podcast

Articles

Podcasts

Videos

Find a branch or ATM

Contact our Thought Leadership team—we value your insights!

Have questions or feedback?

Manage your meeting

Need to meet?

Explore the latest insights, reports, and timely topics affecting economic growth at home and around the world.

CIBC Thought Leadership

Connect with us:

Find more insights and analysis from the CIBC Economics team.

CIBC Economics

This transcript has been generated using machine learning technology. While this technology was trained with CIBC terminology, it may contain errors.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Katherine Judge: Welcome to the Eyes on the Economy podcast. I&#8217;m Katherine Judge, a Senior Economist at CIBC, and today I&#8217;ll be speaking with Avery Shenfeld, CIBC&#8217;s Chief Economist about the US and Canadian economic outlooks. Avery, welcome.
Avery Shenfeld: Nice to be here.
Katherine Judge: You wrote a week ahead cover on July 4th, arguing that Trump is right about having lower interest rates up to a certain point. What is that point?
Avery Shenfeld: Well, it&#8217;s really about whether or not we can keep interest rates at this level forever or whether he&#8217;s right that at least at some point the U.S. economy is going to need some interest rate cuts in order to stay at full employment. And we do share Trump&#8217;s view that at some point we will in fact need lower rates to sustain the kind of economy that the U.S. has been enjoying up till now. And that really comes by looking at how well the interest sensitive side of the economy is doing with interest rates in the mid 4% range. And it is true that if you go back to the start of 2023, that&#8217;s when rates were already at the current level or higher. And over that period, the economy did quite well, but it did have some tailwinds pushing it along, very strong equity market, big wealth gains that funded excess consumer spending relative to what the longer term trend had looked like. And if you go before that, we also had faster immigration that was providing some fuel to consumer spending than we have right now. And so if we zoom in then on interest-sensitive spending, what we see is a mixed or generally somewhat softer picture. So for example, anything tied to housing or even business construction actually is now weakening. There are some strong areas in things like capital goods orders, business equipment spending tied to that, that have grown at a reasonably fast pace. But if you put all the interest-sensitive demand together, you tend to see a picture that is, while still growing, growing at a slower pace. So to us, that suggests that if we lose some of those tailwinds that were driving consumer spending, you are going to, at some point, need lower interest rates in order to sustain a full employment economy.
Katherine Judge: So these interest-sensitive segments of the economy are growing slower. Now, we don&#8217;t agree with Trump that we need rate cuts right now, of course, and that&#8217;s a view that Fed Chair Powell also agrees with. So what are the arguments for waiting for rate cuts then?
Avery Shenfeld: It really is about the luxury of being able to wait for more conclusive evidence that we need these rate cuts and that we&#8217;re not in the face of an uptick in inflation that would be sustained. And that luxury really comes from the fact that the US economy right now is still essentially at full employment. A 4.1% unemployment rate is usually as good as it gets if you&#8217;re going to sustain 2% inflation. And of course, the most recent readings on core PCE inflation, at least if you look at the year-over-year rate running at 2.7%, that&#8217;s above the Fed&#8217;s target. The last couple of months have been better, but it is a short-term period of evidence. And of course, we still don&#8217;t know yet how tariffs are going to play out for inflation because for the most part, the inventories of goods that are being sold on retail stores, shelves, or at car dealer lots, these are items that were brought in before the tariffs kicked in in early April. So we&#8217;re really on the side of both President Trump and Jay Powell, on the side of President Trump in saying that the US might at some point need a full percentage point lower on the overnight rate, down to three and a half, to keep the economy at full employment. But also on the side of Jay Powell, he also has a point in saying that, while the economy is currently at full employment and facing some material uncertainty over where inflation is headed, the Fed can afford to just stand back, wait and see. And so we don&#8217;t expect to see the first rate cut until Q4, by which time there might be evidence that inflation has at least crested on a monthly basis and is not spreading beyond the direct impacts of tariffs.
Katherine Judge: Now, the Bank of Canada decided to pause at the last two meetings. They&#8217;d previously been cutting, of course. They are of the view that the labor market weakness is still relatively contained to trade exposed sectors in Canada. Are we seeing evidence that it&#8217;s spreading to other sectors in your view?
Avery Shenfeld: I think we are, and we&#8217;re going to get more data on this, of course, on Friday when we see the next set of labour force survey numbers. But if you follow the somewhat less tracked numbers from Canada&#8217;s payroll survey. We call that the SEF data, the Survey of Employment, those data lag behind in terms of the timing of the release to the labour force survey, so they&#8217;re not as widely watched, but they actually are likely more accurate in terms of industry level detail. And if you look at the SEF data, not only have they generally been weaker, seeing much deeper declines in total employment than we&#8217;ve seen in the LFS data, but the share of the weakness that is attributable to the most trade sector, trade sensitive sectors has also been smaller. So we&#8217;re seeing a little bit more of a broader picture of labor market weakness in that SEF data, which would be a reason to believe then that even if we do get a little bit of improvement on the trade side through our current negotiations, I&#8217;m a bit skeptical there, that there&#8217;s some underlying weakness overall. And again, the SEF data show that, as well as the fact that if you look at demographically what&#8217;s happening, again, we started off seeing weakness for new graduates, people at the ost disadvantaged end of the labor market. But again, even in the LFS data, we are seeing a bit of a broadening in unemployment or people leaving the workforce who are more in the core part of that labor market.
Katherine Judge: And are there any hints if you look at the data on a provincial basis that the weakness has spread beyond the most trade exposed areas of the country?
Avery Shenfeld: It does appear that that might be the case. So we do see, for example, that in Ontario and BC, the LFS data looks particularly weak compared to other provinces. And of course, Ontario, that makes some sense if you believe it&#8217;s all due to trade because, you know, that&#8217;s the province that has the most at stake in sectors like autos and steel. But BC on the other side of that is actually one of the least exposed provinces in terms of the share of its GDP or the share of its trade associated with the US. It&#8217;s more of a Pacific Rim trading economy, less exposed, of course doesn&#8217;t have a slice of the auto sector. But what Ontario and BC do have in common is they have expensive houses, they&#8217;ve got high household debt and they therefore have the most exposure to the drag that&#8217;s being associated with people who took out a five-year mortgage to buy one of those expensive Toronto or Vancouver houses in 2020 or 21 and are now seeing those mortgages renew at higher rates. It&#8217;s not causing a massive wave of defaults, but it might be putting the squeeze on the broader trend in consumer spending in those provinces and driving therefore a broader and perhaps more significant upturn in unemployment. And to us that suggests that like the US, maybe interest rates aren&#8217;t low enough to get the economic growth that Canada actually needs. And particularly in Canada&#8217;s case, of course, we don&#8217;t really have the luxury that the Fed has of waiting and seeing because we are far from full employment now. And there&#8217;s a greater urgency then that if the economy needs interest rate relief, we should be providing it somewhat sooner.
Katherine Judge: Thank you for your insights Avery and thank you to our listeners and remember you can find our economic commentaries referenced today on the CIBC Economics website. Until next time we&#8217;re keeping our eyes on the economy and calling it as we see it.
Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.
Disclaimer: The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice. CIBC Capital Markets is a trademark brand name under which different legal entities provide different services under this umbrella brand. Products and/or services offered through CIBC Capital Markets include products and/or services offered by the Canadian Imperial Bank of Commerce and various of its subsidiaries. For more information about these legal entities, and about the products and services offered by CIBC Capital Markets, please visit www.cibccm.com. Speakers on this podcasts are not Research Analysts and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construed as a Research Report. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned. The commentary and opinions expressed herein are solely those of the individual(s), except where the speaker expressly states them to be the opinions of CIBC World Markets Inc. Speakers may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to these instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.

The need for rate cuts in Canada and the US, and if so, when?

CIBC Economics

Avery Shenfeld

Managing Director and Chief Economist

CIBC Capital Markets

Katherine Judge

Senior economist

CIBC

For the full catalog, visit