Soft September CPI should help keep the BoC on hold
We have argued in recent weeks that fundamentals do not warrant tightening from the Bank of Canada, a view admittedly at odds with the Bank’s own rhetoric, which has tilted increasingly hawkish since the September meeting.
We retain that view having seen September’s CPI figures, where headline inflation rose to 3.1%, a tenth short of the 3.2% consensus had pencilled in, and up just 0.1pp on August. More importantly for the Bank of Canada, underlying inflation softened, with core-median CPI growth easing to 1.9% and CPI-trim to 1.8%, both a tenth below expectations, leaving the average of the Bank’s preferred measures at 1.85%, a new low for the year. With underlying inflation headed lower, we see little justification for monetary tightening, expecting policy to remain untouched on October 28th.
As we previewed in our Week Ahead, energy costs did all the heavy lifting, with the headline acceleration almost entirely a product of ongoing hostilities in the Middle East, and Eastern Europe.
Gasoline prices rose 27.8% YoY in September, up from 22.8% previously, and 6.1% on the month alone, as strikes on Gulf and Russian energy infrastructure pushed crude to its highest since May, with refined products seeing notable upside cost pressures. Strip energy out, however, and there is little sign of the broadening into services that Governor Macklem has warned about. CPI excluding food and energy rose just 2.06% YoY unrounded, down from 2.12%, with services inflation also softening last month.
As such, today’s print should take the edge off Governor Macklem’s recent hawkish shift.
Having called 3% inflation “too high” when holding at 2.25% on September 2nd, and warning in Bangkok on Friday that looking through energy prices gets harder the longer the shock lasts, the Bank now faces a report showing underlying inflation drifting below target, despite recent Middle East developments. Moreover, this follows two consecutive monthly job losses totalling 110k, amidst US trade conflict that the Governor himself concedes could halve Q4 growth. As Macklem admitted back in March, absent events in the Middle East the Bank would be talking about lower rates, not higher ones. In our view, not much has changed.
We therefore continue to expect a hold on October 28th, albeit alongside upgraded headline inflation projections in the accompanying MPR, with WTI having nudged above $100 earlier today.
This afternoon’s Q3 Business Outlook Survey at 16:30 BST is the final piece of the puzzle, with firms’ pricing intentions and inflation expectations the final test for second-round effects, albeit even then we would place more weight on recent hard data when looking for the BoC to stay unmoved. That still leaves us at odds with market pricing, with a two-in-three chance of October tightening still embedded by swaps. But assuming this is now pared back, we would expect a bout of loonie weakness, reinforcing our bias for USDCAD to drift back toward 1.43 in the near term.
Underlying inflation continues to soften, challenging the BoC’s recent hawkish tone
Source: Bloomberg, Monex Europe