June Rate Cut Chances Fall in UK, Canada

Transcript

Hello everyone. Welcome to market weekend review for the week ending May 23rd, 2025. My name is Bean Lynn. I'm a senior investment strategist at head of Canadian strategy here at Russell Investments. Today we'll be talking about three major topics. First, we'll talk about Canadian and UK inflation. Second, we'll talk about the flash PMIs. Finally, we'll wrap up with our discussion of some watch points for both equities and fixed income going forward. So, let's get started. In terms of inflation, we got inflation data for both Canada and the United Kingdom. And in both markets, core inflation came in above consensus expectations. And although this was a bit of a setback, it is important to remember that when it comes to the central bank's inflation fight, this was never going to be a linear path. There was always inherently going to be some twists and turns along the way, but over the medium-term, we do expect that both central banks will likely be able to bring inflation down to their 2% target, but it might take some time before inflation ultimately reaches that level. Now in terms of the implications onto central bank actions, we did see in the aftermath of those reports, the markets were reducing their probabilities of rate cuts for the month of June for both the Bank of Canada and the Bank of England. However, even if those two central banks were to stay on hold in the month of June, we do think that more rate cuts this year are likely needed. For the Bank of England, we expect that over time they will likely take interest rates down to a more neutral level. Meanwhile, in terms of the Bank of Canada, interest rates right now are probably already at that neutral level. However, we still expect that later this year they'll need to do more rate cuts because when we think about the Canadian labor market with the unemployment rate near 7%, the Canadian labor market is already quite fragile and the risk of a recession in Canada is above average and is probably higher than the risk of a recession in the United States. And so against that backdrop, we do think that eventually the Bank of Canada will likely need to continue its rate cutting cycle even if it doesn't cut rates this time around. Next, let's talk about flash PMIs. Flash PMIs are an example of a leading economic indicator. So, these indicators give us some more insights about the state of economy ahead of the insights that we can glean from other economic indicators. And in terms of the US flash PMIs, they pointed to signs of robustness and resilience in the US economy on both the manufacturing side and on the services side. We had a flash PMI that came in above 50. So was in expansionary territory. However, when it comes to Europe, we saw a little bit of a different story there where European flash PMIs overall were actually contractionary driven by some softer thanex expected PMI data on the services side. Now ultimately in terms of our views on cyclical risks, we continue to think that the US most likely is headed for a soft landing, but recession risks in the US are still somewhat above average. Meanwhile, we expect that outside of the US there might be higher cyclical risks than within the US. However, when it comes to relative equity market valuations, we continue to think that stocks in the US are a little bit more expensive than stocks outside of the US. And so, we balance those two factors out. We think that maintaining a neutral asset allocation across regions is probably a more beneficial choice than making a big regional tactical bet at this point in time. And finally, we'll wrap up with a discussion of some of our watch points on both equities and fixed income. What we've seen is that the equity markets are now coming very close to their all-time highs in the US with the S&P 500 trading around 5,800 to 5,900. So coming up within striking distance of that all-time high. Meanwhile, on the fixed income side of things, we have seen bond yields move back up in the US. And one of the reasons for that move upward in bond yields is because there's been more questions around the US budget bill and to what extent that budget bill might potentially add to the US deficit. In terms of our views on both equities and bonds at the moment though, we continue to be neutral on that risk on riskoff decision. We think that at this point in time, given the elevated macroeconomic uncertainty, staying close to that strategic asset allocation might still be the best course of action. It's also important to watch over the coming weeks as we get closer to the expiration of the 90-day pause on tariffs to what extent we see more trade deals potentially get worked out between different nations. That's all for this week. Thanks for tuning in. Hi, I'm Sophie Antal, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

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.

Inflation Nations

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.

Split Stats

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.

Staying Neutral

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.

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