07:34 AM EDT, 10/07/2024 (MT Newswires) -- Last week served Canadian market watchers an opportunity to take a breather, said TD as there was no top-shelf economic data, no Bank of Canada (BoC) speeches and no domestic headline-grabbing news.

However, a hefty United States jobs report Friday pulled Canadian yields higher, noted the bank. The US port strike also came to an end, stemming worries of potential near-term inflationary impacts.

Elsewhere, conflict is escalating between Israel and Iran, which has sent oil prices almost 10% higher on last week to $74 per barrel. Despite the rise in oil prices, the Canadian dollar tracked modestly lower.

The BoC is 75bps into its cutting cycle, delivered in three 25bps increments over their last three meetings. The pressing question for the policymakers is whether they feel it's necessary to deliver a supersized, 50bps cut at their next meeting on Oct. 23, stated TD.

Outside of the 2020 pandemic-emergency rate cuts, the 2007-08 Global Financial Crisis and the early-2000 Dot-Com bubble, one would have to look back to October 1996 to find the last time the BoC cut by more than the standard 25bps in the middle of an easing-cycle.

With inflation now back to the two-percent target, Canada's central bank is putting more stock into the growth outlook to ensure that inflation doesn't fall too much. It's a fair shift in priorities given the slowdown in the Canadian economy, pointed out TD.

Last week's gross domestic product reading for July and advanced look-ahead for August, confirmed that Q3 growth is tracking well below both the BoC's current estimate and potential growth. The bank doesn't think the GDP data tipped the scales any more-or-less in favor of a potential 50 bps interest rate cut, which would follow the recent move from the Federal Reserve.

The BoC also needs to accept that its current forecast is facing downside risk, according to TD. A fresh set of forecasts via an updated Monetary Policy Report (MPR) at its next meeting will shed light on how it's looking at near-term growth.

Now, emphasis will be placed on upcoming inflation data and labor market trends, where the BoC will be assessing how durable the current 2% inflation is and whether or not labor markets are continuing to cool. The BoC's Business Outlook Survey (BOS) and companion consumer survey will also land this week and be closely watched, the bank added.

With all TD knows to date, it looks for the BoC to continue on its gradual path, delivering another 25bps cut at its next meeting, bringing the policy rate to 4.00%. Market pricing, for what it's worth, is attaching around a 30% chance of a supersized cut.

TD acknowledges the risk of a potential larger cut should incoming data display further signs of deterioration. Past this, the bank sees rates continuing to gradually decline into next year before hitting 2.25% by early 2026.