As a result, we've upped our Fed call, and now see another 75 bps of tightening in July before the fed funds rate ends the year in the 3.25%-to-3.5% range. In Canada, we’re fully expecting the Bank of Canada will raise rates by 75 bps next month, with the door now kicked fully open by the Fed (the Bank was probably already leaning in that direction anyway). By the end of the year, the policy rate in Canada is now expected at 3.25%. The main reason for a relatively abrupt pause to the tightening cycle after aggressive near-term moves is that we simply judge that the economy won’t be able to fully handle it, and the risk of at least a meaningful growth recession is building rapidly. For equities, this will call into question the resilience of earnings, which have held up well so far. That is, most of the decline to date has been a repricing of valuations to the move in interest rates—weaker earnings would create another layer of weakness.
With that, we’ll simply point you to this week’s Focus feature on “Re-Rating Recession Risks”. Here is an excerpt: The relentless strength of inflation, and the policy response needed to address it, is ramping up the risks of a hard landing for the North American economy. This week’s aggressive 75 bp Fed rate hike marks a new and more aggressive phase of the global tightening cycle, reinforcing those rising risks (Chart 1). Central banks have little choice but to push rates rapidly higher to slow demand and meaningfully dampen inflation pressures…From our vantage point, the inflation process looks very sticky and too deeply rooted for a perfectly clean outcome. Here is the full report.
|Table 1 - Market Performance|
|Source: BMO Economics, Bloomberg|