First National Financial LP

Market Commentary: Higher for longer, again?

  • Paul Uffelmann, Director, Capital Markets
Rates are on the move. The yield on the 5-year GoC is north of 3.40%, up almost 50bps in the past two weeks, after fluctuating around 3.00% for two months. In mid-March, the market was anticipating the Bank of Canada would move its target interest rate down by 75-100bps by the end of the year. Today, an increase of 25bps looks more likely. What happened?
Since my last note, concerns about the US regional bank sector died down…. then flared up again… then died down again and, while still unresolved, appear to be holding at a low simmer. As fears of contagion and financial stability questions were replaced with discussions of how tightening credit conditions will impact the economy, persistent inflation returned to the fore.  
Last year, the Bank of Canada aggressively raised interest rates and saw steady improvement in the inflation rate. Unfortunately, data released last week showed a slight reacceleration in the rate of inflation with CPI coming it at 4.4% YoY, up from 4.3% YoY a month earlier. Not a huge miss and likely not enough on its own to move the Bank of Canada out of its holding pattern, but nevertheless a step in the wrong direction. The Bank of Canada’s next rate decision comes out on June 7th. 

In the US, a series of speakers from the Federal Reserve have recently been stressing that there is more work to be done to ensure inflation does not become entrenched. There is still a fair bit of data, including the June 13th CPI release, that could influence the Federal Reserve’s rate decision on June 14th. At the moment, the market is pricing in a higher probability of no change but a 25bps increase would not be a huge surprise. 

So higher for longer? Maybe, but it is difficult to predict when and where higher rates and tighter credit conditions will cause significant stress. Last week the Bank of Canada released its annual Financial System Review in which they flagged household debt, mortgages in particular, as an area of concern. Should another crisis pop up, talk of pivots and rate cuts could quickly resume. Oh, and then there is the issue with US debt ceiling…
As always, your First National advisor is ready to help you work through your options.