Now That Inflation Is No Longer Running Hot, Concerns over the Economic Slowdown Are Rising

Although inflation has come down, it remains above target in most countries. Except for the Bank of Japan, central banks most likely won't start hiking rates again, but they may keep rates higher for longer if insufficient progress is made on inflation. There's also a great deal of uncertainty over the lagged effect of higher interest rates on economic growth. As more and more homeowners are renewing mortgages at higher rates, far too many Canadian borrowers could have trouble making payments. Tenants are also under increasing pressure. And that's before we even consider the possibility of a spike in layoffs, which would increase the unemployment rate in a more damaging way, and negatively impact the housing market and credit in general. July's disappointing US jobs report triggered a brief market correction. This could easily happen again, which may cause positions in markets and asset classes to rapidly unwind. The US presidential election in November could also be a game-changer. A close outcome could provoke social instability. And a return of Donald Trump to the White House may create uncertainty, especially regarding international trade and the Federal Reserve’s independence. Irrespective of who wins, fiscal deterioration in the United States (and elsewhere) could prompt credit rating downgrades and possibly push long-term interest rates higher. Worsening geopolitical tensions like an escalation in Middle East conflicts and the election of populist and protectionist governments could also spell instability for the global economy, financial markets and commodity prices. From a currency perspective, if the world's economy deteriorates, many investors may park their assets in US dollars, sending the greenback even higher. The risk of correction would be greater for emerging and commodity-linked currencies.

The Bank of Canada just delivered two consecutive interest rate cuts, and we expect it to lower rates even more by the end of the year. Compared to our previous projections, we believe the central bank will make three additional cuts of 25 basis points instead of two by the end of 2024. We then expect it to lower rates six more times in 2025. Now that inflation has improved, the Bank of Canada can shift its focus to the state of the economy and the job market. Further interest rate cuts should help prevent a hard landing in Canada. Most of all, they should help blunt the impact of the mortgage renewal shock expected in 2025 and 2026. In the US, improved inflation figures and more mixed economic data also suggest that the Fed could lower rates several times over the next few quarters. The Canadian dollar could keep hovering within its recent range for another few months. We believe the loonie will start appreciating next year, in line with resilient investor risk appetite and our assumption that the Canadian economy will stick a soft landing. We also expect interest rate cuts to give commodity prices a modest boost by fuelling demand, especially in advanced economies.