Markets scale back bets for BoC rate cut next week after GDP report

Globe and Mail

a day ago

Market bets for a Bank of Canada rate cut next week have dwindled further after this morning's stronger-than-expected GDP report, although there are still some economists calling for easing.
Gross domestic product in the first quarter grew by 2.2% on an annualized basis as compared with the downwardly revised 2.1% growth posted in the previous quarter, Statistics Canada said. The GDP grew by 0.1% in March after a contraction of 0.2% in February. The economy is likely expected to expand by 0.1% in April, the statistics agency said referring to a flash estimate.
This was the final economic indicator before the Bank of Canada's rates decision on Wednesday.
In the wake of the data release, money markets now see only about a 16% probability of a rate cut June 4, down from 28% prior. However, they are still pricing in between one and two quarter-point rate cuts by the end of this year.
Here's how implied probabilities of future interest rate moves stood in swaps markets moments after the 830 am ET data, according to LSEG data. The overnight rate now resides at 2.75 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Here's what they looked like minutes before the inflation report:
Here's how economists are reacting:
Royce Mendes, managing director and head of macro strategy, Desjardins
'Despite the strength in headline GDP, the domestic economy looked very frail. Final domestic demand contracted 0.1%. Housing was particularly weak during the quarter and consumer spending also printed soft. Household spending per capita was up just 0.1% in Q1, down sharply from the 0.8% growth rate in Q4 2024. While business fixed investment proved more resilient, the fact that it was driven by equipment and machinery could indicate that some of the strength was due to firms trying to front run retaliatory tariffs.
Given the temporary volatility in the trade data during the quarter, the reading on final domestic demand provides a clearer signal of the health of the economy. The stagnation in that indicator points to a disappointing underlying growth rate relative to the already-tempered expectations. Furthermore, revisions also cut the Q4 2024 GDP print down to 2.1% from the 2.6% growth previously estimated, pointing to less momentum towards the end of the year. ...
The weak final domestic demand reading for Q1 suggests that the economy was stalling even before feeling the full impact of tariffs. Given the deterioration in recent labour market indicators, we believe that the economy will struggle to post meaningful growth in the second quarter. Despite the upward move in core measures of inflation, which looked to be driven by one-off factors, we expect the Bank of Canada to cut rates another 25 basis points next week."
With a report from Reuters
More to come