What the most recent data shows

DR: On the Canada side, we are definitely seeing a slowing in the labour market. We’ve got the unemployment rate at above 7% nationally. And I think that is something that people are going to be pretty concerned about here for the next little bit. Growth in Canada is also pretty tepid. The Q2 data, which is the most recent data that we have, was quite weak. And Q3 looks a little bit better but it’s definitely not going to be a complete boomerang rebound. The data seem to be suggesting aggregate growth in Canada is slowing, and I don’t really expect that to pick up for a bit. On the U.S. side, [the] labour market also continues to be weak. When you look at private payrolls, they’re quite slow. The quits rate’s a lot lower. The hiring rate’s a lot lower. Even ADP, on the private payroll side, is quite a bit lower. So the data in North America is definitely slowing, and I think investors are starting to think about what that means for various asset classes.

What he’s expecting from the Bank of Canada

DR: So I think the Bank of Canada will cut rates at its next meeting by 25 basis points. So effectively going back to back, having cut rates in September by 25 and then another 25. The market, the last time I looked, was not completely priced for 25 but was leaning that way. The risk, to me, I think beyond that are for more cuts, as opposed to nothing else. I think the risk is that the bank will not be done.

What has influenced fixed income this year

DR: I think markets have generally played out as expected. Where the challenge has been, I think, has clearly been around the tariffs. Obviously, the tariff tantrum was very significant. I didn’t expect it to get quite that bad that quickly. And although I expected all markets really to sell off around Liberation Day, I didn’t expect it to go quite that far. And markets bounced back relatively quickly thereafter. I’m a little bit surprised that there hasn’t been more progress on Canada tariffs. I would have expected maybe having a bit more of a concrete deal on some of these bilateral issues. But in terms of bond markets, I think generally here things have been relatively well behaved, particularly in North America.

Central bank independence

DR: You know, I think the central bank independence story is a thematic that we’re going to be living with for a number of years. And that’s not only a U.S. story, but I think it’s actually growing on a global side. You just saw the election of the new LDP leader in Japan, and she is very focused on making sure that the government has a very strong say in monetary policy. It just underscores where I think the world is moving. We even saw Liz Truss, former U.K. PM, a month or two ago, also suggest that she thinks that the Bank of England is going to become more intertwined with government policy. On the Fed side, as Powell’s term as chair comes up, there will be concerns around who is going to be there, what is the policy going to be, and what is that interference from the government, and is there less independence on the Fed? So this is a significant topic. This is something that’s going to be front and center here for investors for the next, at least the next year.

Opportunities for investors

DR: I have the most confidence around being long the front end of the Canadian curve, kind of the two-, three-, five-year space of the Canadian curve. And the reason I say that is because I think that the housing market is going to see some more malaise, unfortunately, in the year, year-and-a-half ahead. I think the labour market’s unfortunately going to see a little bit more malaise, possibly on the back of the real estate side. And the immigration story is probably not going to change here anytime soon. So if the economy evolves as I expect that it will, the bank would probably need to get into accommodative territory, below 2.25%. And the market’s not pricing that. And if the bank does do that, then the front end of the Canadian curve looks extremely attractive because it’s not priced. It probably won’t be great from an economy perspective. But from a markets perspective, there are definitely opportunities, I think, in the front end of the short-term Canadian sovereign curve of the fixed-income market.

And finally, what should fixed-income investors bear in mind as we close out the year?

DR: I think the bottom line is that we could be seeing slightly different pathways for the Canadian curve and the U.S. curve. I think the Canadian curve could steepen, and the U.S. curve could flatten. Generally, but not always, fixed-income markets kind of move in tandem. And there’s a little bit of a spread and a little bit of a beta. But we could be seeing, over the next three or six months, slightly different curve shapes between Canada and the U.S. And I think investors should just keep that in mind as we move forward.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Dustin Reid of Mackenzie Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

**

Go back to the article.