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Canada's Strong GDP Raises Rate Hike Prospects: 5 Picks

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The Canadian economy showed resilience to harsh winters and global economic crisis and exhibited growth in April. Economists had largely written off growth for the period. However, in its latest report released on Jun 29, an unexpected spurt in Canada’s growth has increased the likelihood of a rate hike by the Bank of Canada in July.

Under conditions where interest rates are likely to help sectors, financials and consumer discretionary turn out as star performers. Both these sectors witness an increase in margins in a rising rate environment. Consequently, investing in Canadian stocks from these two sectors seems prudent at the moment.

Canada’s GDP Beats Market Forecasts

Per the latest report from Statistics Canada, the country’s GDP expanded 0.1% in April to $1.34 trillion on the back of strength in its factory orders. The country’s economy has witnessed growth in seven of the last eight months. Furthermore, such a rise in GDP was largely unexpected as economists had forecast the growth to remain stagnant from the previous month.

Also, manufacturing activity in the country witnessed a rise of 0.8% in the month on the back of increased output from machinery. Further, output from food and chemical products also increased to boost the overall industrial output in the month.

The report also stated that Canadian producer prices increased 1% in the month to register the fifth consecutive rise. It was boosted by high energy and fuel prices. Finally, of the 21 commodity groups that were surveyed, 17 showed expansion. This was the greatest such expansion since November 2017.

Bank of Canada to Hike Rates in July

Strength in the Canadian economy has raised speculation of a likely rate hike by the Bank of Canada in July. The central bank has hiked interest rates three times since July 2017. Further, the central bank is set to announce the future of Canada’s monetary policy on Jul 11 and economists predict an 80% probability of such a development.

Currently pegged at 1.25%, the central bank’s governor Stephen Poloz, is expected to come up with a hike in his next announcement. Poloz has strictly followed a data-dependent approach toward deciding interest-rate levels in the economy. Also, recent surveys by Bank of Canada reflect robust labor market conditions and stupendous wage growth. This further makes hints at a hike in interest rate this month.

5 Best Choices

Unexpected growth in Canada’s GDP in April reflects the country’s resilience to harsh winters and global economic downturns. Such a development has not only boosted the loonie but also increased prospects of a rate hike in the Bank of Canada this month.

Further, tight labor market conditions and steadily rising wages pave the way for a rate hike. In this context, we have selected five stocks that are expected to gain from these factors. These five stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lululemon Athletica Inc. (LULU - Free Report) is a designer and retailer of athletic apparel and accessories.

The company is based out of Vancouver and sports a Zacks Rank #1. The expected earnings growth rate for the current year is 24.18%. The Zacks Consensus Estimate for the current year has improved 1.2% over the last 60 days.

Bank of Montreal (BMO - Free Report) is a provider of diversified financial services including personal and commercial banking as well as wealth management.

The company is based out of Montreal and carries a Zacks Rank #2. The expected earnings growth rate for the current year is 11.31%. The Zacks Consensus Estimate for the current year has improved 1.5% over the last 60 days.

The Toronto-Dominion Bank (TD - Free Report) is a provider of personal and commercial banking products and services in Canada as well as the United States.

The company is based out of Toronto and has a Zacks Rank #2. The expected earnings growth rate for the current year is 15.65%. The Zacks Consensus Estimate for the current year has improved 1.2% over the last 60 days.

Sun Life Financial Inc. (SLF - Free Report) is a provider of insurance, wealth, and asset management services.

The company is based out of Toronto and has a Zacks Rank #2. The expected earnings growth rate for the current year is 13.56%.

Restaurant Brands International Inc. (QSR - Free Report) is the owner, operator and franchisor of quick service restaurants.

The company is based out of Vancouver and has a Zacks Rank #2. The expected earnings growth rate for the current year is 34.36%. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 60 days.

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