It has certainly been a positive week for Canadian investors and borrowers.  The Bank of Canada delivered another 0.25% rate cut on Wednesday, bringing the overnight rate down to 4.5%.  For anyone with variable rate loans or mortgages, I am sure that you welcomed the reciprocal cut of 0.25% in your bank’s prime rate.  Tif Macklem’s opening statement for the press conference was more dovish than the rate announcement itself. He highlighted a reasonable expectation for future rate cuts should inflation continue to ease in line with BoC’s forecast, noting that the risk of inflation rising has declined in the Bank of Canada’s view in recent months.  A sluggish Canadian economy is also helping to bring down inflation, as increased supply coupled with a decline in consumer demand helps prices come down across the board.  The notable exceptions to this decline in price continue to be shelter costs and other labour-intensive services, such as dining out and personal care.  Overall, the outlook remains positive for further rate cuts to come this year from the Bank of Canada, with markets currently pricing in another 0.75% in cuts by December 31^st.  Bank of Canada follows up with a second rate cut

 

Thursday morning’s upside surprise in U.S. GDP for Q2 of 2.8% (Consensus was 2.0%) showed that their economy grew at a faster pace than expected, supported by solid expenditure details.  In addition, PCE inflation data has continued to indicate easing price pressures, echoing the slowing in CPI inflation in Q2.  The labour market in the U.S. has also shown signs of slowing, evidenced by higher unemployment rates and a gradual decrease in employment and wage growth.  In sum, strong economic growth is unlikely to be a concern for the Fed as long as inflation continues to slow and the labour market moves into a better balance. The result is the first of hopefully many rate cuts by the U.S. Fed in September and that tarmac for that coveted soft landing appears to be in view.  Next week we anticipate the Federal Reserve will stay firm with its current policy and leave rates unchanged but set the stage for cuts to come in September and November.  The probability of a 0.25% rate cut at the September meeting is 88.4% as of this Friday. U.S. GDP Update

 

In Europe this week, the ECB also began to lay the groundwork for rate cuts in September as well.  In comments to the press on Tuesday, Vice President of the ECB Luis de Guindos stated that the decision to cut rates may be based more on macroeconomic forecasts than incoming data.  Given the ECB over the last several months has continued to gain confidence in its assumption around incoming data, forecasting what is to come and shaping policy on that front may also allow the region to benefit from the upswing in economic activity needed.  The expectation in the EU is for another 0.50% in rate cuts to the end of the year.  Hopefully, these cuts land at the right time.  Despite the recent disinflation trend and a stable labour market, the ECB’s general outlook for the economy is more downbeat and the expected GDP growth to decline by 0.8% in the next 12 months. ECB Should Be Able to Cut If Data Stay on Course, Nagel Says.

 

The situation in China remains mixed. Customs exports rose 8.6% YoY in June, beating forecasts of 8% and 7.6% growth in May. Meanwhile, imports unexpectedly shrank 2.3% amid still weak domestic demand, versus an expected 2.8% for June and a 1.8% gain in May. This has resulted in a trade surplus of $99.05 billion, the highest since at least 1990 and a dramatic increase from May’s $82.62 billion. Though China continues to perform well globally, the domestic economy continues to show signs of weakness. In Japan, the Yen spiked more than 2% vs the U.S. dollar last week in the wake of softer-than-expected US CPI. This adds to the fact that Japanese households have been experiencing inflation at record levels over the coming year. With the recent trend in inflation, it is expected that the Japanese government will slightly trim its forecast for economic growth of 1.3% to about 1% for the fiscal year ending March 2025. Core inflation in Japan's capital perks up, demand-driven price growth soft