Notes From The Desk: Two For One Special – US Inflation & The BoC
US Inflation.
US CPI came in hotter than expected for the third month in a row.
- Headline inflation printed at 3.5% (vs. 3.4% expected).
- Core inflation came in at 3.8% (vs. 3.7% expected).
Today’s data does not signal the ‘continued progress’ that the Federal Reserve is looking for. Perhaps most concerning is the trend higher in the prices of services, as job and wage growth continue to fuel spending.
Heading into the numbers, bond markets priced in 2-3 cuts this year, but after the print, that has shifted to less than two, with yields rising ~ 20 bps.
The Bank of Canada.
The Bank of Canada (BoC) held the overnight rate steady at 5%. While this was expected, they did drop some breadcrumbs for the market.
- The Bank abandoned concerns about the persistence of core inflation, acknowledging that it was moving lower.
- They lowered their inflation forecasts, expecting CPI to be 2.2% by the end of this year and reaching 2% in 2025.
- The rise in unemployment provides them with comfort that wage pressures will subside.
The combination of these factors leads us to believe that they are slowly moving towards lowering rates.
- In the press conference, the Governor left the door open to a cut in June, saying it was within the ‘realm of possibilities’. If the next couple of months of data show that the cooling in inflation and employment is ‘sustained’, that possibility could become reality.
- Domestic yields which had moved higher after US CPI, have recovered somewhat after the announcement and press conference.
