Apr 1 2024: Canadian firms are showing signs of optimism for improved conditions after nearly two years of economic decline, as reported by the Bank of Canada (BoC) on Monday. This development has led traders to adjust their expectations regarding a potential rate cut in June.
According to the BoC’s first-quarter survey, fewer firms are anticipating a recession in the next 12 months, although they remain cautious about subdued demand in the coming year. The survey also noted a decline in the number of firms expecting inflation to exceed 3% over the next two years, alongside an increase in firms expecting sales growth.
Royce Mendes, head of macro strategy for Desjardins Group, commented that while the survey results may not prompt immediate rate cuts, they suggest a possible rate reduction around mid-year.
Following the survey, the Canadian dollar faced losses, trading down 0.27% against the U.S. dollar to 1.3573. Additionally, yields on Canadian two-year government bonds rose by 9.4 basis points to 4.281%.
Money markets adjusted their predictions for a June rate cut to around 51%, down from approximately 55% before the survey results. Market expectations no longer fully price in a 25 basis point rate cut in July.
The Bank of Canada is set to release updated projections on April 10 alongside its interest rate policy decision, which is expected to maintain current rates. The Bank has mentioned the possibility of rate reductions this year but has not provided a specific timeline.
The business outlook indicator, reflecting firms’ sentiment about their prospects, improved in the first quarter compared to the previous quarter. This improvement was observed across all regions, sectors, and firm sizes, indicating a widespread positive outlook.
While firms acknowledge weak overall demand, there are signs of returning optimism, particularly regarding sales outlooks and employment intentions.
February’s inflation data and a rebound in gross domestic product (GDP) in January present mixed signals regarding the impact of high rates on the economy. Wage growth, a factor influencing inflation, is expected to be slower but remains relatively high. Labor shortages are also declining, according to the survey.
Overall, the survey indicates a cautious yet optimistic sentiment among Canadian firms, highlighting the ongoing balancing act for policymakers between economic recovery and potential recession risks.