TD Economics is forecasting slower economic growth ahead, which may pose both bumps and buying opportunities for the market.

In a report released today, Craig Alexander, v.p. & deputy chief economist, writes “We continue to believe that the softening in the housing market and the unwinding of the housing-related wealth effects will take a toll on consumer spending in the months ahead, leading to a slowdown in the U.S. economy. And, the fallout will be felt globally.”

“This implies that while demand for commodities will remain robust, a weaker global economic backdrop is likely to make markets less bullish about commodities and result in a further drop in prices, with the TD Commodity Price Index expected to fall by around 15 to 20% over the next twelve months,” Alexander writes.

The prospects for more moderate economic growth ahead is also why TD believes that the Federal Reserve and the Bank of Canada are likely done raising interest rates. “Moreover, if the upcoming economic data confirm that the U.S. economy is headed into a slowdown, there is a good chance that the Fed and the Bank may find themselves easing policy in late 2006 and early 2007,” Alexander suggests.

“All of this has many financial implications. First, the outlook is for more modest corporate profits growth and a correction in commodity prices, both of which are clear hurdles for equities. However, so long as the slowdown is not a hard landing, the weakness should only be short-lived, and this might create some buying opportunities if valuations become cheaper,” he says. “Remember that the stock market is a leading indicator, meaning that equity prices will rebound long before economic growth accelerates. And, equity markets are likely to respond positively to any central bank rate cuts.”

“Second, if rates have peaked, the prospects for fixed income markets are positive,” Alexander adds. “In the near term, one cannot rule out the possibility that yields could recoup some of their recent decline, but an economic slowdown would cause them to fall. Again, the window for the bond rally is likely in the second half of this year and the first half of next year.”

“Third, the Canadian dollar may strengthen in the near-term on U.S. dollar weakness, but look for it to lose ground when commodity prices decline,” it concludes. “Fourth, investors may want to keep the gravol handy, since all of this means that volatility will likely remain a dominant theme.”