08:05 AM EDT, 10/08/2024 (MT Newswires) -- In the wake of the correction in Federal Reserve expectations triggered by the United States payrolls report of Friday, Canadian rate cut expectations have also corrected "significantly," noted Commerzbank.

It's also interesting to note that this time the correction in Canadian expectations is really only due to the US employment report and not, as usual, distorted by the simultaneous release of the Canadian employment report -- this time it will only be released this Friday, wrote the bank in a note to clients.

In practice, a stronger US labor market has led financial markets to reassess the chances of Canadian rate cuts, stated Commerzbank.

In principle, this also seems logical, pointed out the bank. The US is by far Canada's most important trading partner, so a stronger US economy could also argue for a stronger Canadian economy.

There are two obvious ways in which this could happen, according to Commerzbank. First, the economies could be synchronized to the extent that stronger job creation in the US in a given month would suggest stronger job creation in Canada. Or, to put it another way: It's possible that the labor markets in both countries are replicating the same underlying factors that are driving job growth. In short, a look at the data suggests, at best, a very vague short-term relationship.

On the other hand, there is of course the -- much more realistic --possibility that a stronger US economy will lead to a stronger Canadian economy in the medium to long term. This would justify smaller rate cuts in Canada, added the bank.

However, such correlations tend to work in the long run, not in the short run before the December meeting. In addition, the Canadian economy is in a different situation. Employment growth there is very moderate, while inflation has reached its target.

As a result, the real economic situation currently favors Canadian rate cuts rather than those by the Fed.

In short, the correction in Canadian rate cut expectations doesn't seem to Commerzbank to be fundamentally justified.