Connor Hare

The holiday-shortened week was a very busy one for investors in Canada, with global political developments and economic data to digest. Equities faded late in the week on oil prices, pushed lower on higher Saudi production and trade tensions, but a broad-based recovery took hold, with a positive end to the week looking like at the time of writing. The U.S. implemented additional $34bn in tariffs on Chinese exports taking relations to a new low and weighing on the greenback – down 0.5% on Friday vis-à-vis most majors.

Escalating tensions between Canada’s two most important trade partners weighted on sentiment, but economic data has so far remained intact. Hiring resumed in June with the Canadian economy adding 32k jobs last month. Gains were led by construction and manufacturing, while services disappointed, losing jobs on net for the first time in five months. Despite the job creation, unemployment ticked higher by 20bps to 6.0% as more than 75k people entered the labour force – a six year high. Average wages decelerated, down some 30bps, but at 3.6% y/y remains near a decade-high (Chart 1).

Canadian trade figures were less inspiring with the deficit in May widening to $2.8bn. Imports were up 1.7% and 1.2% in nominal and real terms, respectively. They were somewhat boosted by airliner and gasoline imports, but strength was broad-based across categories, indicative of healthy domestic demand. Exports, on the other hand were weak, remaining flat in nominal terms while volumes fell 1.0%. While much of the weakness was related to transitory factors including supply disruptions in automotive parts and work stoppages in iron mines, exports are unlikely to surge going forward. Alongside ongoing NAFTA uncertainty, the imposition of tariffs in June will have a severe impact on the Canadian metals industry, with potential for downstream effects a real risk.

Another risk central to the Canadian economy is the housing market. This week we got June real estate board data for the two most closely watched markets in Canada. Figures from TREB suggested the recovery in the GTA market has begun in earnest. Sales rose for the first time this year (Chart 2), surging by nearly 18% in June according to TREB figures, but remaining well below historical norms. New listings, meanwhile, pulled back, helping rebalance the market. The tighter conditions led prices higher, with the HPI up about 0.2% while average prices rose over 3% - on account of increased activity in the most expensive single-detached segment. The GVA by contrast, saw both activity and new listings pull back around 10% apiece in June, according to REBGV figures. The decline in sales was the fifth in six months, with the softness manifesting in prices. The HPI was down 0.5% in June, the third consecutive decline and the weakest performance since late-2016, which also followed a provincial policy change.

Risks related to trade and housing will surely be top of mind for the Governing Council when it meets next week to discuss monetary policy. But, until they are seen as likely to materialize they will not drive monetary policy. This is set on incoming data and the outlook, which are relatively sanguine. From that standpoint, another 25 basis point hike next week is the most appropriate move.

Michael Dolega, Senior Economist | 416-983-0500

The U.S. economy slowed more than previously believed in the first quarter of 2018, with growth coming in at 2% ann. according to the BEA’s third estimate, down 0.2 percentage points from the second estimate. The downward revision was largely due to weaker consumer spending, while softer inventory investment also played a part. New data out this morning on personal income and outlays reinforce the notion that the soft start to the year was temporary. Supported by a healthy 0.4% m/m gain in nominal personal incomes, nominal spending rose a respectable 0.2% in May. But given inflation, consumption was flat in real terms. Strength in March and April still set Q2 consumer spending – currently tracking just shy of 3%, slightly below our forecast (Chart 1) – up for a rebound. We continue to expect the economy to grow by some 4% in Q2 given widespread strength in other components.

Consumer spending should continue to follow a decent 2.5% growth path in the second half of 2018, bolstered by a tight labor market and tax cuts, which will continue to support incomes. The latter will feature favorably for housing demand, even as interest rates rise. But a lack of inventory will constrict the sales pace. On this front, pending home sales – a solid gauge of near-term activity – retreated in May, marking the second consecutive monthly decline and weakening a previously improving trend.

Perhaps the most striking element from this morning’s report was inflation data. The headline PCE index ticked higher to 2.3% y/y, while core PCE (the Fed’s preferred measure of inflation) hit the bullseye of 2% for the first time in six years (Chart 2). These developments support our view for the Fed to continue raising rates gradually, with two more hikes expected for 2018. The focus now shifts from below-target-inflation to containing the upside risks.

With little else in the way of primary data, shifting headlines on trade remained an important driver of stock market activity. Markets opened lower on Monday after indications that the U.S. planned new curbs on Chinese investment in U.S. tech firms. Foreign policy also got in on the action, with crude prices surging on the anticipation of tougher U.S. sanctions on Iran. The rollercoaster ride in equities continued, with the President seemingly taking a softer stance on Chinese tech investment, but then hinting at the possibility of protectionist action on autos.

Ultimately, trade spats with a number of important trading partners risks siphoning away much of the economic boost from fiscal stimulus by way of higher consumer prices, reduced exports, supply chain disruptions, and by denting consumer and business confidence. Under the presumption that the tougher trade rhetoric is simply a negotiating tactic, there is still hope that common sense will prevail, and tensions will de-escalate. The risk, however, is that once the wheels have been set in motion, tensions can quickly escalate to a full-out trade war. China, Mexico and the EU have already retaliated to some degree, while Canada is announcing a detailed list of U.S. products to be slapped with retaliatory tariffs at the time of writing, which will take effect over the weekend. The U.S. may up the ante, further reinforcing the negative feedback loop.

Admir Kolaj, Economist | 416-944-6318

Our new quarterly forecast is titled Full Steam Ahead, which is an accurate description of our forecast. The American economy is barreling ahead with more momentum than we had expected. Real GDP growth is tracking 3.0% in 2018, revised up from 2.7% in our March forecast. This is a notable improvement from 2.3% in 2017, thanks in large part to fiscal stimulus.

A healthy economy is set to push the unemployment rate even lower over the coming quarters. This in turn will add to inflation pressures. Stronger economic momentum and firming inflation have prompted us to edge up our rate-hike expectation by an additional 25 basis points for this year, taking the upper end of the policy range to 2.5% by year end (see Financial Outlook).

At the risk of sounding like a broken record, 3% growth is difficult to sustain beyond a near-term cyclical updraft. The boost from tax cuts and government spending increases will start to fade next year. Add to that the reduced lift from monetary policy. The Fed has raised its policy rate 150 basis points over the past 18 months, and is expected to raise it 125 more over the next 18 months (Chart 1). Higher oil prices than in our previous forecast will also nip at consumer and businesses’ purchasing power. These cyclical concerns add to the underlying structural dynamics of the US economy. Even with an expected improvement in productivity growth, an aging population holds potential growth in the economy to roughly 2%.

All of these factors mean that on a quarterly basis growth is set to slow over the course of 2019, to 2.1% by the end of the year (Chart 2). Still, this should be kept in perspective. Even as the U.S. slows, it is expected to outpace all other G7 economies (see Global Outlook). And, when an economy is already running at 3%, the only real direction for it is to slow.

Now is the time in the economic cycle where so –called “animal spirits” can lead to excess risk taking, and sow the seeds of the next recession. For the U.S. it is as yet unclear what these unknowns might be. Indeed the factors that cause the next recession may come from outside the U.S.’s borders. But one potential risk is self-inflicted. An escalating trade war is a clear downside risk, particularly for the U.S.’s key trading partners (see impacts of auto tariffs on Canada), which would have knock on impacts at home. Even so, with the economy doing so well, it has sufficient economic cushion to absorb some negative shocks.

In an otherwise quiet week for economic data, we did get an update on the trigger of the last recession – the housing market. There a few signs of froth there. Housing starts continued their gradual upward trend in May. Residential construction has been on a stronger footing this year after weakness in multi-unit structures drove a lull in 2017. The existing home market, on the other hand, was a bit disappointing in May. Sales have trended down recently, as the market struggles with a lack of listings. Forward looking indicators suggests activity should improve in the months ahead. In time, construction of new homes should help, but improvement is expected to be gradual as affordability constrains demand.

Leslie Preston, Senior Economist | 416-983-7053

This was a busy week for soccer fans and investors alike. The former got treated to a kickoff of a month-long FIFA World Cup extravaganza in Russia, while the latter had a full docket of policy decisions from the Fed and the European Central Bank, as well as readings on inflation and retail sales and to close off the week an announcement of 25% tariffs on $50 billion of goods imported from China.

Tuesday’s inflation report got the ball rolling ahead of the FOMC rate announcement. As widely expected, inflation continued to gain traction in May. The headline and core consumer price indexes rose by 0.2pp (m/m) apiece to 2.8% and 2.2% (year over year), respectively. A strong economy, wage pressures and (now) tariffs will continue to push inflation measures higher in the coming months, particularly as businesses become more comfortable with passing higher costs to consumers (see Chart 1).

The Fed’s June rate hike looked like a done deal even before the inflation report, and indeed the FOMC raised the federal funds rate target by 25 basis points to a range between 1.75% and 2.0%. Details of the statement and  the accompanying economic projections were insightful. Notably, the statement removed its forward guidance that the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”  With committee member projections showing the federal funds rate rising above its anticipated “longer run” rate by 2019, this made sense. The Fed’s increased confidence in its rate hiking path was also illustrated in an edging up of the median expectation for the fed funds rate to 2.4% (from 2.1%) this year, implying two more rate hikes this year (one more than previously). During the press conference, Chairmen Powell also said that starting next year he will be holding a press conference following every FOMC meeting, a move likely aimed at freeing up Fed’s hands somewhat with respect to future rate changes.

The Fed’s view that economic growth is revving up was corroborated Thursday’s retail sales report. Spurred by tax cuts, job gains and rising incomes, American consumers have been on a tear for the last three months, and in May retail sales surged by 0.8% – double the expectations and the biggest jump in half a year. Helped along by a pickup in consumer spending, GDP growth is currently expected to surpass 4% (annualized) in the second quarter, and average 3% for the year as whole – the best result since 2005.

While the U.S. economy may be sizzling, there are risks on the horizon. As with tariffs on steel and aluminum, the recent tariff announcement on Chinese goods sparked a retaliatory action by China. Taken alone these tariffs are likely to present a modest drag on U.S. growth and modest lift to inflation (please see our recent report on U.S.-China tariffs). However, while direct impacts are modest, the hit to business confidence and supply chain disruptions could result in a more deleterious effect on growth, So far, financial markets have taken these skirmishes in stride, but a further escalation or full out trade war could bring this assumption into question.

Ksenia Bushmeneva, Economist | 416-308-7392

Next week the Federal Open Market Committee (FOMC) will meet for the fourth time this year to discuss whether the current level of stimulus is appropriate for the U.S. economy. During their discussions they will evaluate the health of the economy, wage and price pressures, and emerging risks before deciding on revisions to their outlook for economic activity, inflation, and the future path of the fed funds rate.

The U.S. economy is firing on all cylinders at the moment. Growth in the second quarter is currently tracking a blistering 4.0% annualized pace, helped along by a strong rebound in household spending, firm business investment, and surprising strength in net exports. What’s more, growth is expected to continue at a 3.0% annualized pace on average for the remainder of the year, with fiscal stimulus contributing about half a point.

Strong economic activity is working to absorb any remaining spare capacity. The unemployment rate is at an eighteen year low, and as of April there were more job openings than there were job seekers (Chart 1). Wage growth is healthy by historical standards, but should move even higher as skilled labor becomes scarce. But, wages typically keep up with productivity growth, and on that front the U.S. economy continues to perform below historical trends (Chart 2).

Consumer price inflation is above 2.0%, a sign that the U.S. economy is bumping up against capacity constraints. Add higher fuel prices, higher import prices due to increased tariffs, and strong wage growth, and it’s just a matter of time before profit margins get pinched enough for firms to pass on rising costs to consumers. All told, headline consumer price inflation is likely to peak at 2.7% this year, with the Fed’s preferred measure, the core personal consumer expenditure deflator, holding near its target of 2.0% through the end of this year.

Altogether, this solid outlook should be more than enough to convince the FOMC that the U.S. economy does not require the amount of monetary stimulus currently on offer. As a result, the fed funds rate is likely to move up by 25 bps next week, with another hike or even two embedded in the updated dot plot summary for this year.

That said, although further rate hikes are certain, their exact timing is still open for debate. Geopolitical risks remain elevated, and a policy misstep or two may be just enough to send financial markets, business confidence, and global trade into a tailspin. Trade skirmishes could easily escalate into trade wars, particularly if talks fail to make progress between the U.S. and its major trading partners. Although much better prepared than in past tightening cycles, emerging markets remain at the mercy of nervous investors who are more concerned with capital retention than returns in such an uncertain environment. Argentina and Turkey were the first victims of speculative attacks, but they surely will not be the last during this tightening cycle. All told, in light of these and other risks, the FOMC is likely to stay on its current path of gradual rate hikes.

Fotios Raptis, Senior Economist | 416-982-2556

The theatrical twists and turns of this week’s events are worthy on an opera, with the opening act set in Italy. Political turmoil and fears that new elections in Europe’s fourth largest economy could strengthen the grip of Eurosceptic parties spooked investors, who began to unload Italian assets. This sent yields on short-term government debt skyrocketing (Chart 1). Investors also steered clear of other southern European debt, with short-term Spanish, Greek and Portuguese bonds also selling off. Concerns regarding new elections subsided as the week wore on, and these moves began to reverse course. By the end of the week the populist coalition was allowed to form a government. Still, the fact that the new Italian government – which favors tax cuts and spending increases – is likely to clash with the E.U. on a number of issues, suggests that this is merely a new chapter which may further tests the bloc’s stability. The sheer size of Italy’s economy – roughly ten times that of Greece – will warrant special attention.

Markets were thrown another curve ball when the White House announced that it would be pushing ahead with tariffs on $50B of Chinese goods and end the exemption on steel and aluminum tariffs for the E.U., Canada and Mexico. These normally close allies pledged to challenge the tariffs through the WTO and NAFTA channels and levy retaliatory tariffs. At around $12.6B and $7.7B of U.S. products targeted by Canada and the E.U. respectively, and an estimated $4B in trade with Mexico, the amount of affected trade is still quite small. But the wide list of products marked for tariffs, which stretch from agricultural products to motorcycles, are sure to strike a sour cord with the U.S. Ultimately, the tariffs will make goods more expensive for the American consumer. In a prior analysis, in which we expected the exemptions for the allies to stay, we estimated that the tariffs would have a muted direct impact on U.S. economic activity and inflation. The recent events make us more confident that while the impact on U.S. economic activity is still expected to be limited, the tariffs are likely to boost consumer price inflation by at least 0.1 percentage points this year and next.

Behind the curtain of the unfolding Italian and trade sagas, U.S. economic data was broadly positive. American consumers were back in full force in April, with personal spending rising by a robust 0.4% in real terms, building on a solid March print. The back-to-back gains point to a 3.5% rebound in second quarter consumer spending after a soft first-quarter print (1% Q/Q ann.). This narrative is further reinforced by a strong labor market. In May, payrolls gains (223k) beat expectations, the unemployment rate fell to an 18-year low (3.8%) and wage growth accelerated to 2.7% y/y (Chart 2). Rounding out the good economic news was an above-consensus print in the ISM manufacturing index, which pointed to manufacturing activity accelerating in May.

The latest data cement the case for a Fed rate hike on June 13th. But this is no time to fall asleep, with further policy rate normalization also requiring a watchful eye on developments out of Europe and the potential fallout from heightened trade tensions. For now, Nessun Dorma.

Admir Kolaj, Economist | 416-944-6318

The FOMC minutes, renewed trade tensions and a cancellation of the June summit with North Korea made the week anything but boring for investors. It was also a politically-charged week across the Atlantic. U.K. negotiations with the EU soured over U.K.’s participation in the Galileo satellite project, while the new Italian Eurosceptic government appointed Giuseppe Conte as prime minister.

Financial markets rallied on Monday on the news of positive weekend developments in the U.S.-China trade dispute. Details of the agreement were vague and largely unquantifiable as far as trade deficit reduction targets are concerned. In the follow-up statement China agreed to  “meaningfully” increase imports of U.S. agricultural and energy products, and lowered tariffs on imports of autos and parts. These relatively limited concessions were sufficient to put the proposed tariffs on $50 billion worth of Chinese goods set to take effect on May 21 on hold.

Although U.S. trade tensions with China have eased for now, they have flared up elsewhere, weighing on market sentiment later in the week. On Wednesday President Trump ordered a review of automotive imports, citing national security concerns. The decision drew sharp international criticism and warnings of retaliatory tariffs, but was also opposed domestically. Automakers as well as Republican lawmakers expressed concerns that, if imposed, auto tariffs will raise auto prices for consumers, disrupt supply chains, start trade wars and alienate U.S. allies.

Worries about trade also showed up in the FOMC minutes. Specifically, the FOMC members acknowledged that trade uncertainty could hurt business sentiment and investment intentions. As for the monetary policy discussion, the FOMC members agreed that they would soon need to “take another step” in removing monetary accommodation, with a June rate hike looking like a done deal. At the same time they stressed that the Fed’s inflation objective is “symmetric”, suggesting they will allow inflation to temporarily overshoot 2%. All told, we remain of the view that a total of three rate hikes this year the is most likely outcome.

Higher interest rates will certainly have an impact on the housing market. After declining by 6% in the first quarter, existing home sales have started the second quarter on a weak footing as activity fell 2.5% in April. Sales of new homes also took a break in April, declining by 1.5%. Since the start of the year, the average rate on a 30-year mortgage rose by 70 basis points. Rising rates alongside brisk growth in home prices have dented affordability; however, this is only part of the story behind relatively tepid home sales. Low inventory of houses on the market has  been the most important factor restraining resale activity (Chart 1), but the pace of construction remains modest and will likely be contained by labor shortages and rising input costs. The price of American steel rose 40% this year, while lumber prices are up 34%. Some relief to the housing shortage may come as more existing homeowners, with fully rebuilt home equity (Chart 2), become encouraged to list their homes. However, the overall pace of activity in the housing market will likely once again remain modest this year.

Ksenia Bushmeneva, Economist | 416-308-7392

The past week featured plenty of events for equity markets to fret about, from uncertainty surrounding U.S. trade negotiations, to a eurosceptic right-wing coalition in Italy. Concerns about emerging markets (EM) have led to the worst week for EM currencies in a year and a half, as the U.S. dollar continues to rise. And for Americans, it seems like everything is going up these days, from mortgage rates to gasoline prices (Chart 1).

Drivers may be getting sticker shock as they fill up their tanks, with the national average gasoline price approaching $3 per gallon. However, about half of the 10% rise in gasoline prices since March is the typical seasonal increase. Still, this will leave a bit less cash in wallets for spending on discretionary items. To put some numbers to it, in 2017 each American consumed about 442 gallons of gasoline per year, so a 5% increase works out to about $62/month for a family of four.  

Higher oil prices are acting to drive inflation expectations, and consequently Treasury yields, higher. The 10-Year yield reached 3.11% on Thursday, the highest level since mid-2011. For much of last year, we argued bond yields were too low, and now things are looking much more reasonable. What’s more, the latest readings on the economy are consistent with higher bond yields. A healthy retail report for April demonstrated that consumers are back in action after taking a breather in Q1 Consumer spending growth in the second quarter is tracking close to 3% annualized, which would help to support a similar growth tally for the economy as a whole.

Mortgage rates have followed Treasury yields higher. The average rate on a 30-year fixed-rate mortgage rose to 4.61% this week, very close to the 2013 taper tantrum episode highs. The impact of higher mortgage rates is less far reaching than gasoline prices. It will only affect new borrowers and homeowners who are refinancing. The average new mortgage was $317,300 in March, so the impact of the 74 basis point increase in rates since the beginning of the year will raise the average monthly payment about $138 per month. This should hinder affordability in the housing market, and lean against demand.

That said, we remain confident that the positive fundamentals for housing will underpin gains in residential construction going forward. Housing starts may have been off a bit in April, but looking through the monthly volatility, the trend in the forward-looking permits data is still positive (Chart 2). Moreover, the monthly decline was due to the always volatile multi-family component. True, there are headwinds to homebuilding activity, including labor shortages in the construction industry, rising building material costs and a lack of buildable lots. But, after some weakness over the winter, homebuilder sentiment took a tentative step higher in May, suggesting these barriers are not insurmountable.

The pinch of higher prices and borrowing rates is expected to restrain consumer spending and housing investment slightly versus 2017’s performance. But, for the remainder of 2018 we expect business investment and government spending to power real GDP growth of around 3%.

Leslie Preston, Senior Economist | 416-983-7053

Events this week remind us of how uncertain the world can be at times, and how unpredictable financial markets can be. On Tuesday President Trump announced that his administration will no longer be part of the current Joint Comprehensive Plan of Action (JCPOA). That was a 2015 deal agreed to by the U.S., UK, EU, Germany, France, Russia, and China that lifted sanctions against Iran in return for a promise to pause its nuclear program. Although pulling out of the agreement will have limited direct economic implications for the U.S., the imposition of sanctions on Iran and the threat to do so on those nations that continue to do business with it, is likely to deal a blow to its trade partners (Chart 1).

Financial markets were caught somewhat off-guard by the decision, with conflicting news headlines generating gyrations throughout the day. Since a renegotiation of the deal is a possibility, markets shrugged off the news, with domestic equity markets likely to end the week up 2%. WTI oil prices also moved higher this week, holding above US$70 on this and other news of escalating Middle East tensions.

Oil prices have been rising steadily over the past five weeks, with implications for the domestic and global economy. Higher energy prices should help support domestic investment and overall economic activity in oil exporting countries such as Saudi Arabia, Canada, and increasingly the United States. However, consumers will likely feel the pinch from higher energy prices, as the rising price of gas reduces their overall purchasing power.The pass-through to consumers from rising energy prices is usually quite brisk, and this time is no exception (Chart 2). The U.S. CPI report for April saw prices rise 2.5% over the past twelve months, largely owing to a strong upward move in the price of gasoline (+13.4% y/y). Aside from energy, shelter costs continue to tick up, a reflection of tight housing inventories in many U.S. cities that is sending home prices higher.

Abstracting from energy and other volatile prices, underlying price pressures remain fairly subdued despite strong economic activity and tightening labor markets. Core inflation lost some momentum in April, as price growth in core services slowed a touch. Still, core inflation registered a 2.1% gain year-on-year, but that includes a fading base-year effect from the dip in telecommunications prices last year that is acting to prop up inflation.

The loss of inflation momentum may help reduce concerns that the Fed isn’t moving fast enough to cool off a hot economy. Inflation is likely to hold near the Fed’s 2% target for the remainder of the year, with the economy running just hot enough to warrant two more rate hikes this year. That said, downside risks to the domestic and global outlook continue to materialize.  Although they have had limited impact thus far, things can quickly escalate. While the Iran sanctions act to elevate the risk of a trade war between the U.S. and its trade partners, all parties appear open to dialogue. Still, this decision adds further pressure on Europe and China to settle trade imbalances with the United States.

Fotios Raptis, Senior Economist | 416-982-2556

The start of May has been busy for investors with a mid-week Fed rate decision and plenty of economic data to sift through. Domestic data generally outperformed, sending the U.S. dollar and rates higher, but yields pulled back a touch towards Friday. Higher dollar and rates weighed on U.S. equities, while international stocks saw some upward movement on lower yields and exchange rates – related to somewhat weaker data.

International data this week revealed that economic momentum continued to slow in April. The most recent international PMIs softened somewhat, however much of the softness can likely be attributed to heightened trade uncertainty. Protectionist themes and tariffs have been making headlines on a regular basis, denting business confidence and stifling expansion plans. For instance, this week the Trump administration doubled down on demands for China to reduce its trade surplus with the U.S. by $200 billion.

Most critically, domestic businesses appear unable to escape the rising tide of trade protectionism. Both the manufacturing and non-manufacturing ISM indices pulled back 2 points apiece in April. However, they remain near cycle highs, and are indicative of ongoing healthy pace of growth.

mestic data confirms that growth remains solid despite the downside risks. Personal income rose by a healthy 0.3% in March, while consumer spending rose 0.4%, consistent with the narrative of tax cuts and rising jobs and wages motivating Americans to shop. A rebound in spending in the second quarter supports an outlook that sees economic activity expanding around 3%, a trend that we anticipate to hold through the end of the year.

The persistence of strong, above-trend growth is driving price pressures higher. Inflation strengthened in March, reaching 2% according to the PCE deflator (the Fed’s preferred measure). The core PCE deflator (which strips out the most volatile components) also strengthened to 1.9%, just a hair below the FOMC target of 2%. The Fed took notice of this data during their meeting this week. Although it kept rates on hold, some notable changes to the wording were made. All told, the Fed’s confidence regarding inflation and its outlook should provide it with the conviction to keep moving rates higher, assuming wage and prices rise as expected.

This morning’s payroll report for April was consistent with this view despite the headline miss. Although wage growth slowed a touch, the drop in the unemployment rate to a 17-year low of 3.9% suggests that wage and price pressures should continue to gradually build.

Ultimately, inflation holding near target is consistent with our call for two more rate hikes from the Fed this year, with the next hike likely coming in June. That said, it’s not out-of-the question that the Committee raises rates by another 75 basis points this year. This gradual pace of tightening should help minimize the risk of slowing activity too quickly and resulting in a recession, something the FOMC officials are keenly trying to avoid..

Michael Dolega, Senior Economist | 416-983-0500