The Week Ahead (LULU, GTLB, CRWD and NIO Earnings; BoC Interest Rate Decision)

GitLab will report on Monday. Investors are waiting to see how the company will perform because some in the enterprise software sector see issues with sales.

Everything seems aligned for the Bank of Canada to commence a cycle of policy easing, with expectations to trim the overnight rate by 25 basis points down to 4.75% this coming Wednesday. This anticipated move mirrors recent rate reductions by the Swiss National Bank and Sweden's Riksbank and occurs after a year-long stint of the overnight rate being fixed at a constrictive 5%, with the last increment dating back to July 2023.

The Bank of Canada is on track to initiate its first rate cut on Wednesday. Conditions seem perfectly arranged for the central bank to begin its policy loosening cycle, with an anticipated decrease in the overnight rate by 0.25% to 4.75% on Wednesday. This anticipated action is in step with recent rate slashes by the Swiss National Bank and Sweden's central bank, Riksbank, and follows a period where the overnight rate was maintained at a tight 5% for roughly a year, with the most recent hike in July 2023.

Mounting evidence suggests that the current elevated interest rates are no longer necessary. Canada's economic growth has notably slowed, as evidenced by a decline in GDP per capita in the first quarter of the year. Inflationary pressures have also diminished, with the three-month growth rate of the Bank of Canada's preferred median and trim core consumer price index measures falling below the 2% target in April. The slow economic environment is bolstering confidence that inflation will continue to trend downward, despite a resurgence in the robust U.S. economy. During the last interest rate announcement, Governor Tiff Macklem acknowledged that the prerequisites for reducing interest rates seemed to be met, but he indicated a desire for more proof of declining inflationary pressures. Subsequent consumer price index reports have consistently come in lower than expected, providing the Bank with sufficient justification for a rate cut.

However, despite a relatively apparent rationale for an interest rate reduction in Canada, the Bank of Canada is expected to remain wary about the rate at which future cuts might occur. Governor Macklem has highlighted potential areas where inflationary pressures might reemerge, such as rising energy prices due to global geopolitical tensions, or accelerated increases in wages and housing prices within Canada.

Current indicators show little sign of domestic inflationary pressures picking up again. The labor market has cooled during the spring, with a slowdown in hiring demand. Predictions for the upcoming labor market report suggest a modest increase in employment by 15,000 and a slight uptick in unemployment to 6.2% in May. Meanwhile, the housing market remains subdued as high borrowing costs and lack of affordability deter buyers. With these risks in mind, the Bank of Canada is likely to propose a cautious and incremental approach to any further easing. Nonetheless, projections indicate that a weakening economy will continue to drive down inflationary pressures in Canada. Based on this outlook, an anticipation of a total of 1% in interest rate reductions is forecasted for this year, potentially bringing the overnight rate to a still constricted 4% by the end of 2024.