see the slowdown in employment in Canada, but it was not at such, you know, such a level of decline, so such weakness that we didn't expect. Another thing that, you know, kind of makes economists think about is seasonality factor. So we saw the decline very much concentrated in the specific age cohort of 16 to 25 years old. So this if you remove this this decline, there was actually there were gains in employment for the for the month of May. So technically and we have to say that those seasonal factors might be affecting the headline number. So if if that's the case, we could see some revisions. We would like to see more of a cool down in employment and continuous cool down, and that's probably going to happen, but notwithstanding some revisions potentially in the future. All of it to say is that, yes, in the labor market we're seeing the cool down happening, which is a great thing for the economy because we want to see that cooling continue. That helps also bring down wage growth or, you know, slow the wage growth that will feed into the inflation as well and help help cool inflation down the road.
Is there anything in what the Bank of Canada did last week and the factors that they were weighing that would weigh on the Fed as it heads into its two day meeting tomorrow, comes out on Wednesday, it has its rate decision. Is the American economy dealing with the same factors? I imagine the Fed's asking itself the same question Have we done enough up to this point? Can we ease off or do we need to keep going?
I think it's if if you look at prior to last week, the Fed was very much conformist to the point that they wanted to pause this time around. And we are of the same opinion that they will actually pause. If you look at the market, their pricing also applies at this point. They are they haven't made the same decision that the Bank of Canada did before. They had more, stronger inflationary factors playing out as well. So there were reasons for that. Employment is much stronger as well in the U.S. So there were reasons to to keep on going and continue to to hike. But at this point, I think they wanted to take a step back and reassess what's happening with the economy, especially because we saw this mini banking crisis as well. So there were some factors that suggesting that there is potentially a credit crunch. So for them, it makes more sense. But there will be you know, there is a risk. Obviously, tomorrow we have the CPI report.
They're going to have a bit of an advantage, maybe because of Macklem probably want to walk into that meeting with a labor report. They're going to walk into their meeting with an inflation report.
Yes, exactly. So tomorrow will be a very decisive moment for them as well. I'm pretty sure that inflationary numbers would be will have a strong bearing on the decision as well. So, yes, we think that they are ready to pause. But if there is very strong indication that the inflation is accelerating, they may reconfigure their decision as well for and hike one more time.
What is the read on that inflation report? I mean, ahead of the inflation, we don't know exactly what it's going to say, but obviously economists in the street will get a feel of where it's headed. What kind of report do you think we might get in the morning?
Well, we are we're thinking that is still going to is it will show, you know, growth, especially in the core number, months on months. So there will still be indications of strength in inflation year on year. But what we are hoping for is to see, you know, some of these factors to cool off already, to see some indication that inflation is on the path of the slowdown without acceleration. So obviously, we're not expecting a dramatic cool down in inflation over one month, but it would be nice to see some of those, especially core inflation factors to see a significant slowdown.