Brad Black, Managing Director and Head, Global Distribution, CIBC Capital Markets: Hello everyone. I’m Brad Black, Head of Global Distribution at CIBC Capital Markets At CIBC, our mission is to empower you with timely insights and actionable strategies, keeping you ahead of the curve in today’s dynamic backdrop. As we continue to navigate these uncertain markets, I’m excited to lead today’s economic and rates outlook discussion, joined by two of our leading experts, Avery Shenfeld, CIBC’s Chief Economist, and Ian Pollick, Head of FICC Strategy. Avery, let’s jump right in.

Every day the conflict in The Middle East has gone on, inflation goes higher. Growth is getting weaker. How are you weighing these two competing forces in the United States as well as Canada. Maybe walk us through implications for both.

Avery Shenfeld, Chief Economist, CIBC: Well, I think in terms of the inflation risk, it’s more prominent in the US than it is in Canada. Remember that when we entered this conflict in The Middle East, core inflation in the US had never got to the central bank’s 2% target. The economy in the US entered this period, essentially at full employment. And so, not only is headline and core inflation running higher than in Canada, but there’s more upside risk in an economy that is still pretty hot. If you look at the Canadian situation, we’re really more worried about growth than inflation. Yes, headline inflation is headed up, but the early readings on core inflation have shown it’s remained tamed. We will see things like airline fares and trucking costs for goods start to factor into some of those core measures. But we’re looking at a Canadian economy where the unemployment rate is very elevated, where wages and labour costs have slowed, and where consumers really don’t have the spending power to just pay more for everything. So, I think in Canada, we’re much more concerned about the squeeze that is starting to show up on consumer spending that will inflict the second quarter growth numbers, and still concerned that this is coming at a time when we had other things to worry about, like the trade frictions with the US that are still hampering exports and business confidence on this side of the border.

Brad Black: Ian, let’s turn to you. Global bond markets have sold off a lot since the start of the war. Your latest interest rate forecast doesn’t have yields retracing all that much, though, even with fewer central bank hikes than priced. Maybe explain why.

Ian Pollick, Managing Director and Head, Fixed Income, Currency and Commodities Strategy, CIBC Capital Markets: So, you have noticed Avery and I have sent out our forecasts with a bit more regularity than we’re used to. But I think when the facts change, we need to communicate it to clients. And so you’re right. Like, if you looked at our forecast from a point-to-point basis, say today until the end of the year. Bond yields don’t look that different. But the path in between is a U. And so where we’ve changed that is the U is just a little bit higher. There’s three reasons. The first one is that, this war will be over at some point. When that war is over, mechanically the bond market has to reprice. And so we’ll reduce some of the urgency for central banks to hike interest rates. At the same time, energy prices probably go lower. And that reduces some of the inflation that’s living in the bond market. And that promotes growth. And so real interest rates have to stay a little bit higher. Number two is that I think we are going to return back to some of these pre-war themes of fiscal sustainability, like conflicts have a very good way of making people spend more on defence. That was already a really big theme in 2025. And so the term premium, that extra compensation to to own a bond is going to go up. As people think deficits gets worse, bond supply increases. And finally, you and I have talked a lot about this in client meetings. Bonds are just a bad hedge to risk assets when inflation so far above target rates. And so when I look at the stock-bond correlation, it’s more negative today than it was in 2025. Equities go down. Bond prices go up. So, you’re in this kind of bizarro world where I think those three factors just keep the level of rates a little bit higher than we had thought.

Brad Black: Avery, some of the pre-war themes haven’t gone away, in particular the sheer size of AI CapEx spend. Between that and your view on the US economy How are you thinking about the fed?

Avery Shenfeld: Well, the US economy is quite resilient, and I think people put a lot of emphasis on inflation in discussing why the fed didn’t keep easing last year… why they went on a bit of a pause. But reality is the other factor here, and most importantly, in fact, was the fact that the economy didn’t show it needed it. And part of that was AI related capital spending, but also consumer spending remained quite resilient as well. And so the economy was doing fine with interest rates where they were creating no urgency for the fed to ease. Now, as we look ahead into 2027, while AI capital spending is going to still be strong. The question is, will it continue to grow at this breakneck pace? I think at some point the pace of growth and therefore the contribution to GDP growth will start to decelerate. And we also have consumers, you know, the income numbers not quite as strong. So maybe some of the velocity that we’ve seen in consumer spending also eases up a bit. So I think there is an open door for the fed to return to the idea that they have a little bit of room to ease, but we do need, of course, the war to end and the oil prices to come down. but we do need, of course, the war to end and the oil prices to come down. but we do need, of course, the war to end and the oil prices to come down. We need the White House to not impose further tariffs that add to inflation, and we need to start to see that deceleration in the growth rate, not the level, but the growth rate in AI capital spending. And I think if you get all that together, you can make the case that in 2027, the fed has room to cut a couple of times. Now this is of course a very delayed cut because had the war not happened, we would have seen those cuts I think in the latter half of 2026. So this is postponed, that sort of easing. And the fed certainly wants to see the end of the war and a path towards lower oil prices before they even talk about a rate cut.

Brad Black: Ian, how should we be thinking about the shape of the yield curve going forward? If central banks are moving slower, but growth risks are increasing, what should our clients expect?

Ian Pollick: So like, the number one thing that we try to impart on our clients is that there is a lot of pricing in the market that we just don’t think gets realized. And so let’s take a step back. In a stylized world, a central bank hikes interest rates. Your yield curve flattens. If central banks are cutting interest rates, your yield curve steepens. And if they do nothing, you’re somewhere in between. So the fact that we’re pushing the fed out to 2027 just means that the US yield curve in 2026 will stay a little bit flatter than we had anticipated. In Canada, we also expect the curve to stay flat, but for a variety of different reasons. Growth is not good in Canada, and so growth lives in the ten year part of the curve. So whereas the US is largely being driven by the front end not going down, in Canada, we anticipate that the long end will stay somewhat in check. And so that keeps both curves relatively flat. Obviously that has an implication when I think about equities per se financials. But what’s really important is that we can’t completely dismiss this idea of stagflation. We don’t really believe it. But you can’t say that it’s zero probability. And so the yield curve in that world you have a very elevated two year point. It’s inverted. Your five year point comes inverted. And then your five year to your third year is very, very steep. If I take a modal type of probability of all those three outcomes, we think the curve stays a little bit flatter this year. But in ‘27, if what Avery said comes to fruition, the US yield curve should steepen a lot more than Canada.

Brad Black: So Avery, Canadian data has been very weak thus far in 2026. What do you think the next move is from the Bank of Canada? And maybe equally importantly, when?

Avery Shenfeld: Well, for the near term, which means the next several quarters, the next move is no move. You know, the market’s been pricing in some odds of a couple of hikes from the Bank of Canada at 1.3 hikes priced in before the end of the year. I think that was a reaction to the Bank trying to reassure Canadians that if inflation stayed hot, if it broadened and heated up beyond energy prices, that they’d be prepared to hike more than once to get inflation under control. But what the market really ignored was the rest of what the Bank of Canada said, which is that they didn’t think that that was not likely, and they understood that the softness in the economy would be a cushion against those sorts of inflation pressures. So we think the Bank of Canada is in no hurry to hike rates in response to an oil shock that they likely also believe, as Ian said, will end at some point and oil prices come back down. If we get into 2027 and a number of favourable developments have started to happen. We’ve gotten through the trade talks with the US. We’ve reduced that uncertainty for exporters. We’ve perhaps given some relief on tariffs to sectors like aluminum and perhaps on steel. That will help the growth numbers in 2027. And if we also start to get some of those fiscal policies kicking in, that’s something we’re not seeing this year, but fiscal policies aimed at promoting these large capital projects, if those start to actually get shovels in the ground in 2027, you can create an environment where we’re doing a little bit better on exports, doing a little bit better on business confidence and getting that capital spending, and the unemployment rate starts to come down. You create the case actually for the Bank of Canada to take rates back to their estimate of neutral, which is around 2.75. So a couple of rate hikes. But you know the earliest we see this is around mid-year 2027. And there’s a lot of ‘ifs’ in what I laid out towards that case. For now, you know the next move is really no move for quite a while.

Brad Black: Ian, let’s stick with the theme of central banks. As I mentioned, Canadian data has been very weak. And yet market participants are still pricing in at least two hikes for this year. How do we reconcile this, and what are the implications for that for our clients?

Ian Pollick: So remember that we went into this war in February where the market was exceptionally well supported. So bond yields fell across all the advanced economies. Really on this idea that US-AI would displace so many people in the labour market, it would force the fed to cut. The data was weak in Canada, it was weak in the United Kingdom. And so globally, people flocked to the very short end of the yield curves and all these different jurisdictions. Now, when the war started, we had this very big flush out of long positions, and the reality is… the very simple reality, levered money had a lot of these positions that they could not hold when the war started. And so in a small bond market like Canada, the problem with this creates is that you don’t have a huge amount of liquidity when everyone’s moving in the same direction. And so I would characterize of the 30 to 40 basis points that live in the short end, at least 60% is scar tissue. It’s just their balance sheets are constrained. It’s very hard for a lot of these accounts to come back and harvest what looks to be a lot of premium. Now, there is some fundamental value here where people say, you know what? Avery’s case is real. There could be a rate hike as early as this year if everything went right, and maybe early in ‘27. So the combination between the two says one thing to me, for those accounts that have the ability to own the short end, whether because of capital constraints or balance sheet capacity, they should do it.

Brad Black: Avery, a big question for the Canadian economy is the USMCA, which remains a key risk for corporate Canada and therefore the economy. Do you have a base case outlook for this, and what are the risks that you foresee around this base case?

Avery Shenfeld: So our base case is that, at some point this year, not likely on the deadline that was originally set, that Canada, the US and Mexico would reach some sort of understanding. But I think the Prime Minister’s words on this are right, we’re not going back to a world in which we can count on the US as a real free trade partner, because remember, we had a Canada-US-Mexico deal and that didn’t stop Canada being hit with tariffs in 2025. And it doesn’t guarantee we couldn’t be hit with tariffs down the road. So we’re hoping for a little bit of tariff relief for aluminum, perhaps some reduced tariffs for the steel industry. Not much hope I think for autos, lumber… I think that tariff barrier is going to remain. Still a drag on the Canadian economy by no means a cure, which is why we’re really also engaged in plan B here, which is this longer term, much slower path towards diversifying exports to other countries, which means building up our capacity and sectors like LNG, where we can export the product off of North America. But it’s a slow process and it’s a slow transition. So no immediate cure. But what’s key in our base case is that things don’t get worse. And I think the reality is the risk with the Trump administration is you never know when the president might get angry about something Canada did or said, that they’re still investigating Canada, among other countries, to look for additional tariffs they could impose to replace the ones that the Supreme Court ruled were unconstitutional. And so we’re not out of the woods actually from things getting worse. So that’s certainly not our base case. And if they got worse enough, we could create an environment where the Bank of Canada actually has to ease rates as its next move. So still watching that as is the central bank, because they, like us, are still a bit in the dark. The talks between Canada and the US haven’t actually even started, really. There’s ongoing talks with Mexico… With Canada, basically, Canada has been slow walking this to some extent because the US is making lots of demands of Canada, before they even talk to us, they want us to drop all the countermeasures we put on them. And Canada, I think for obvious reasons, is saying no, we want to keep those chips for the negotiating table. So the game hasn’t really started in terms of the negotiations. We’re worried about our base case, but our base case, I say, is slightly optimistic and that things get a little better as opposed to a lot worse.

Brad Black: Thanks Avery. Ian, Canadian bond bond yields look very expensive versus the US on a relative basis. What have you been advising clients to do given we’re trading at such historical extremes?

Ian Pollick: Exactly what Avery said. The US is going one way, Canadais going the other. And so it’s creating this huge differential in the level of interest rates. Now, over time, if you are in a perfect world, you recognize that there’s a very similar macro DNA between the Bank of Canada and the Federal Reserve. And if I look at the difference between what their steady state policy rate should be, it’s probably 50 to 75 basis points. And so we are expensive. And so what that means is if you have a longer term investment horizon and you can hold some of this risk as an investor, you should be under weighting Canadian bonds and buying US bonds. That spread will narrow over the course of the next 6 to 8 months. And that’s exactly what’s in our forecast. On the other side, from an issuer’s perspective. Remember that in 2025, the index now allows for Maple bond inclusion. And for those that don’t know what Maple bonds are, it’s when a US company comes to Canada and issues a Canadian dollar bond. Canadian investors now have to buy that. So you have somewhat of a captive investor base. Take advantage of these levels because you’re all in coupon is very very low.

Brad Black: So let’s stick with you for a second. The last time we spoke here, a big theme was de-dollarization and Canadian investors increasing FX hedges to protect foreign assets. Is there any update on this theme worth sharing? And then maybe more broadly, how are you thinking about the Canadian dollar?

Ian Pollick: Listen, it is a theme that’s just not going away, right? I think what is misunderstood about it is the speed of its implementation. It is a very slow process to gain exposure to market beta or alpha in markets outside the United States. Just because the US offers a lot of exposure that we don’t have in Canada. So when I speak to clients where I’ve seen in the data, hedge ratios are rising. You know, for context, the average hedge ratio for Canadian investor owning US dollar assets was earning between 25 to 35% in 2025. That number is now firmly above 50%. And so it’s all people are saying, well, I don’t want to own the US dollar. I don’t want to own dollar assets. I’m just going to protect my investment in case there’s swings in the currency market. So that’s ongoing. It’s happening. We have conversations, as you know about it, almost every single week. For the Canadian dollar, Avery I’ll ask your opinion in a second, because I’d like to get what you think about this. We just expect US dollar weakness. And so a lot of the appreciation that we see in the Canadian dollar isn’t because it Canadian dollar is speaking to a really good macro outcome in Canada. But what we’ve been talking about in our conversation today is that interest rate differentials are going to matter if the bank is moving in one direction faster than the Fed, then the currency markets going to price that in. So just to give you a number out there, I think $1.34 by the end of this year and slightly more appreciation in 2027.

Avery Shenfeld: Yeah, I think in general, I mean, the Canadian dollar is a low beta version of the general trend for the US dollar. And people have talked about, you know, dollar debasement, making grand statements about the US dollar is going to, at some point plunge. I don’t see it that way. I think this is actually just a normalization of the US dollar exchange rate against a pack of major currencies. You know, people forget that we had $1.35 to Euro. We had we had yen at ¥100 to the US dollar. The US dollar has really climbed a long way over the past number of years. And these currencies do tend to have some cycles, long cycles where at some point people start to think perhaps the US dollars gained as much as it can. Maybe I want to lighten up on my US dollar exposure a bit, or stop adding weight to it, and then the dollar corrects a bit. And I think that’s all we’re in for here. The war has actually disrupted what was a trend towards a weaker US dollar. If this conflict ends, we do expect that to actually trigger a little bit of an appreciation of the Canadian dollar or the Euro, some of the other major currencies. I don’t think the Canadian dollar will be the big winner in that trend. But as Ian said, you know, we could get to $1.34 at the end of the year, perhaps $1.33 in 2027. So, you know, not a really strong Canadian dollar. More of a normalization in this exchange rate.

Brad Black: Well thank you, Avery and thank you Ian. Great insights and discussion. And to our viewers thank you for joining us. We hope today’s discussion provided valuable insights to inform your decisions. As always, our CIBC team is here to support you. Please feel free to reach out to discuss your specific circumstances and opportunities to make your objectives a reality.

All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change.

Economic and rates strategy: Mid-year update

Economic and rates strategy: Mid-year update

CIBC Economics

Brad Black

Managing Director and Head, Global Distribution

CIBC Capital Markets

Avery Shenfeld

Managing Director and Chief Economist

CIBC Capital Markets

Ian Pollick

Managing Director

CIBC Global Markets