Q2 2024 Market Commentary: A Tale of Two Monetary Policies
Anthony Ciccone | CHFC | President at Ciccone McKay Financial Group
In this Q2 2024 Market Commentary, Matthew Mobilio, CFA, CFP, Portfolio Manager at Louisbourg Investment Inc., explores how the Bank of Canada (BoC) and the U.S. Federal Reserve have recently taken divergent paths in their monetary policies, reflecting the distinct economic landscapes of each country.
The BoC has cut its interest rates by 25 basis points (bps) to address economic challenges such as mounting household debt and a cooling real estate market. In contrast, the U.S. Federal Reserve has maintained higher rates to combat persistent inflation and support a robust labor market. This divergence has significant implications for currency exchange rates, borrowing costs, and overall economic stability in both nations.
As these differing policies unfold, they will shape the financial markets and economic outlooks of Canada and the United States in the coming months.
The BoC and the Fed Diverge
Matthew Mobilio | CFA, CFP | Louisbourg Investments | Portfolio Manager
Over the past quarter, the main headline has been the Bank of Canada (BoC) cutting its interest rates – in sharp contrast to the U.S. Federal Reserve’s decision to hold rates steady. The BoC’s lowering of rates by 25 basis points (bps) reflects the differing economic landscapes of the two countries.
The challenges Canada’s economy has faced justify the rate cut. After years of mounting household debt, many Canadians, particularly those with mortgages up for renewal, welcomed the move as a relief. This rate cut could spur a revival in the real estate market, a sector highly sensitive to interest rate changes. With bond yields suggesting further cuts, variable rates might align with the current fixed rate. This means that while, yes, there is some relief, borrowing costs will remain high.
Impacts on the U.S. and Currency Markets
In contrast to Canada’s easing, the U.S. Federal Reserve’s decision to maintain higher rates underscores its battle against persistent inflation and a robust labour market. The difference in monetary policy between Canada and the U.S. has become a significant topic of discussion, reflecting the unique economic conditions each country faces. The BoC’s rate cut aims to provide economic relief amid moderating inflation and a cooling housing market. The Fed’s higher rates address ongoing inflationary pressures and strong economic indicators like GDP growth and employment.
This divergence in policy has implications for currency exchange rates. The BoC’s rate cuts could lead to downward pressure on the Canadian dollar, affecting import costs and overall economic stability. For Canadian borrowers with variable-rate mortgages, the rate cut offers some short-term relief, but the long-term effects on the housing market remain uncertain. Meanwhile, in the U.S., steady high rates could temper consumer spending and borrowing, aligning with the Fed’s goal to control inflation.
Outlook for the next quarter
United States
As I was writing this note the Fed received some good news that June CPI rose just 0.06% m/m lower than expected. If inflation continues to moderate, gradual rate cuts might be anticipated in the latter half of the year. GDP growth is projected to decelerate, reflecting the impacts of previous monetary tightening and reduced consumer spending. While the job market has remained resilient, hiring rates are predicted to normalize, helping to alleviate inflationary pressures in the service sector.
Canada
The Bank of Canada has begun easing monetary policy, though borrowing costs will stay high compared to pre-pandemic levels. Further rate cuts are possible if core inflation continues to decline, driven by increased investments in residential and non-residential sectors. Canada’s GDP growth is forecast to improve from 2023’s sluggish performance.
However, overall growth will remain below potential, and consumer spending is expected to weaken due to high household debt and elevated interest rates. Employment growth is likely to lag behind labour force growth, with an expected rise in the unemployment rate due to an influx of immigrants and weaker hiring intentions. Wage growth is anticipated to ease, further contributing to moderated inflation.
Overall, the BoC’s move towards easing financial conditions contrasts with the U.S. Federal Reserve’s commitment to combating inflation. This divergence highlights the distinct economic challenges and priorities of Canada and its neighbour. As these differing policies unfold, they will have implications for the economies and financial markets of both nations.
Author:
Matthew Mobilio, CFA, CFP
Louisbourg Investments Inc., Portfolio Manager
As always, for more information about Ciccone-McKay Financial Group, or if you want to chat with someone at the firm, we welcome your call: 604-688-5262.
