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Fundamental Perspective: An economic analysis considering the overall state of the economy, industry trends, and influences propelling the market.
Key Message:
Expectations are for the economy and market to experience continued growth through the rest of this year and likely into 2022. The main factors threatening this outlook continue to be the pandemic, financial stimulus, and interest rates.  
Inflation and interest rates have been a main topic of interest in news outlets lately and for good reason. To support your understanding, we want to highlight the relationship between inflation and interest rates.
Inflation refers to a general increase in price levels (costs of goods), which is primarily caused by an increase in the quantity of money (ex. financial stimulus or faster growth in money than productivity in the economy).
  • Central banks today primarily use inflation targeting in order to keep economic growth steady and prices stable.
  • With a 2-3% inflation target, if prices rise faster than the target, central banks tighten monetary policy (increasing interest rates) to try to restore that target.
  • Raising interest rates and /or restricting the money supply are both contractionary monetary policies designed to lower inflation. Higher interest rates make borrowing more expensive, curtailing both consumption and investment.
  • As interest rates increase, consumers have less discretionary money to spend and investing in fixed income becomes more attractive causing money to move away from the equity market, both of which hurt the economy and market. More importantly, higher interest rates can slow the economy dramatically if they rise too fast making the cost of borrowing more expensive, and more difficult for consumers, corporations and governments to repay the large amount of debt that has been incurred since the bottom of the last recession.
Due to the significant impact of raising interest rates, central banks are very particular about both the timing and size of change. Historically, the decision to increase rates is done at a time when the economy has enough stability to handle the change, and the increase is done slowly. As this decision can have a dramatic impact, the central banks are very cautious about their communication around such decisions. It is typical that we start to see the narrative change slowly as the decision to increase rates approaches, allowing the economy and market to start reacting in advance.  
As of right now, communication is very clear that there is no intention to increase interest rates until the middle of 2022. This paves the way for more economic and market growth throughout the rest of 2021 and into 2022. Increasing interest rates is widely anticipated to be a leading indicator and catalyst for significant downward pressure on the market.
Interest Rate Outlook for Canada:
The Canadian Central Bank’s inflation measure as of April 2021 was 3.4%, which is beyond the target rate. However, this was expected, as noted in the last Central Bank announcement;
“Over the next few months, inflation is expected to rise temporarily to around the top of the 1-3 percent inflation-control range. This is largely the result of base-year effects—year-over-year CPI inflation is higher because prices of some goods and services fell sharply at the start of the pandemic... As slack is absorbed, inflation should return to 2 per cent on a sustained basis sometime in the second half of 2022... Even as economic prospects improve, the Governing Council judges that there is still considerable excess capacity, and the recovery continues to require extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. Based on the Bank’s latest projection, this is now expected to happen sometime in the second half of 2022.”
June 9th 2021 will be the next Canadian Central Bank announcement on interest rates and Monetary Policy.
Interest Rate Outlook for the U.S.:
The U.S. latest inflation measure was 4.16%, which was not a concern for the Federal Reserve as of their April 2021 meeting;
“The path of the economy will depend significantly on the course of the virus, including progress on vaccinations... The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time… (with past inflation being low, they have room to let inflation run at higher levels for a while)... The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate… The committee expects it will be appropriate to maintain this target range until labor market conditions have reached [higher levels]”.
June 15th & 16th will be the next U Federal Reserve meeting.

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