Market Wire: Underlying Canadian inflation cools, lowering monetary tightening expectations

There was again little evidence of energy price spillovers in Canada last month, with underlying inflation pressures holding steady, slightly reducing market-implied odds on a rate hike from the Bank of Canada at its meeting next week. Data released by Statistics Canada this morning showed core inflation – which strips out food and energy prices – and is computed as the average of the two price measures now preferred by the central bank (trim and median) – rising just 1.9% on a year-over-year basis from 2.0% previously.

Although a jump in gasoline prices lifted the headline all-items measure, with prices increasing 3.1% over the same period last year and accelerating from 3.0% in the prior month, grocery price growth slowed, and other categories showed little to no indication of rising at an uncomfortable pace.

The report comes after Governor Tiff Macklem told reporters on Saturday that “the question we are going to be asking ourselves” at the Bank of Canada’s October meeting “is, ‘Is inflation likely to come back down towards our target on its own, or are we going to have to raise interest rates to influence the path, nudge the path for inflation back towards the target?’”.

The Canadian dollar is edging lower as traders pull back on expectations for an imminent rate hike, slightly widening interest differentials with the US, where the Federal Reserve is expected to stay on hold in October before delivering three hikes over the next year.

Overnight index swaps are putting the odds on an October move at 65%, down from above 70% ahead of the release. We're not convinced, and think the lack of demand-led price pressures in Canada reflects a still-weak domestic economy, suggesting that the Bank of Canada’s Business Outlook Survey could move markets later this morning by helping to lower policy expectations further.

We don’t expect this evening’s Alberta referendum result to have major implications for the Canadian dollar, given that support for separating from Canada remains extremely low.

In broader markets, the dollar is holding steady as equity futures advance after a week-long selloff, Treasury yields are inching higher, and crude prices are slipping from extremely elevated levels to merely elevated. Spreads between French and German debt are pushing toward recent highs after cost-of-living protests turned into widespread looting over the weekend, threatening to widen political divides ahead of next year’s presidential elections. The euro is softening modestly, but remains above last week’s lows.

Quick programming note: after many years of writing a note every morning, I’m testing a new format. In place of the 'morning market brief', you’ll receive ‘wires’ like this one, sent around data releases and breaking news, along with a weekly look-ahead on Saturday mornings, and regular ‘snapshot’ forecast updates for individual currencies. Foreign exchange markets don’t move on a schedule, and the analysis shouldn’t either. I hope you’ll find this approach more useful, and welcome your feedback. Reach out any time with comments, thoughts, or ideas: karl.schamotta@corpay.com