“The market is way too aggressive with its rate hike forecast”

Canada just saw the single biggest month of job losses since 2022, across a broad range of industries, geographies, and employment types. The loss of 84,000 jobs in February is certainly not good news for the Canadian economy, and points to an ongoing degree of economic weakness that BeiChen Lin argues is largely driven by trade uncertainty. The Head of Canadian Strategy for Russell Investments notes that while a new CUSMA deal remains unsigned, Canadian businesses are unable to forecast the future and hire.

In that context, Lin argues that Canadian bond markets should not be in their current position, pricing in roughly 40 basis points of interest rate hikes over the rest of the year. He argues that while the Bank of Canada (BoC) has only a single mandate focused on inflation, the current state of Canadian CPI as well as the more implied mandate of supporting growth should be enough to motivate another Bank of Canada cut, as early as April.

“This is against a picture where the economy is slow, where jobs are printing negative. I think the market is way too aggressive with its rate hike forecast. If anything, I would say today's report means that there is a significant chance that we could see another rate cut to come,” Lin says. “Now, I think the bank of Canada is going to feel a little bit hesitant still to cut next week. But if the inflation data that's coming out on Monday cooperates, I expect that the bank of Canada will likely hint towards an April rate cut.”

Why Canada lost 84,000 jobs

Given trade uncertainty, unemployment numbers have been increasingly the subject of speculation on both sides of the US-Canadian border. The US theme of job ‘hoarding’ has been noted as businesses elect neither to hire nor fire until they get more economic clarity. Canadian businesses, however, are under more pressure than their US counterparts because the economy lacks the same resilient consumer base and higher GDP growth rate. Lin notes, too, that Canada’s rising unemployment rate has come as labour force participation has declined overall. If the unemployment rate was adjusted for that decline, he speculates that the unemployment rate would look that much worse.

Economists had predicted job gains of roughly 10,000 going into the announcement on Friday. Lin notes, however, that because Statistics Canada uses household survey data, rather than business surveys like the US Bureau of Labor Statistics, those jobs numbers can be more volatile and more challenging to forecast.

While the loss of this many jobs is not a good signal for the Canadian economy, Lin does not see this as anything in the magnitude of the Great Financial Crisis or the COVID-19 pandemic. This is a noticeable slowdown, and people and businesses have had time to plan accordingly. Lin believes that the BoC has seen this slowdown, too, and will respond.

What’s ahead for BoC rate policy

While Canadian inflation is still on the high end of the BoC’s target range between one and three per cent, Lin believes that a 2.5 per cent CPI does give the BoC some room to cut further. Economic softening, he says, should be more of a motivating force for policymakers than inflation. Moreover, he notes that the BoC’s inflation mandate is over the medium-term, allowing them to control for the risk that economic slowdown and demand destruction causes inflation to fall below target.

While Lin argues that the next move will be a cut, and that it could come as soon as April, he predicts the BoC will hold in its March decision on Wednesday. When that decision comes, he will be watching for any comments by Governor Macklem aimed at pushing back on market pricing. Earlier this year Macklem made comments about the potential that the BoC’s next move could be up or down, as a means of pushing back on markets predicting more hawkish policy. Another similar statement, Lin says, would validate his view of a possible cut in April. More hawkish language, he says, would challenge his view, though he thinks that tone is unlikely.

Lin now sees an opportunity for advisors and investors, given the Canadian bond market’s positioning. The 10-year Canadian government bond is currently trading at 3.5 per cent, though Russell Investments’ estimate of the fair value of the bond is 3.2 per cent. He now sees benefits from Canadian bond exposure as a stabilizer and as a well-priced source of potential upside. As they take advantage of that opportunity, Lin also believes that advisors can work to reassure their clients in the face of challenging economic news.

“Canada still has a lot of advantages. It has a very innovative population, it has the benefit of continued population growth,” Lin says. “Despite some of these near-term challenges, I think in the medium to long term, if you see more of these intra provincial trade barriers start to come down, you can create a world in which longer term potential growth in Canada might actually be higher than where potential growth is today. So I would encourage Canadian advisors to always help their clients focus on the longer-term picture.”