TD Securities analysts provided their outlooks for both the United States Federal Reserve (Fed) and the Bank of Canada (BoC) in the context of a data-heavy week and ongoing geopolitical tensions, particularly involving Iran and their impact on energy prices. For the US, economists Oscar Munoz and Eli Nir anticipate a normalization in labor data, projecting nonfarm payrolls to increase by 80,000, with 85,000 private sector gains offset by 5,000 government job losses. The unemployment rate is expected to stabilize at 4.3%, and average hourly earnings are forecasted to remain modest at 0.2% month-over-month, with the year-over-year figure rising to 3.7% [1]. The ISM Services PMI is expected to edge down to 53.7, reflecting the drag from higher energy prices, while JOLTS and Michigan sentiment are seen softening only slightly [1].
The macroeconomic backdrop is shaped by the Iran conflict and elevated energy prices, but recent US GDP and PCE data indicate enough resilience for the Fed to maintain a patient stance. Q1 GDP rebounded due to the reversal of the government shutdown and stronger underlying activity, though consumption moderated and fixed investment was buoyed by artificial intelligence-related spending [1].
For Canada, TD Securities strategists Robert Both and Emma Lawrence expect the BoC to keep the Overnight Rate at 2.25% through 2026, with a return to the neutral rate of 2.75% in early 2027 via two 25 basis point hikes in January and March [2]. The BoC's latest policy statement was slightly dovish, warning that deteriorating trade conditions could prompt further rate cuts, while escalating geopolitical risks could necessitate consecutive rate increases. Markets responded by pricing in more aggressive hikes [2].
Higher oil prices, attributed to US strikes on Iran and subsequent threats to global crude supply, are seen as a material inflation shock. However, TD Securities believes the BoC can remain patient, as well-anchored inflation expectations, lower inflation breadth, and muted core inflation momentum allow policymakers to look through stronger headline CPI. Inflation is expected to peak around 3% in Q2, above the BoC's April Monetary Policy Report projections [2].
Both central banks are portrayed as maintaining a cautious and patient approach in the face of geopolitical uncertainty and inflationary pressures, with the Fed supported by resilient economic data and the BoC relying on stable inflation expectations and core momentum.
CONCLUSION
TD Securities expects both the Fed and BoC to remain patient despite inflation shocks from higher energy prices and ongoing geopolitical tensions. The Fed is supported by resilient US economic data, while the BoC is seen holding rates steady until 2027, with only gradual hikes anticipated. Market participants are responding to the nuanced policy signals, but no immediate drastic moves are expected from either central bank.