'I think we're now thinking hikes instead of cuts': Tétrault on oil price hike's impact on rates

Key Concepts

• Fiscal Update: The federal government’s periodic report on spending and deficit projections.
• Sovereign Wealth Fund: A state-owned investment fund that invests in real and financial assets.
• Dot Plot: A chart used by central banks to visualize the projected path of interest rates.
• Supply Shock: An unexpected event that changes the supply of a product or commodity, resulting in a sudden price change.
• VIX (Volatility Index): A popular measure of the stock market's expectation of volatility based on S&P 500 index options.
• Capitulation: The act of surrendering or selling off assets during a market decline, often at the bottom of a cycle.

1. Federal Fiscal Update and Market Expectations

Rob Tetro, Senior Portfolio Manager at Canaccord Genuity, anticipates the federal government’s spring fiscal update will reveal a deficit in the $45 billion to $50 billion range for the 2025-2026 fiscal year.

• Rationale: With an 11-month deficit already at approximately $25 billion and March historically being a high-spending month, the $45–50 billion figure aligns with current trends.
• Market Impact: Tetro argues that this number is already "priced in." Because the government has provided sufficient "breadcrumbing" (hints), he expects muted market movement unless the announcement contains significant, unexpected policy shifts.

2. Economic Policy and Growth

• Sovereign Wealth Fund: Tetro views the government’s proposal to leverage the balance sheet to own equities—modeled after the Norwegian approach—as a positive development that the market is likely to receive well.
• Bank of Canada (BoC) Outlook: While the immediate expectation for the upcoming BoC announcement is "status quo," the long-term outlook has shifted. The narrative has moved from potential rate cuts in 2026 to the possibility of rate hikes in the near term.

3. The Oil-Inflation-Interest Rate Nexus

Tetro outlines a specific causal chain linking geopolitical instability to monetary policy:

1. Geopolitical Crisis: The Middle East crisis creates a supply shock in oil markets.
2. Inflation: Higher oil prices drive broader inflation.
3. Monetary Response: To combat inflation, the Central Bank is forced to pivot from cutting rates to implementing hikes.

• Actionable Insight: Tetro suggests that a resolution to the Middle East crisis is the primary prerequisite for the Central Bank to pause rate hikes. Without this, he predicts one to three quarter-point hikes this year.

4. Investor Psychology and Geopolitical Risk

Tetro provides a front-line perspective on how retail investors react to geopolitical volatility:

• The "This Time is Different" Fallacy: Investors frequently contact advisors during crises (e.g., the Iran crisis) claiming that current events are unique and necessitate selling off assets. Tetro emphasizes that this is a recurring psychological trap.
• Capitulation Risks: He notes that some clients "capitulated" during a recent 10% market dip, causing them to miss the subsequent recovery in late March and April.
• Historical Context: Tetro references research showing that since 1945, there have been 30 major geopolitical crises, and in the vast majority of cases, the market was higher 12 months later. He distinguishes these events from structural economic crises (like 2008), noting that geopolitical events typically resolve more quickly than systemic economic failures.

5. Synthesis and Conclusion

The primary takeaway is that while geopolitical noise and fiscal deficits create short-term anxiety, they rarely alter long-term market fundamentals. Tetro advises against reactive selling, noting that the market is resilient to geopolitical shocks compared to structural economic downturns. Investors should focus on the "chain of events" regarding oil prices and inflation, as these are the true drivers of central bank policy and, consequently, market performance.