04:32 PM EDT, 06/17/2024 (MT Newswires) -- The Toronto Stock Exchange closed lower for a third-straight session on Monday, with the S&P/TSX Composite Index shedding 51.22 points to close at 21,587.88 on weak resources issues and an unclear path for the Bank of Canada to further cut interest rates.

Weak prices for precious and industrial metals are cutting into the share outlooks for miners, while energy stocks took a hit despite rising benchmark oil prices.

The sectors leading the drop on Monday were Base Metals and Utilities, down 1.19% and 0.88%, respectively.

Industrials were one of two rising sectors on the day, up 0.5%, along with Health Care, which managed a 0.08%. gain.

The market's drop comes as traders try to suss the path of Canadian interest rates following the Federal Reserve's decision last week to hold its policy rate steady at the highest in 23 years and forecast just one cut to rates this year. The Fed's reluctance to cut rates is raising questions over whether the BoC will hold off on rate cuts to keep closer to the Fed, or continue to cut after its first rate drop earlier this month.

Based on information in hand, National Bank said in its Monthly Fixed Income Monitor for June 2024, a follow-on cut in July "seems a likely bet." While allowing for a 'skip,' it noted an additional 50 bps of expected rate relief in Q4 would leave the BoC's overnight target at 4% come the end of the year. "Restrictive yes, but increasingly less so," National said, before adding: "That's somewhat more easing than is currently discounted in OIS markets, owing to a sub-consensus growth call."

Unlike the BoC, National bank noted, the Fed's June 12 communications were "seemingly designed to dampen enthusiasm for a near-term pivot."

"Rather than over-analyzing the 'dots,' we concede that cutting conditions risk taking longer to materialize south of the border, this despite the very latest news on inflation. We're pushing our first FOMC rate cut into Q4, which is less about avoiding potential election interference than contending with ongoing labour market resilience and residual inflation risks."

With the BoC moving quicker with rate cuts, the Canada-U.S. policy rate differential is "increasingly in focus" and "widening," with 100 bps likely and prevailing gap by year end, National Bank noted.

However, National also noted, empirical analysis would not necessarily characterize that as "overtly destabilizing" for the Canadian dollar. And the BoC Governor himself embraced the argument that the effective limit to Canada-U.S. policy rate divergence is still some ways off.

"Ultimately," National said, "the policy rate differential debate could prove theoretical (or at least transitory), since the onset of sub-potential U.S. growth around the turn of the year should allow the Fed to ease more aggressively than the BoC in 2025 (the former starting from a higher setting). In lining our fed funds forecast up vs. fresh FOMC guidance, bear in mind that our base case macro outlook embeds greater unemployment and less-sticky inflation than most FOMC participants."

Meanwhile, Wells Fargo Investment Institute in its latest Investment Strategy Report noted that historically the arrival of a Federal Reserve rate cut cycle has coincided with a sizable stock market drawdown. In WFII's view, investors should not equate the first cut as an all-clear stock market signal.

"Instead," it said, "we prefer to focus on the rationale for the cut. If the Fed tweaks policy to adjust real rates for falling inflation, we believe stocks will likely perform well over the tactical time frame (6 to 18 months)."

CIBC Capital Markets said Monday that with the Bank of Canada having officially kicked off its easing cycle earlier this month, a key focal point since then has been the extent to which domestic policy can diverge from that of the Fed. When asked about the topic at the June post-meeting press conference, Governor Macklem stated that "we are nowhere near" the limiting bounds of policy divergence. Which, CIBC added, is important in communicating that the Bank's easing cycle "can have depth."

Broadly, CIBC said, "these communications appear well internalized by the market," as the expected endpoint of the BoC's easing cycle sits flush to the midpoint of the Bank's neutral rate range (2.75%). "Now," CIBC added, "what remains inconsistent in our view is the distribution of expected easing, where the market is anticipating some 30% of total easing to be delivered in 2026 and beyond. In contrast, we expect the Bank to deliver cuts at a more rapid pace, and end the cycle in 2025."

Meanwhile, BMO Economics in its morning note said last week's rally, fuelled by "encouraging" CPI progress in the U.S., boosted rate cut expectations in Canada as well. As much as the Bank of Canada downplayed the need to be wary of its divergence with the Fed, better odds of Stateside cuts inevitably bolster the case for easing north of the border, BMO added.

On Wednesday, BMO also noted, the BoC will publish the Summary of Deliberations from this month's meeting, which kicked off the rate cut cycle. Ben Reitzes noted BMO expects the tone to lean dovish. BMO will be looking for additional color on Governor Macklem's comments that indicated there was still room for the BoC to diverge from the Fed, and his general lack of concern on the impact of the divergence on the loonie.

Gold prices moved lower mid-afternoon on Monday as yields rebounded after narrowing on Friday when a report showed weak consumer sentiment. Gold for August delivery was last seen down US$20.20 to US$2,328.90 per ounce.

West Texas Intermediate (WTI) crude oil closed at the highest in six weeks on Monday on expectations for rising demand during the busy summer season, offsetting weak industrial data from China. WTI crude for July delivery closed up US$1.88 to settle at US$80.33 per barrel, the highest since April 29. August Brent crude, the global benchmark, was last seen up US$1.23 to US$83.85.