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Milan Cacic

June 07, 2024

Money Financial literacy Economy Weekly update Weekly commentary
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THE FIRST AND THE SECOND DOMINOS FALL!

On Wednesday, the Bank of Canada cut the benchmark overnight rate by 25 basis points to 4.75%. Canada is the first of the G-7 central banks to cut interest rates. Less than 24 hours later, the European Central Bank announced that they also cut their bank rate by 25 basis points to 3.75%. Tiff Macklem, the Bank of Canada Gov., said he was confident that inflation was headed to 2% and "it's reasonable to expect further cuts".

 

When we take a step back and look at the big picture, we see more indications that rates will likely come down more as the year progresses:

 

  • Crude oil prices are off 15% since April
  • Diesel demand is down significantly in May
  • 10-year US treasury yields have dropped from 4.75% to 4.45% in the past week
  • US employment is slowing
  • Capital spending is slowing

 

Combine the above with the fact that mortgage refinancing in Canada will hit a significant wall in March 2025. Most of the mortgages taken out after March 2020 were done at sub 3% interest rates. When people have to renew their mortgages in March 2025, they'll be looking at more than double their rate from 2020. The Bank of Canada is going to need to get ahead of this.

 

 

can the US Federal Reserve be far behind?

 

Interest rates in Canada and United States tend to track one another very closely. As you can see from the chart below, the Bank of Canada and the US Federal Reserve move in-sync for the most part. Based on this historical data, we believe it is likely that the US Federal Reserve will also start cutting rates soon. This should bode well for bonds, commodities, and (ironically) tech stocks. I will explain why lower long-term rates are good for technology stocks in a future note.

Graph

I have also included a piece from our CIBC economics team entitled “Make Data Great Again”

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan

 

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CIBC Private Wealth” consists of services provided by CIBC and certain of its subsidiaries through CIBC Private Banking; CIBC Private Investment Counsel, a division of CIBC Asset Management Inc. (“CAM”); CIBC Trust Corporation; and CIBC Wood Gundy, a division of CIBC World Markets Inc. (“WMI”). CIBC Private Banking provides solutions from CIBC Investor Services Inc. (“ISI”), CAM and credit products. CIBC Private Wealth services are available to qualified individuals. Insurance services are only available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are only available through CIBC Wood Gundy Financial Services (Quebec) Inc.


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