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Canadian Economy Outperforms Forecasts, Lifting Loonie

The Canadian economy grew more quickly than expected in the first two months of the year, helping reduce market-implied odds on an imminent pivot to easing at the Bank of Canada. Numbers released by Statistics Canada this morning show real gross domestic product topping forecasts with a 0.6 percent expansion in January, followed by a potential 0.4-percent gain in February.

The services sector led gains, with a 0.7-percent rise in January, helped by the ending of public sector strikes in Quebec in November and December. A rise in home resales helped lift activity among real estate agents and brokers. But goods-producing industries also generated growth, with the utilities and manufacturing sectors helping drive a 0.2-percent expansion in the tangible part of the economy.

18 of 20 economic sectors reported positive growth, and on a year-over-year basis, activity rose 0.9 percent.

A preliminary estimate showed real gross domestic product rising 0.4 percent in February, with “broad-based increases” occurring over a number of areas, especially mining, quarrying, oil and gas extraction, manufacturing, finance and insurance.

The Canadian dollar is rallying as growth expectations converge – somewhat – with the United States, and as traders bet on continued cautiousness from the Bank of Canada at its April meeting. The Bank’s updated Monetary Policy Report should bring downgrades in growth and inflation forecasts, but with easing financial conditions, resilient housing markets, and strong demand for Canadian exports complicating a deeper malaise in consumer spending, policymakers are unlikely to sound the “all-clear” for rate cuts just yet.

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Higher for (even) longer