RBC Capital Markets said next week's key Canadian economic release will be the May Labour Force Survey on Friday, with its economists expecting employment growth and a modest decline in the unemployment rate.
In its CAD Weekly Soundbites report, RBC said it expects a 25,000 increase in employment in May and a decline in the unemployment rate to 6.8% from 6.9% in April. "Near-term, the labour outlook is unlikely to worsen further, given trade-concentrated layoffs have likely bottomed out and recent weakness largely reflected longer job searches for new entrants," RBC added.
Remaining economic slack, along with inflation around target, reinforces RBC's view for the Bank of Canada to stay on hold with rates for the rest of 2026.
RBC noted other key things to watch for next week include first-quarter productivity on Wednesday and S&P PMIs, with manufacturing due Monday and services and composite readings due Wednesday. Senior Deputy Governor Carolyn Rogers is also scheduled to appear before the House Public Accounts committee on Monday, although RBC said no fireworks are expected given the proximity to the June Bank of Canada meeting.
On monetary policy, RBC said the recent GDP print "further extends runway to hikes." The bank noted that the Bank of Canada flagged risk scenarios to both cuts and hikes at its April meeting, though its overarching message was one of comfort with where policy was positioned.
"Slight but meaningful slack in labour markets and the economy, combined with underlying inflation around the 2% target, provides little impetus for the BoC to move off the bottom-end of its 2.25-3.25% neutral range," RBC added.
RBC said despite volatility during the week around Iran deal optimism and weak Canadian GDP data, Canada-U.S. bond spreads were little changed from the previous week, with the five-year spread at negative 108 basis points.
On foreign exchange, RBC said that if the U.S. and Iran were to reach a deal, USD/CAD may have further room to sell off on a weaker U.S. dollar initially. However, it added that the U.S. dollar's status as a higher-yielder in the G10 and relatively wide U.S.-Canada rate differentials act as a floor under USD/CAD.
George Davis of RBC Capital Markets said a "spinning top pattern" halted the move higher in Canadian 10-year yields near 3.70%, while the subsequent bullish trend reversal below 3.51% resulted in a false break to the topside. "A daily close below resistance at 3.43% would amplify the false break and shift the focus down to 3.39% and 3.36% initially, followed by 3.27%," Davis said. "Support is now located at 3.53% and 3.61%."