- The Bank of Canada held its policy interest rate at 5 per cent for the sixth consecutive meeting, with the Canadian economy yet to show evidence of sustained easing
- The decision coincides with inflation falling into the BoC’s target range, wage growth continuing to cool, and the unemployment rate reaching 6.1 per cent in March, rising over 6 per cent for the first time in more than two years
- Concurrently, Canadian economic growth is coming in well ahead of the Bank of Canada’s estimates
- Read on for a thesis about how to pick stocks amid this conflicting mix of economic resiliency and weakening inflation
The Bank of Canada (BoC) held its policy interest rate at 5 per cent for the sixth consecutive meeting, with the Canadian economy yet to show evidence of sustained easing.
The decision coincides with core inflation and wage growth continuing to cool, and the unemployment rate in March hitting 6.1 per cent, which is up by 1 per cent year-over-year, marking the first time the rate rose above 6 per cent in more than two years. These signals that high borrowing costs are working as intended have been offset by record population gains outpacing employment growth, with those aged 15 and up rising by 91,000 in March.
Analysts see the BoC’s first rate cut coming in June or July, and they will be parsing through Wednesday’s interest rate announcement and monetary policy report for language indicative of dovishness ahead.
The Consumer Price Index has been on a steep downward path from 8.1 per cent in June 2022 to 2.8 per cent in February 2024, falling within the BoC’s target range of 1-3 per cent for the first time since March 2021. That said, this cut-friendly trajectory could find itself derailed because of numerous factors:
- The United States added 303,000 jobs in March, well beyond estimates as low as 150,000, while its unemployment rate fell slightly to 3.8 per cent, signaling economic strength that might lift Canada along with it
- Oil has shown resiliency, rising from US$69.50 per barrel in December 2023 to US$85.83 as of 8:35 am ET, because of expectations of economic growth in the U.S. and China, and attacks on Russian refineries
- Canada beat the BoC’s expectation of zero growth for Q4 2023 by a full percentage point
- Figures for Q1 2024 point to further growth of 3.5 per cent, well ahead of the BoC’s estimate of 0.5 per cent
Given the present mix of economic resiliency and weakening inflation, many investors are likely neutral on whether risk-on or risk-off holdings are more appropriate to overweight. It’s reasonable to suppose that this dynamic has led to a cross-sector undervaluation of stocks viewed as too risky to consider, despite their quality assets, that are poised to outperform once borrowing conditions normalize.
Prospective areas for due diligence under this thesis include junior mining, where stocks have been lagging target commodities for the past few years; healthcare, where pre-revenue drug and technology developers have been pummeled despite their revolutionary potential; and brands with leading market share masked by their growth-focused financials, including Tilray, Canopy Growth, PyroGenesis, Jackpot Digital and Else Nutrition.
How are you positioned based on monetary policy?
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