Bad economic news is not always bad for the stock market

The Bank of Canada held its policy rate at five per cent on April 10, saying it needs to see a sustained decline in inflation before rate cuts can begin.

Bank of Canada governor Tiff Macklem said that he realizes that most Canadians want BoC to lower interest rates but that inflation needs to stay lower for longer for rates to go down.

Macklem also defended the central bank’s two per cent inflation target as the key benchmark for setting interest rates. To the suggestion that the central bank could raise the target to three per cent, close to where inflation now sits, Macklem responded: “Why not four per cent, why not five per cent? If you’re going to change your target when it gets difficult, you don’t have a target.”

At the same time, some market experts insist that the central bank should lower rates sooner. David Rosenberg, founder and president of Rosenberg Research, told BNN Bloomberg that the Canadian economy has slowed more than enough to justify an interest rate cut by the Bank of Canada, and that underlying inflation may be lower than the central bank thinks. “I think that the Canadian economy is pretty well flat on its back,” he said.

Rosenberg’s comments came after Statistics Canada reported a Canadian trade deficit of more than $2 billion in March, as compared to the $1.21 billion surplus that analysts surveyed by Bloomberg were expecting. The news came after GDP data released by StatCan, which suggested economic growth in Canada was mostly flat in February and March.

These statistics have further fuelled bets that the Bank of Canada will lower its key interest rate at its next policy decision in June.

And because lower rates promise heightened economic activity, current bad economic news turns out good news for the markets. After the latest U.S. jobs report came in much cooler than expected, American markets rallied, while Canada’s main stock index S&P/TSX composite was also up. This Monday, Canada’s main stock index gained more than 300 points in a broad-based rally.

However, too much of bad news on the economic front may be too much for the stock markets. The question for investors now is whether economic data will continue slowing down enough to warrant rate cuts, but not too quickly, Rose Devli, portfolio manager at 1832 Asset Management, told Global News. May will show if we are in stagflation and hence what the course for the markets will be in the near future.

Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204
[email protected]
www.ukrainiancu.com

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