Next week is a busy one on both sides of the border, headlined by Canada’s monthly GDP report and a highly-anticipated rate announcement from the Fed. The former is unlikely to impress but shouldn’t change the narrative around a Q2 rebound, which in turn will leave the BoC content with its cautiously neutral stance for now. Contrast that with a Fed that is almost sure to lower rates next Wednesday—if anything, markets think a 50 basis point cut is more likely than no move.
Our view is that the Fed will cut rates by 25 basis points next week and leave the door open to another move, which we expect in September. We don’t think the Committee’s forward guidance—that it will act as appropriate to sustain the expansion—needs to change much to leave markets pricing significant odds of a follow-up cut in September. We expect July’s rate cut (and hints of further action) will be framed as providing a bit of insurance/accommodation to offset slowing global growth and trade headwinds. As we argued in last week’s preview, domestic data don’t make much a case for the Fed lowering rates at this stage. That said, slower business investment and disappointing inflation did feature in an otherwise solid Q2 GDP report. Powell could also trot out disappointing global data (e.g. the latest European PMIs) as justifying an abundance of caution. We’ll be watching out for any dissent against the Fed’s rate cut—recall that June’s dot plot showed roughly half the Committee didn’t expect to lower rates this year. Unless that whole contingent has come around to the idea of easing, some might be inclined to vote against the move.
Anticipation of the Fed’s rate decision could draw attention away from Canada’s monthly GDP report that morning. Our forecast is for no change in May GDP following average gains of 0.4% in the prior two months (the best back-to-back increases in more than a year). Both goods and services production are expected to have been flat in the month. On the former, manufacturing sales were strong in May but we are assuming offset from a pullback in oil production. The energy sector has provided a solid add to growth in the last two months, reflecting rising drilling activity and higher production caps. But Statistics Canada attributed some of April’s growth to non-conventional producers putting off usual seasonal maintenance, so we could see some retracement in May. Even with flat GDP in May, earlier gains leave us tracking a 2.2% annualized increase in Q2, roughly in line with the BoC’s forecast.
The latest trade figures round out the week, where we look for Canada to slip back into deficit position after a surprising surplus in May. Retracement of what looked like one-off increases in transportation exports should be responsible for the pullback. Even so, net trade is expected to provide a nice add to growth in the second quarter after Q1’s sizeable drag.
