June Rate Cut Chances Fall in UK, Canada

Key Takeaways

• Inflation ticks up in Canada and the UK
• U.S. economy still looks robust
• Bond yields rise on U.S. budget bill concerns 

On the newest edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, unpacked the latest UK and Canadian inflation numbers. He also weighed in on recession risks and recent market performance. 

Lin said core inflation in both the United Kingdom and Canada topped consensus expectations in April. While acknowledging the latest numbers were a setback for both countries, he stressed the path to lowering inflation is never a linear one.

“There’s always going to be twists and turns along the way, and it might take some time for the Bank of England and the Bank of Canada to bring inflation down to 2%. But I do think both banks will get there over the medium term,” he said.

Markets have reduced the chances for rate cuts in the UK and Canada next month, but Lin expects more will be needed later in the year. A weak economic environment prompted the Bank of Canada to be the most aggressive G-7 central bank this rate-cutting cycle, with officials slashing interest rates by a cumulative 2.25% before pausing in April. Although these interest rate cuts have helped Canada avoid an official recession so far, more cuts later this year are likely needed due to the ongoing fragility in the economy.

“With the unemployment rate hovering near 7%, the risk of a recession in Canada is above average and higher than in the United States,” Lin remarked. 

Next, Lin turned to preliminary PMI (purchasing managers’ index) readings, which are typically leading economic indicators. In the U.S., preliminary PMIs for May pointed to resilience in both the manufacturing and services sectors. “Both readings were above 50, which indicates expansionary conditions,” he said.

The story was different in Europe, with the preliminary numbers suggesting contractionary conditions. This was largely driven by softer-than-expected data in the services industry, Lin remarked.

Overall, he said the U.S. is still probably headed for a soft landing, while recession risks look a little higher in other countries. On the other hand, U.S. stocks continue to appear a little more expensive than non-U.S. stocks, Lin noted.

“Balancing these two factors out, we think maintaining a neutral asset allocation across regions makes the most sense right now,” he stated. 

Lin noted U.S. stocks have fully recovered from their April slide and are now within striking distance of all-time highs. On the flip side, U.S. bond yields have risen on concerns that the new budget bill could add to the federal deficit.

“In this market environment, we’re neutral on both U.S. equities and bonds, especially due to the elevated macroeconomic uncertainty,” Lin said. He added that a key watchpoint moving forward will be whether more trade deals are reached as President Trump’s 90-day pause on reciprocal tariffs comes closer to expiring.