The Bank of Canada took center stage last week, holding its policy rate at 2.25%, said TD.
It reinforced a message that has become increasingly clear: Canada's economic growth is soft at the same time that risks to inflation remain elevated. The tone of the announcement struck a careful balance, noted the bank.
Policymakers acknowledged that growth disappointed in Q1 and that excess supply persists, but flagged that higher oil prices are complicating the inflation outlook, despite core inflation measures having recently eased toward target.
This leaves the BoC in a narrow channel for future policy decisions, stated TD. Importantly, Governing Council preserved optionality in both directions, noting it could respond if growth deteriorates more sharply or if inflation pressures filter through to core inflation.
Markets interpreted the message as modestly dovish, with pricing for a 25bps hike by year-end edging lower following the decision.
Elsewhere in financial markets, upward inflation and rate hike expectations in the United States pushed the Canadian dollar (CAD or loonie) to a fresh seven-month low (0.7140/USD), while Canadian government bond yields dipped by roughly 10bps across the curve, pointed out the bank.
Away from monetary policy, last week's data offered some constructive signals. Canada's April merchandise trade surplus widened for a second consecutive month to the largest surplus since early 2025. While higher oil prices played a role, the details were encouraging: export volumes rose further and recent gains are reasonably broad-based. The upshot is that net trade now looks poised to contribute positively to Q2 growth, reversing its drag in Q1.
That improvement comes just as the July 1 CUSMA review approaches. At this stage, a timely renewal looks unlikely as negotiations have yet to gain steam, added TD. However, missing the deadline doesn't imply a collapse of the agreement.
Instead, CUSMA would remain in force and would shift to rolling annual reviews, raising the specter of prolonged negotiations and ongoing trade uncertainty. For the Canadian economy, that means that the backdrop remains "unsettled," weighing on business confidence and investment decisions in the near-term, according to the bank.
Friday's Q1 national balance sheet release added another piece to the puzzle. Household net worth rose 1.3% quarter over quarter, while the debt service ratio edged up to 14.8%, underscoring that while households continue to provide some support to activity, high debt burdens are a constraint for many.
Taken together, last week's developments point to an economy regaining its footing, but not yet strong enough -- or stable enough -- to declare the soft patch is over, concluded TD.