Welcome to Soundbites – weekly insights on market trends, and investment strategies, brought to you by Investment Executive, and powered by Canada Life.

For today’s soundbites, we’re reviewing the year so far with Brent Joyce, investment strategist and vice-president with Mackenzie Investments. We talk about how the Canadian market is doing, where it should end up, and what the Bank of Canada’s priorities are likely to be for Q3 and Q4. We started by asking when we should expect to see the peak growth rate for 2021.

Brent Joyce (BJ): I would say we are either seeing that now, or over the next couple of months. Certainly, by the end of the third quarter, I would expect to see the growth rate peak. A lot of that is base effects from last year’s very depressed levels — they’re going to soften, but it is still a very supportive environment for risk assets and for capital markets. Words like ‘peak’ and ‘slowing’ doesn’t necessarily mean ‘shrinking.’ It’s the rate of change now that isn’t going to be as spectacularly strong, but it is still a growth environment for just about everything.

Is the market growth we’ve seen justified, or are people just excited about the end of the pandemic?

BJ: Is it justified? I’d say, in some respects, yes. There is a wave of spending coming. There is government non-pandemic spending that’s coming down the pipe on infrastructure and greening the economy. And then you’ve got the consumer. So, even though we’re past peak growth, looking forward, I’d say equity prices are certainly pricing in robust spending by households and governments. They’re looking for a rebuild on inventories. The cupboards are bare. These are all very much opportunities for the corporate sector to make money.

What are the risks to continued expansion?

BJ: We’re still worried about Covid. The pandemic’s not over and we have these variants of concern, so I would say that still is the number one risk. We see that as a tail risk. But then, more mainstream risks that we’re worried about: lots of attention on supply chain bottlenecks and delays, inflation spiking, we’re hearing lots about labour market shortages. But these really are good problems to have. They’re problems that capitalism can and does fix. They’re supply problems. They are signs of robust demand and recovery. And corporations are on this planet to tackle these problems.

His thoughts of inflation in the months ahead.

BJ: Inflation numbers are going higher than anything we’ve seen in a decade. But prices aren’t depressed everywhere, right? It’s really on the services side, and those areas of the economy in hospitality and travel and so on that were most especially hit. And then the opposite has been the case on the goods side. There has been strong demand for goods and so the prices there have already risen, and so we’re not going to see as big a base effect there. So, you put it all in the wash, and we do think that it should wash its way through. When we look at the math, it’s not a stretch to see headline inflation hit three and a half percent in September in Canada, but core inflation is, you know, where the Bank of Canada pays attention, that’s going to be smoother. The bank has wiggle room there with its inflation-targeting regime, the 1% to 3% band that’s well understood by the markets and the public, I think, at this point.

So, what about interest rates?

BJ: The big spike in the first quarter has gone a good piece to moving rates back into an equilibrium that’s commensurate with the growth path that’s happened in the economy. There has to be some relationship there, right, between GDP growth, inflation, and where bond yields sit. Toward the back half of the year, 10-year bond yields we do think will be moving toward 2% on both sides of the border. For two-year bonds, the story in Canada now is one that is largely getting close to our year-end target. We’ve seen a sharp move up just in the past couple of weeks. We’re now over 40 basis points or 0.4% on Canada two-year bonds. And that’s getting closer to pricing in a rate hike from the Bank of Canada at some point in 2022 which seems reasonable to us.

And finally, what he anticipates will be the Bank of Canada’s focus for the balance of the year.

BJ: I think it really is going to be housing, housing, housing. They believe that the housing market in Canada is going to cool off. There are very, very early signs that that may come to fruition. But if they’re wrong then they are in a real pickle. The other piece would be the Canadian dollar. They certainly were not too fussed about 83 cents on the Canadian dollar. But if it gets into the high 80s, I don’t think the Bank of Canada is going to like that. That would require them to have a response that’s somewhat dovish. But they might not have the luxury to do that if they’re trying to cool the housing market or if inflation continues to run fairly hot.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Brent Joyce, investment strategist and vice-president with Mackenzie Investments.

Visit InvestmentExecutive.com, where you can sign up for our AM newsletter. We’ll be back July 28th for another Soundbite.

Thanks for listening.

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