Jefferies reports that market expectations for further Bank of Canada rate increases have eased, dropping to the equivalent of 1.2 hikes from 1.6 just last week after oil prices slipped following a ceasefire announcement. The investment bank noted that, even as oil moderates, the earlier period of elevated energy prices is starting to show up in consumer spending pressures, including higher grocery bills.
The firm identified multiple sources of pressure on the Bank of Canada - rising living costs, a weak labour market and uncertainty around CUSMA. Jefferies said Canada is prepared to engage with U.S. concerns in pursuit of a comprehensive trade agreement, underscoring the role that trade negotiations may play in the economic outlook.
On the financial sector, Jefferies observed that Canadian banks are capturing productivity benefits from increased use of artificial intelligence. Those productivity gains are being noted even as broader economic headwinds persist.
Housing market dynamics are notably mixed, according to the firm. Major markets such as Toronto and Vancouver are experiencing price declines, while smaller cities are registering stronger price growth. In this context, Statistics Canada is scheduled to release housing starts data for March today, a dataset that arrives as regional housing trends diverge.
Jefferies summed up its view by saying that dark clouds remain over the Canadian economy, driven by a combination of weak labour conditions and the prospect of renewed CUSMA renegotiations. The firm tied the recent shift in rate-hike expectations directly to the movement in oil prices following the ceasefire announcement, while also flagging the transmission of higher energy costs into everyday living expenses.
Market implications
- Lower oil prices have reduced near-term market bets on additional Bank of Canada rate hikes.
- Elevated energy costs are contributing to higher consumer prices, including groceries.
- Trade negotiations and labour market weakness are adding uncertainty to the economic outlook.
What to watch next
- Statistics Canada housing starts for March, released today, which will provide fresh data amid divergent regional housing trends.
- Any developments in CUSMA discussions and signals from the Bank of Canada on the persistence of inflationary pressures tied to energy costs.