This week, market participants are keenly awaiting the release of Canada’s Ivey Purchasing Managers Index (PMI) and April employment data.
These key economic indicators could provide valuable insights into the economic outlook and inflation trajectory of the Canadian economy.
On the US front, market sentiment is being influenced by the speeches of Fed officials Thomas Barkin and John Williams scheduled for Monday.
The disappointing US data released last Friday has fueled expectations that the Federal Reserve (Fed) may cut interest rates in September.
The data showed weaker-than-expected job additions, a rise in the unemployment rate, and a decline in wage inflation.
Consequently, the US Dollar faced selling pressure across the board. The market is now pricing in a 68% probability of a September rate cut by the Fed, according to the CME Fedwatch tool.
Bank of Canada (BoC) Governor Tiff Macklem recently indicated that the Canadian central bank is gaining confidence in the direction of inflation and that it may be appropriate to lower borrowing costs soon.
However, he tempered expectations of a rapid decline in borrowing costs.
Market participants anticipate the BoC to start easing monetary policy at its next meeting in June. If the Canadian central bank cuts interest rates before the Fed, this could put pressure on the Canadian Dollar (CAD) and limit the downside of the pair.
Meanwhile, oil price recovery has boosted the commodity-linked Loonie against its rivals, given that Canada is the largest oil exporter to the United States (US).
Looking ahead, the Canadian labor market report due next Friday will be closely watched for further signs of deterioration in the country’s economic backdrop.
We expect an increase of 15,000 workers after a small 2,000 drop in employment in March. However, the unemployment rate is likely to remain steady at 6.1%, its highest level since January 2022.
The Bank of Canada will be closely monitoring these developments, particularly for signs of whether softening labor markets are plummeting wage growth.
Against this backdrop, April proved to be a challenging month for both equity and fixed income markets.
A combination of hot US inflation data and a resilient private demand in the first quarter fueled market fears that central banks may not ease monetary policy as quickly as previously hoped.