Launch Pad

The waiting game. The BOC will meet tomorrow with the consensus view that the central bank will leave its overnight rate unchanged at 2.25% and likely keep rates steady through the remainder of the year. While headline inflation accelerated to 2.8% in April, largely due to higher energy prices linked to the Iran war, core inflation measures continued to ease, suggesting underlying demand pressures remain controlled. Recent economic data present a mixed picture with Canada’s economy entering a technical recession after two consecutive quarters of contraction, but May employment rose by 87,800 jobs and the unemployment rate fell to 6.6%, indicating some resilience in the labour  market. Most economists believe the BoC can afford to remain patient because inflation remains  within its 1%–3% target range and the economy is still operating below full capacity. Looking ahead, policymakers will need to balance the risk of higher inflation from elevated oil prices against ongoing economic weakness and uncertainty surrounding the upcoming renewal of the CUSMA trade agreement. 

Speaking of which, Canada, the U.S. and Mexico are expected to miss the July 1 deadline to renew the CUSMA trade agreement, setting the stage for potentially years of negotiations and ongoing uncertainty around North American trade. It’s worth mentioning, however, that missing the deadline does not terminate the agreement. CUSMA would remain in force until at least 2036 while entering annual review periods. The Trump administration appears unwilling to grant an automatic extension and instead wants to use the review process to negotiate changes, mostly around automotive manufacturing, where it is pushing for vehicles to contain at least 50% U.S. content to qualify for tariff-free treatment. Canada and Mexico are also seeking relief from tariffs on products such as steel, aluminum, autos, and lumber, while other longstanding issues, including Canada’s dairy system and defense procurement, remain points of contention. For Canada, the biggest concern is that prolonged negotiations could discourage investment and prolong trade uncertainty at a time when the economy is already showing some signs of weakness. While officials from all three countries continue to show optimism around reaching agreements, the most likely outcome appears to be a lengthy period of negotiations. 

No more waiting. As investors prepare for the first interest-rate hike from the ECB since 2023 this week, sector selection is becoming even more important. Markets have priced in a 25 bps, with at least two hikes expected by year-end as policymakers respond to inflation pressures linked to higher energy prices. Historically, banks and energy companies tend to benefit from rising rates and higher bond yields, while utilities, real estate, and other bond-sensitive sectors often struggle. Analysts also see challenges for consumer-facing industries such as luxury goods and autos, where higher borrowing costs can weigh on demand. While European equities remain supported by themes such as AI, electrification, and industrial investment, valuations are significantly higher than during the last ECB hiking cycle, making markets more vulnerable if bond yields continue rising. As a result, many strategists favour selective exposure to financials, energy, tech, and industrials, while remaining  cautious on rate-sensitive sectors such as real estate and utilities. 

Asset-backed securities remain an attractive area within fixed income according to some strategists, offering strong carry and relatively low duration in an environment where inflation risks and potential Fed tightening remain concerns.  The sector has consistently outperformed Treasuries this year, helped by stable labour market conditions, strong credit enhancement, and favourable supply-demand dynamics as issuance in traditional ABS sectors such as auto loans and credit cards remains quiet. ABS also offers one of the highest yields per unit of duration among investment-grade fixed-income sectors and has historically held up well during periods of market volatility and economic uncertainty. While valuations are not especially cheap, the combination of attractive income, defensive characteristics, and relatively low exposure to broader market shocks makes ABS an area of interest for some investors. 

Is cash king? With increased volatility in the markets (even as stocks hover around record highs), investors continue to pour cash into some of the safest assets available. Money-market funds in the U.S. now hold a record $8.29 trillion after attracting more than $1 trillion of inflows last year. Investors have embraced what is now coined the “T-bill and chill” strategy, earning attractive yields while avoiding market volatility as many funds yield around 3.5% south of the border these days. The trend reflects growing uncertainty around inflation, geopolitical tensions, and interest rates, with both retail and institutional investors preferring liquidity and flexibility over chasing higher returns. Despite repeated predictions that falling interest rates would trigger a massive rotation out of money-market funds and into risk assets, assets have continued to grow, suggesting investors view cash not as a temporary parking place but as a legitimate long-term portfolio allocation in an uncertain environment. 

Can they handle the heat? This year’s FIFA World Cup is facing scrutiny over heat-related risks, with researchers warning that temperature and humidity could become a significant competitive factor throughout the tournament. Analysis which measures the combined effects of heat and humidity on the body, suggests that teams such as Tunisia, France, Ghana, Ecuador, and Iraq could face some of the most challenging conditions during the group stage, while several knockout-stage matches are scheduled in locations where heat stress may approach or exceed levels at which player unions recommend postponing games. Scientists argue that prolonged exposure to high temperatures can reduce running intensity, explosive movements, passing quality, recovery rates, and overall performance, while also increasing the risk of dehydration and heat-related illness. The temperature for Canada’s opening match this Friday at Toronto Stadium is currently forecasted to be in the mid 30s with humidity. Well, at least FIFA reversed their water bottle policy and is now allowing disposable water bottles into stadiums.  

The crop and fertilizer markets have been upended with the U.S.-Iran war, but as peace talks continue the war risk premium looks to be quickly declining as fears of prolonged supply disruptions fade, easing one of the biggest threats to food inflation. Prices of urea, one of the world’s most important crop nutrients, have plunged more than -30% since mid-April, wiping out the gains triggered by the conflict. This is pushing down prices of corn, wheat and other farm products, with the Bloomberg Agriculture Spot Index tracking 10 of the world’s most-traded crops falling to its lowest level since March 5 on Friday. The decline may curb farm input costs and slow the pace of food inflation, but experts caution that energy prices remain elevated, while fertilizer is still sensitive to flare-ups in Middle East tensions.