This article by David Rosenberg, founder and president of independent research firm Rosenberg Research & Associates Inc., provides an analysis of the current state of the Canadian economy and its implications for interest rates. Here are some key points from the article:
- The unemployment rate has climbed 140 basis points from its cycle low of 4.8% to 6.2% currently.
- Over the past six decades, not once was a recession avoided with this sort of increase in the jobless rate from the trough.
- The market is priced for only two cuts at the next four meetings.
- However, Rosenberg argues that rates are still far too high when benchmarked against where activity and inflation reside.
Based on this analysis, Rosenberg provides some investment recommendations:
- Look to the swaps market for maturities that do not have enough easing priced in.
- Trade around a steepening of the Government of Canada bond curve.
- Be long the Government of Canada bond market outright as the declining ‘cost of carry’ acts as a gravitational pull for the entire curve.
- Trade the Canadian dollar from the short side, at least until the Fed begins to tilt away from its current ‘higher for longer’ narrative.
- For the stock market, have a barbell between industrials (weaker Canadian dollar) and utilities (lower yields).
Overall, Rosenberg’s analysis suggests that the Bank of Canada should continue to cut interest rates to support the economy, and investors should position themselves accordingly.