In its April 18 announcement, the Bank of Canada will “tread carefully,” says Luc de la Durantaye, the head of asset allocation and currency management at CIBC Asset Management.
The main reason will likely be “continued uncertainty around trade negotiations. Not necessarily with NAFTA [since] we might find a resolution, but trade negotiations in general will continue to bring volatility.”
In contrast, oil prices “continue to be well-supported” and “are a positive for the economy,” says de la Durantaye, who manages the Renaissance Optimal Inflation Opportunities Portfolio.
However, due to “modest” economic data and an expected slowdown in activity compared to 2017, de la Durantaye calls for the BoC to be prudent in its normalization of monetary policy through the rest of the year.
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When will U.S. Fed ramp up?
The Federal Reserve remains committed to “a regular and predictable pace” of policy tightening, says de la Durantaye.
But there might be a slight stepping-up toward the end of this year and early next, he adds, “given the continued strength of the employment market in the U.S.” and the outlook for wage metrics.
Indeed, the central bank’s March meeting minutes that were released on April 11 signal some Federal Reserve officials are calling for “slightly steeper” rate hikes on the back of a strong economy lifting inflation.
While the Fed stuck to its regular language in its March press release, which announced a quarter-point hike to the target range for its key policy rate, potential growth in the economy and consumer spending are bright lights amid trade tensions.
Still, there’s room for further expansion. An April 16 report from the Commerce Department showed retail sales rose 0.6% in March, boosted by sales of cars, furniture and appliances, but economists had expected more and are looking forward to Q2 2018.
CME Group’s FedWatch tool indicates a Fed hike is likely to occur in June, followed by more tightening late in the year.
Slow but steady for Europe
The European Central Bank is taking it slow. It “will likely stop its asset-purchasing program by September of this year and, perhaps, [it will] send signals early in 2019 that it will start moving away from negative rates at the short end,” says de la Durantaye.
All of that will be done “in a very measured and predictable way,” he adds.
The euro’s appreciation late last year “held up economic activity in Europe,” says de la Durantaye, who expects the ECB will want to avoid pushing the currency too high, too fast.
That would result “in headwinds in their target of bringing inflation back […].”
Overall, it will be a “calm environment” regarding monetary policy across the globe, which will “continue to be accommodative but slightly less so than last year.”
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