Bank of Canada cuts rates again

Insights from SLGI Asset Management Inc.

• The Bank of Canada (BoC) cut its key interest rate by 25 basis points (bps) to 4.5% at its July meeting, following a similar cut in June. This BoC’s decision comes even as wage growth remains elevated, possibly due to high gains for government workers. However, wages are a lagging indicator and inflation data is normalizing towards 2%. Further, both the Business Outlook Survey (BOS) and the Consumer Expectations Survey (CES) also indicate stress among consumers and small businesses. These factors provided enough ammunition for the BoC to cut interest rates by 25 bps. The BoC has three more rate decisions in 2024 and we expect at least one more cut, and possibly two if needed.
• Canada’s June Consumer Price Index (CPI) declined 0.2% to 2.7% as expected. This is the slowest pace in over three years.
• The BoC’s latest BOS sees weak future sales and investing intentions while wage expectations remained elevated due to high cost of living.
• The Bank’s CES reflected continued pressures from high borrowing costs. Higher prices for frequently purchased items like food and energy kept near term inflation expectations elevated. Long-term inflation expectations rose for the first time in two years due to shelter costs and high government spending.
• Canadian retail sales fell 0.8% in May while the early reading for June was down 0.3%. Retail volumes fell 0.7%, the weakest in more than a year. This highlights continued consumer stress from higher mortgage rates and living costs more broadly.

Insights from our sub-advisor, Sun Life Capital Management (Canada) Inc.

• When we combine the falling CPI data with unemployment persistently moving higher and GDP growth crawling along around 1%, it certainly gave the BoC some room to lower rates.
• The bond market can sometimes overshoot in its expectations, and if more than one more BoC cut starts to get priced into 2024, we will begin positioning our fund’s duration actively shorter.
• U.S. interest rates and the high level of Canadian government spending may be a headwind to Canadian yields moving too much lower.

Insights from our sub-advisor, MFS Investment Management Canada Limited

• June inflation data was good enough for the BoC to cut rates by 25bps.?
• Going forward the pace of cuts will depend on future inflation data releases and the impact of the wall of mortgage resets coming over the next 3 years.?
• The Bank of Canada forecasts the median mortgage payment to increase by approximately 20% in the next 12 months even after taking into account rate cuts this year.?
• On the margin, we believe the market is underestimating the number of cuts this year but we will see how this evolves with future data releases.
• Because of the potential for future rate cuts, we believe that bonds will outperform cash on a go forward basis.

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MFS Investment Management Canada Limited is the sub-advisor to the Sun Life MFS Funds; SLGI Asset Management Inc. is the registered portfolio manager. MFS Investment Management Canada Limited has appointed MFS Institutional Advisors, Inc. to provide additional sub-advisory services.

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (Canada) Inc. operates in Canada.? SLC Management is the sub-advisor to the Sun Life Core Advantage Credit Private Pool for which SLGI Asset Management Inc. acts as portfolio manager.

SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds.?

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc. all of which are members of the Sun Life group of companies.

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