'We're going to come into a period over the summer where inflation expectations will rise': Davis

So, the Bank of Canada is widely

expected to keep its benchmark interest

rate unchanged this morning. We're close

to that announcement, the interest rate

announcement. We're joined by Earl Davis

now, head of fixed income and money

markets at Beimo Global Asset

Management. Earl, thanks for joining us.

You say that there are distinct signs of

weakness in the Canadian economy. Uh,

tell us the major one or two phenomena

that you're seeing.

>> Yeah, well, the major one is housing

market. we see it continuing to decline

and and getting weaker. There's no

expectation for that to turn around. So

that is the distinct sign for me.

Although the Bank of Canada does not

directly focus on the housing market,

it's an important indicator of future

demand um and saying whether the excess

supply will be s will get wider or

whether it will narrow. And that's

that's a a big component in uh future ex

expectations for uh uh easing from from

our perspective.

But I I know this is not a new theme,

but when you get geopolitical events

like the Gulf pushing up energy costs or

the tariff war, lowering interest rates

aren't always the tool to help.

>> Uh no, they're not the tool to help.

That that is for sure because they could

stoke inflation. So it depends. And then

so let's back up. The market right now

is actually uh anticipating two hikes in

2026. We push back uh against that. We

think there's a a chance of an ease,

although our confidence is getting less

so in that. It's more likely going to be

on hold for exactly the reasons that you

bring up inflation. Plus, there's other

aspects that are, I would say,

positively impacting Canada. One

actually is higher oil is uh increases

actually higher oil price increases the

GDP of Canada. We saw that in the

economic update yesterday, a lower

deficit than anticipated because of a

windfall, which means there's room for

more fiscal stimulus, which could be the

substitute for easing. So yesterday's

economic update actually reduces our

confidence in an ease because that is an

ease when you're putting back money into

the economy. So uh the other thing too

is the US actually we still do 70% of

our trade in the US and the numbers year

to date have been surprisingly strong.

So that means we benefit from that as

well. So there's a number of things

taken away from our confidence in an

ease but we definitely think it's a hold

this year. We think the chances of of a

hike are are not what the market thinks

which is 100% of two hikes this year is

what the market's anticipating. So one

other thing it'll be interesting to see

if the Bank of Canada pushes back on

that in their statement. That's one of

the things we're looking at as

investors. Do they push back on what the

market is thinking or do they kind of

allude to, you know what, growth is

stronger, inflation higher in the MPR,

which means um they're more thinking

what the market's thinking. So that

today's statement is very important.

>> So the market is is generally

pessimistic, you mean, on Canadian

growth, but the Bank of Canada may say,

"Hey, things aren't that bad."

Uh, no. They're specifically pessimistic

on inflation.

>> Oh.

>> Um, in regards to higher inflation and

it is the Bank of Canada's mandate to

fight inflation or to maintain inflation

at the 2% target,

>> which the core reading from last month

was 1.9. But the challenge is and this

is where the risk is. It's not oil

price. It's not gas price. It's the

extension or a longer duration war which

then flows into your packaging through

plastics and petrochemicals flows into

your transports for all goods in regards

to their higher oil costs or gas costs

and jet fuel being passed on to us

translate into higher fertilizer costs

which is higher food again higher helium

costs which goes into kit. So the longer

this goes on, the breadth of inflation

expands, the possibility for inflation

expectations to go higher increases

dramatically. That is what central

banks, especially infl on ones with

inflation mandates, will push against.

So we will see whether they kind of

allude to a bit more hawkishness or they

push back against it. It's very

important. We believe they'll push back

against it just to keep all options open

because Koosma hasn't been settled yet.

So that's that's the big big wild card

in the room.

>> You do expect uh of course all it all

may change at 9:45 uh but you do expect

one more interest rate cut in Canada

this year.

>> Yeah. Just from the housing perspective.

So and the sequencing of the way things

go. Yes. Now we do think we're going to

come into a period over the summer where

inflation expectations will rise. So you

could discount the full two hikes and

maybe possibly more. Um but after the

inflation expectations rise and you get

this broaden them of inflation, you get

demand destruction.

So it's the demand destruction which we

think will be a Q4 story. So it's not

going to be for over the next four

months or five months. But a Q4 story

could be demand destruction and if there

is demand destruction not just

domestically but globally, you could see

an ease come in to help uh alleviate

help increase demand.

>> I I just wanted to loop back to

something there. the impact of higher

oil prices on the Canadian economy.

I know there's multiple factors and sure

higher crude prices help our terms of

trade and our exports, but are they they

must be a significant drag in that we

bring in we import oil to central Canada

where most of the population is.

>> Yeah, you know what? There'd be winners

and losers within Canada. You're totally

right within Canada. But external to

Canada, we're a winner. So, it's more

how do you distribute um how do you

slice the pieces of the pie? The pie is

definitely bigger from a Canadian

perspective with uh higher oil prices

that is undeniable. There's been a lot

of studies that say actually Canada,

developed market countries including the

US benefits the most. Um having said

that then it's a government's job by

definition to redistribute and that's

what we'll see. So you are totally

correct in regards to parts of Canada

but as a whole Canada benefits from this

>> right. So the Bank of Canada

>> Bank of Canada breaking news keeping the

target rate unchanged at 2.25%.

There is a look at the Canadian dollar

and uh so they're holding it. they

expect inflation will peak in April and

uh so that's that's their hope obviously

that they do feel that this uh this

surge in uh energy costs has been

contained the Canadian dollar weakening

as we can see after the bank of Canada

stuck uh with rates um so the bank of

Canada says growth did resume in Canada

after a decline in the fourth quarter

it's now looking for annualized growth

growth of 1.5% in Q1 and Q2.

Um it's slightly upping the growth

forecast for the whole year 2026 to 1.2%

and sees it um uh rising a little bit to

1.6% in 2027.

Uh but right now they're saying GDP

outlook little change because of the

Middle East conflict and inflation

expected to peak at around 3% in April.

Earl, I know you've had no time to to

look at the bank account commentary. Um

but it it sounds like they're they're

not sounding the alarm on inflation in

any way.

>> Correct. I think you've highlight I

haven't looked through it but I believe

you did highlight the most important

statement in there that they believe uh

inflation will peak in April that that

those are significant words. That's the