(May 1 – 09:20 ET) – Canada’s stock markets will outperform the U.S. stock market this year, say TD’s economists. They are basing their prediction on another prediction – that the Bank of Canada will raise rates less than the U.S. Federal Reserve Board.
There are no signs of a slowdown in U.S. economy, says TD in a press release. “As a result, the risks have increased so dramatically that the Fed may have to tighten monetary policy more aggressively than the 75 basis points that we are expecting by the end of the summer,” says TD senior economist Marc Lévesque. “While there remains a clear risk that the Fed may have to take a more heavy-handed approach to slow the U.S. economy in the months ahead, there is good reason for the Bank of Canada to take a much more cautious stance than the Fed.”
He points out that core inflation is only up 1.5%, wage growth remains moderate, and broad money supply growth is also pointing to low inflation. “With all signs indicating that inflation in Canada will remain lower than in the United States, we expect that the Bank of Canada will be reluctant to match the full extent of the rate hikes that are expected from the Fed over the next few months,” says Lévesque.
If the Bank does move slower than the Fed, Canada’s stock markets should outperform U.S. markets, says TD. But the outlook for both markets “remains highly uncertain. If the Fed falls behind, and is prompted to raise interest rates sharply, a prolonged downturn in U.S. equity markets is quite possible, and such a correction in the U.S. stock market would be expected to spill over into Canada. Nonetheless, investors should not lose sight of the fact that Canada’s monetary policy environment is much more favourable than that of the United States, which should translate into a better performance in the equity markets on this side of the border this year”.
-IE Staff