Markets price in strong odds of June BoC rate cut following surprisingly weak U.S. jobs report

A much-weaker-than-expected U.S. jobs report has market participants rethinking the odds of a Bank of Canada interest rate cut at its next policy meeting in June. And those odds have gone up considerably.

Implied interest rate probabilities in swaps markets now suggest about a 78 per cent probability that the Bank of Canada will cut its key overnight lending rate on June 5. Just prior to this morning’s U.S jobs figures, those odds were less than 65 per cent. The weak labour report has market participants pricing in higher odds that the U.S. Federal Reserve will begin cutting its own key lending rate in the near future. That has a knock-on effect on where monetary policy is heading in Canada, since the two economies and financial markets are so closely linked.

The following table details how swaps markets are pricing in further moves in the Bank of Canada overnight rate, according to Refinitiv Eikon data minutes after the U.S. jobs data were released. The current Bank of Canada overnight rate is 5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.

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