The latest mix of economic data in Canada and the U.S. suggests the Bank of Canada will cut rates while the Fed will hold the line, TD Bank says.

TD says that U.S. economic data is delivering mixed messages. From these messages, it believes that the U.S. economy is gradually recovering, with manufacturing staging a turnaround and with business investment finally showing some signs of life. It predicts that economic growth should accelerate in the coming months, as tax cuts take effect.

However, it warns that the lack of job creation, the heavy indebtedness of consumers, the declining pace of mortgage refinancing, and the recent drop in confidence all raise questions about just how strong consumer spending is going to accelerate. Also, the lack of pricing power and tight profit margins suggests that the pace of business investment could remain shaky.

“As a result, the recent reports do not alter our view that while U.S. economic growth is going to improve, real GDP is likely to only average an annualized increase in the range of 3.0%-3.5% in the second half of this year — which is currently a below-consensus forecast.”

TD says that this outlook is dependent upon some improvement in labour market conditions. “All told, barring evidence that disinflationary pressures are building, this economic backdrop is likely to see the Fed leave rates on hold,” it says.

The latest data in Canada was May GDP, which grew at 0.1%. “Overall, the report builds the case that the Canadian economic growth ground to a virtual halt in the second quarter,” it concludes. “Given the growing slack in the Canadian economy and the prospects for a further decline in core inflation, the odds of a Bank of Canada rate cut on Sept. 3 remain good.”