InfraCap Market Insight, June 5, 2024 ~ The Bank of Canada lowered its rate target to 4.75% from 5.0% and indicated that more rate cuts are likely. The central bank indicated that inflation was moderating and cited a core CPI of 2.75% as evidence, which is in line with US inflation. The Canadian dollar was weak today and has declined over 4% this year vs. the dollar. The Canadian cut precedes an almost certain cut from the ECB tomorrow. Europe is the most important policy region in the world with almost a 30% share of the global monetary base vs. the US at only 23%.
We expect that the global rate cuts will cause a global rally in long-term rates as central banks must inject liquidity into the banking system to lower rates, and liquidity injections almost always cause capital markets to rally. In addition, we expect cuts outside of the US to cause the dollar to rally and put further pressure on the Fed to cut rates. As the dollar appreciates net imports rise, which slows GDP growth as we saw from last quarter's weak GDP print of 1.3%.
The Fed's policy framework is flawed as it follows a rigid 2% inflation target tied to a highly flawed core PCE index. We expect the Fed to cut as the US economy is clearly slowing with signs that the critical housing sector is faltering, which should cause a deceleration in the labor market. The slowing labor market is likely to cause the Fed to cut in July or September, as the Fed follows the discredited Phillips Curve theory of inflation, which posits that inflation is caused by tight labor markets, not excessive money supply growth.
We reiterate our 5,750 target on the S&P with risk mostly to the upside. We are likely to raise are target as inflation and labor market data come in over the quarter that are likely to validate an eminent Fed rate cut. will force the Fed to cut rates by September.
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