Canada’s 10-year government bond yield held steady at 3.44% in July, as lower oil prices and weaker-than-expected US employment data reinforced expectations for a more accommodative monetary policy stance. Crude prices hovered near pre-conflict levels amid optimism over US–Iran peace efforts, easing fears of energy-driven inflation and bolstering the view that the Bank of Canada (BoC) will keep interest rates on hold if disinflation continues.
At the same time, North American bond yields came under downward pressure after soft US labor market figures tempered expectations of a near-term rate hike by the Federal Reserve. Uncertainty surrounding efforts to renegotiate the USMCA further weighed on Canada’s economic outlook, dampening the prospects for additional BoC tightening.
Meanwhile, the BoC’s preferred core inflation gauges remained close to the 2% target in May, even in the face of higher energy prices. This supported the assessment that the inflationary impact of the Iran conflict is likely to be transitory.