The Toronto Stock Exchange on Wednesday recovered much of the 500-plus points lost over the prior two sessions as CIBC said "the bar to get the Bank of Canada into a tightening stance is higher than the market thinks", amid fears higher rates would lift borrowing costs for many companies and sideline them and consumers when they are needed to help spur the economy.
The S&P/TSX Composite Index closed up 420.59 points, or 1.25%. to 34,161.82. with most sectors higher, led by Base Metals, up 2.5%, helped by elevated gold. In contrast, the Battery Metals Index was down 4.9% and Energy was 2.3% lower.
On the outlook for rates, CIBC Capital Markets economists Avery Shenfeld and Andrew Grantham published a note titled 'Who really fears inflation, the Bank of Canada or the Fed?'.
Soaring oil prices, alongside price hikes for aluminum, helium and other supplies shipped through the now shuttered Strait of Hormuz, have markets looking at downside risks to global growth, and more immediately, upside risks to inflation, the CIBC pair noted. That's seen markets replace earlier expectations for a Fed rate cut this year with the possibility of a hike, and price in roughly two 25 basis point increases in Canada before year end, they said. But, they also asked, which of those central banks should be in greater fear of inflation these days, and does current relative pricing for policy changes make sense?
CIBC's current rate forecast has both central banks on hold for an extended period, although the bank has penciled in a quarter point rate cut for the Fed in December that is conditional on an early end to the war. The Bank of Canada's own language, suggests it will not be looking to hike rates this year in any scenario that sees the pressure from oil prices abating in the second half of the year on a resumption of shipments through the Strait of Hormuz, the CIBC duo noted.
But with that geopolitical outcome by no means certain, investors will put some weight on a scenario in which a more protracted conflict sees triple-digit crude prices extending from here to the end of the year, Shenfeld and Grantham said. Their analysis suggest the United States would be more at risk of a broader inflationary spiral than Canada in that scenario, making it unlikely the BoC would be hiking first and more aggressively than the Fed.
Further afield, things could look a bit different, according to CIBC. A very extended rise in crude prices might be more of a positive for the Canadian economy than a negative, if it triggered an acceleration in energy-sector capital spending. Or, in CIBC's base case, with a return to US$75/bbl oil prices, the bank could see the BoC nudging interest rates up to 2.75% by the end of 2027 if a favorable outcome in trade talks reduces the drag on exports and business capital spending and begins to lower unemployment. But for this year at least, the bar to get the Bank of Canada into a tightening stance is higher than the market thinks, at least relative to what the case would be for the Fed, CIBC added.
BMO Capital Markets noted at the same time as the consumer price index was released this week, April's New Housing Price Index pointed to further deceleration in shelter costs for May. The house-only portion, which feeds directly into homeowners' replacement costs, fell 0.6% in April alone, the largest drop since 2009. By this measure, prices remain 3.5% below year-ago levels. And, the bank also noted, there's little relief on the horizon as the market continues to digest a glut of new inventory and a backlog of projects coming online.
Separately, BMO noted, rent growth also continues to decelerate, although progress is slower than what it has seen on the ground as the CPI reflects delays in things like switching to cheaper leases. Here, the bank said, it looks like the downside pressure will remain as long as immigration controls keep demand growing much slower than supply. "Altogether, housing continues to be a key source of disinflationary pressure as the economy faces further challenges in energy and other resources," it added.
Of commodities, gold traded higher by midafternoon Wednesday as treasury yields and the dollar fell. Gold for June delivery was upUS $25.90 to US$4,537.10 per ounce.
But West Texas Intermediate crude oil closed sharply lower after as U.S. President Trump said negotiations with Iran were in their final stages while threatening to renew attacks if a deal cannot be reached. WTI crude oil for July delivery closed down $5.89 to settle at US$98.26 per barrel, while July Brent oil was last seen down US$6.18 to US$105.10.