CIBC has released an analysis highlighting the disappointing Canadian Q2 GDP data, which indicates that a rate hike by the Bank of Canada (BoC) in the upcoming meeting is now very unlikely. The annualized quarterly contraction of -0.2% is well below the consensus expectation of 1.2% and the BoC's forecast of 1.5%. This is contributing to expectations that the BoC will maintain its current interest rate levels.

Key Points:

• GDP Contraction: The Canadian economy contracted by an annualized -0.2% in Q2, falling short of both consensus expectations and the BoC's own forecast.

• Housing & Consumption Slowdown: Housing investment experienced a sharp drop. In addition, consumer consumption growth slowed significantly to an annualized 0.2%, down from 4.7% in the first quarter.

• July GDP Estimate: Advance GDP estimates for July indicate a flat month, further reinforcing the idea that the Canadian economy doesn't require higher interest rates at this time.

Implications:

For Policy Makers:

• BoC Rate Hike Unlikely: Given the economic contraction, it's unlikely the BoC will increase interest rates in its upcoming meeting.

For Investors and Traders:

• Fixed Income: Investors in Canadian fixed income may not have to worry about the impacts of a rate hike on bond prices in the near term.

• Currency Impact: The disappointing data could potentially exert downward pressure on the Canadian dollar.

Conclusion:

Today's disappointing Canadian Q2 GDP figures strongly suggest that the Bank of Canada will maintain its current interest rates in the next meeting. The economic contraction and sluggish growth in sectors like housing and consumption point to the fact that the Canadian economy is not in a position to absorb higher rates at this time. This could have implications for fixed income markets and the Canadian dollar.