Barlow’s Research Roundup: BMO strategist predicts ‘rough ride’ ahead for Canada

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Cyclical pressure on inflation

BMO rates and macro strategist Benjamin Reitzes’s weekly column was ominously titled Rough ride for Canada,

“The economy remains in a challenging position. On the bright side, it also makes the Bank of Canada less likely to raise rates. The ongoing cloud of uncertainty around the outlook for trade/ tariffs, coupled with a spike in energy prices, is keeping the broader economy on the defensive. Growth has been uneven over the past year, and is expected to hover around 1 per cent through at least the middle of this year. We’ll likely need to see some progress on a trade deal or other positive catalyst (e.g., major projects) before the outlook turns more positive … The best explanation for the tamer inflation backdrop is that Canada has been operating with excess supply for about two years, which is driving disinflationary pressure. That cyclical downward pressure on inflation appears to be sufficient to overwhelm any broad upward pressure from the spike in energy prices… at least so far. There’s likely a limit there, but consumers aren’t well positioned to shell out extra money for their various goods and services … Retail sales saw a solid gain in nominal terms, but higher gas prices fuelled the move, as volumes dipped. Consumer spending has been uneven for over a year, and that’s likely to persist until economic prospects improve. The other notable data point was the usually overlooked CFIB Business Barometer, which provides a pulse on small business sentiment. After a surprisingly solid run since late last year, the index plunged 11.7 pts in May, as the spike in fuel prices and added layer of uncertainty around the outlook weighed heavily”

Markets are wrong this time

Citi economist Veronica Clark believes the market-implied forecast for Bank of Canada rates is way wrong,

“Markets over the last two months have implicitly delivered up to 50bp of rate hikes for an economy experiencing sub-target core inflation, unemployment stuck at 6.5-7 per cent, and growth running below potential for about two years. Core inflation (CPI-trim and CPI-median) on an annual basis returned to 2 per cent in April data and has been below 2 per cent on a 3-month basis for the last five months. While there remain some near-term risks of stickier inflation given higher energy costs and elevated business price plans, recent months of weaker inflation would help keep annual core inflation from rising too substantially. And ultimately, demand metrics have proven to be a better medium-term indicator for the path of core inflation and remain very weak. We continue to think that not only are rate hikes overpriced, but that BoC officials will still cut rates to 1.75 per cent later this year”

BMO chief economist Doug Porter added that “it would be “crazy” for the Bank of Canada to embark on consecutive rate hikes with core inflation in full retreat and USMCA uncertainty heavily clouding the outlook” in his weekly report.

Copper demand to surge

BofA Securities’ biggest takeaway from their global mining conference in Miami last week was the positive outlook for copper demand and prices,

“The Miners’ share of the MSCI All-world index remains low. Similarly, while miners and copper have mirrored the performance of semi-conductor companies, there has been a wide differential, even though both are essential for data centres/ AI. Being unloved was one factor, miners had tightened the belt and the lack of capex in the past decade is a key reason, supply is so constrained now for a range of commodities … As the global economy is changing, so too are the miners, reflected in BHP becoming the biggest copper producer and the declining importance of iron ore for Rio Tinto. Accompanying that, miners highlighted the constructive demand outlook, with South 32 expecting a CAGR in copper consumption of 2.6 per cent between 2025 and 2035, compared to 2.1 per cent in the past decade … Supply headwinds persist, with Anglo American and Codelco highlighting persistent increases in capex intensities. Similarly, Cochilco expects a 2.0-per-cent decline in Chilean copper production in 2026 on lower ore grades, scheduled maintenance and operational constraints. Miners also continue to face disruptions, with the three largest copper mines delivering around 660kt fewer units since 2024; Ivanhoe and First Quantum are working on restarting operations at Cobre Panama and Kamoa Kakula, but there is uncertainty over the exact timeline and only a gradual ramp-up to previous nameplate capacity, respectively’

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