The Week Ahead (US Major Banks' Earnings, Google Cloud Next 2024; BoC Interest Rate Decision and US CPI in Focus)

The Bank of Canada is expectedted to leave interest rates unchanged for the sixth time in a row on Wednesday. The policy statement is likely to be phrased flexibly regarding the duration of current interest rates before pivoting to cuts.

A small drop in loan activity may take a bite out of profits, while a rise in interest rates may impact net interest income for banks, as they pay out more money to deposit holders. Higher interest rates also push down the value of banks' debt securities, which may also weigh.

The environment for the big banks remains no less complex than it has been in the past year, with both positive and negative factors to consider.

The latest jobs report shows signs of robust economic activity in the U.S. that will benefit banks, expectations for interest-rate cuts that fueled a rally in bank stocks earlier this year have now dimmed.

In Canada, recent economic indicators have presented a mixed picture since the last decision on interest rates. While the early 2024 GDP growth has exceeded the Bank of Canada's (BoC) January forecast with a robust 0.5% increase in the first quarter, this comes after a period of weaker performance. Specifically, GDP per person declined for six straight quarters to Q4 in 2023. Additionally, the labor market has shown signs of weakening, with the unemployment rate climbing to 6.1% in March coupled with a decrease in job vacancies. Furthermore, there has been a notable rise in business bankruptcies, debt service costs are eating into household spending power, and wage growth appears to be slowing down.

For the BoC, however, the most critical development has been the improvement in inflation statistics. Inflation has remained under the upper limit of the central bank's target range of 1% to 3% for the second consecutive month as of February. The three-month rolling average of the BoC's preferred core inflation measures—median and trim—slowed to an annualized rate of 2.2%. The Q1 Business Outlook Survey indicated that businesses anticipate inflation will continue to decline, with evidence that their pricing strategies are returning to normal. The resilience shown in the early-2024 GDP figures affords the BoC the opportunity to maintain current interest rates for now. However, considering the softening seen in most other economic data, the baseline outlook suggests that the BoC might start considering rate cuts around the middle of the year, according to RBC analysts.

In US, RBC expects a tick higher in year-over-year price growth to 3.5% (from 3.2% in February) but driven largely by an increase in gasoline prices. The analysts expect core (excluding food and energy) price growth to edge down to 3.7% from 3.8% on a 0.3% month-over-month (seasonally adjusted) increase.