Why a ‘mixed’ jobs report has investors discounting a BoC rate cut

Read more: Will spring bring a thaw in BoC’s hawkish rate freeze? | Wealth Professional

Harvey notes that the shift in investor mindset around rate cuts largely comes down to the relatively high wage growth, which he sees as inconsistent with the Bank of Canada’s 2% inflation target. At the same time, global markets are pulling back somewhat on their predictions of other central bank cuts, and Canada is being brought along with that.

Nevertheless, Harvey and Monex predict cuts to come in April, with some risk that the cuts come in March. Conflicting signals, like the wage growth numbers, will be part of the road to those cuts. Moreover, Harvey believes the BoC will be hesitant to move too far away from US Federal Reserve policy. Overall he expects the BoC to take a cautious approach and avoid past pitfalls where specific data points were overreacted to. Once the cuts do begin, however, Harvey thinks that we may move towards a more neutral interest rate of around 3.5% relatively quickly.

From an asset allocation standpoint, Harvey sees Canadian bonds as somewhat more attractive than their US counterparts. In November, US bonds looked more attractive, but their price movement since then has made them too expensive at this point in his view. Canadian bonds, conversely, have been somewhat ignored by investors and may present an opportunity. He currently still expects Canada to cut sooner and deeper than the US will, which should prove advantageous for Canadian bond investors.

From a currency standpoint Harvey sees a Canadian dollar that currently is not representing the weakness of the Canadian economy. CAD has had a strong few months against the USD, in part because of rate cut expectations in the US as well as greater risk appetite among investors. Now, however, as investors pull back towards risk aversion somewhat we may see greater weakness in the Canadian dollar.

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