Update on Rate Predictions and Economy

Last week’s equity market issue proved to be a minor correction in a bull market. Forecasting sees a disappointing first half in the US with a “housing induced recession” which will lead to a - 50 bp response from the Fed and the expectation is for Canada to follow. Canada not following could lead to an acceleration in the value of our dollar, which would further negatively impact the industrial and exporting industries and the economy as a whole. So the forecast is for a 50 bp drop in Prime by Q3 (Sept). Further to that, a reduction in Prime will also lead to a drop in the Bond Yields, so Bond Yields are also forecasted to drop about 50 bps by September 2007.

With equity markets looking as though the China inspired volatility is behind them there is still a major concern in the US housing market and US economy as a whole. These tighter lending standards will ultimately subdue the consumer that was refinancing and “using their home as an ATM” over the past several years. Having a subdued consumer will prompt the fed to move and ease their monetary policy in Q3. And the Bank of Canada will be forced to follow suit.