‘Shot of adrenaline’: Fixed income expert shares his economic outlook

Earl Davis, Head of Fixed Income and Money Markets at BMO Global Asset Management, joins BNN Bloomberg to assess Canada's economy against the U.S.

Amid geopolitical uncertainty and fiscal concerns, a fixed income expert says bond yields in the U.S. and Canada have rallied as U.S. President Donald Trump continues to call for lower interest rates after his “Big, beautiful bill” was passed by the U.S. Congress.

“Bond yields have rallied. We see that both in the U.S. and Canada over the past two months and a lot of that was off speak about an easier (U.S. Federal Reserve) coming in, the change of the Fed governor in the U.S next year and the mandate that comes over with the illusions from President Trump that rates need to be a lot lower,” Earl Davis, head of fixed income and money markets at BMO Global Asset Management, told BNN Bloomberg Friday.

“The market has taken hold of that in regard to buying bonds and foreseeing lower yields.”

The Trump administration said it will focus on finding a replacement for Fed Chair Jerome Powell this fall, according to Reuters.

Since Trump returned to the White House earlier this year, his administration has been critical of the Fed for leaving interest rates unchanged, suggesting a change in leadership is needed at the central bank. With the U.S. unemployment rate low and inflation still above their two per cent target, Fed officials have been reluctant to cut interest rates until it is clear the Trump administration’s tariffs won’t drive up prices.

Trump has railed against Powell, a fellow Republican whom he appointed during his first time in office, urging him to resign. However, the U.S. president has no legal path to fire Powell over a policy dispute.

‘Big, beautiful bill’

“The market only focuses on one thing at a time. Right now, the big headline, obviously, is the new bill, the BBB, that has passed in the U.S.,” said Davis. “The way we look at that, that’s almost like a shot of adrenaline to the economy. Less taxes means more money in the economy and more military spending. It’s a shot of adrenaline. We can foresee, over the next three months, the economy doing pretty well.”

The bill will extend Trump’s 2017 tax cuts, authorize more spending on border security and the military, make steep cuts in Medicare and Medicaid and add trillions to the government’s debt.

Trump administration officials argue the bill will boost private sector investment and strengthen the U.S. economy, insisting that while tariff increases could result in a one-time bump in prices, they should not drive-up inflation over the longer term.

Nonpartisan forecasters however say the legislation will add US$3.4 trillion to the nation’s $36.2 trillion debt while cutting health benefits and food assistance.

‘Boost in the arm’ for Canada’s economy’

Davis says he is optimistic about the Canadian economy as Ottawa and Washington near a deal on Trump’s tariffs, bringing certainty to domestic trade. Canada previously imposed a digital services tax that would affect large U.S. technology firms prompting the U.S. to terminate trade negotiations. Canada however scrapped the tax prompting the White House to resume trade discussions with an aim for a deal by mid-July.

Davis says these developments may signal to businesses that they can start reinvesting in the economy and building plans as they will understand the economics with a new trade deal in place.

“If I spend $100, I’m going to make $10,” says Davis. “Before you have certainty on tariffs, they’re like, if I spend $100 am I going to make or lose? So now we’re very close to getting that resolution. That’s going to be a big boost in the arm for the Canadian economy.”