The Canadian economy accelerated toward the end of the second quarter, helping reduce market-implied odds on an aggressive easing cycle from the Bank of Canada. Numbers released by Statistics Canada this morning show real gross domestic product heading toward a 2.2-percent annualised gain in the three months ended June, above market forecasts and the Bank of Canada’s 1.5-percent estimate.

The economy expanded 0.2 percent on a month-over-month basis in May, topping the 0.1-percent consensus as 15 of 20 economic sectors reported growth and goods-producing industries advanced. Manufacturers generated the biggest upside contribution—most likely on a rise in export demand—and retail sales shrank as Canadian consumers pulled back in the face of higher borrowing costs.

A preliminary estimate showed real gross domestic product growing 0.1 percent in June, signalling a softer handoff to the third quarter, but still remaining in positive territory.

The Canadian dollar is climbing as expected growth expectations narrow relative to the United States, and traders bet on a slowing in the pace of rate cuts from the Bank of Canada. Implied market pricing suggests that policymakers are still expected to deliver two more moves later this year, but yields are declining at deeper time horizons, pointing to a broad-based reassessment of downside risks in the economy.

Separately, the Bureau of Labor Statistics’ Employment Cost Index rose just 0.9 percent in the second quarter of 2024, slowing sharply from the beginning of the year and undershooting market expectations for a 1-percent increase. Relative to a year earlier, wages and benefits have risen roughly 4.1 percent, helping support consumer spending and business investment, but gains are clearly decelerating, suggesting that headwinds to growth are becoming stronger.

Further reducing market stress, the Treasury Department said it would sell $125 billion in new notes and bonds at its quarterly refunding auction next week, meeting private-sector expectations and suggesting that funding strains in government finance markets should remain well-restrained.

Bond yields are dropping, and the US dollar is declining in the face of big advances among the majors – but if Chair Powell fails to out-dove participants at this afternoon’s Fed decision, this dynamic could reverse.