ON DECK FOR TUESDAY, JUNE 25
KEY POINTS:
- Mild risk aversion on light macro developments
- Canadian CPI expectations—and whether it matters
- House prices are at an inflection point higher in Canadian inflation
- CPI basket weight updates may lift inflation a touch higher
- Other milestones on the path to the BoC’s next decision
- Canadian by-election stunner reinforces current election modelling
Canadian CPI is the only main focus by way of calendar-based risk after a dull overnight session marked by mild risk aversion. US consumer confidence might spice it up afterward if it’s a material surprise (10amET).
Stocks are mixed with snps up a touch while almost everywhere else either little changed or down as much as 1% in Germany. Sovereign bonds are outperforming in Europe over US Ts.
For May’s CPI report (8:30amET), estimates range from 0.2% (me, 4 in total) to 0.3% (5 forecasters) to 0.4% (2 estimates). Headline and traditional core CPI should be similar given little expected role played by gasoline and good prices.
And that doesn’t matter. Trimmed mean and weighted median will matter in m/m SAAR terms as the BoC’s preferred core inflation gauges on a trend basis. If they’re cool again (chart 1), then that could well be sufficient evidence to give the BoC the green light to cut again on July 24th regardless of what happens in the next CPI print before the July decision. If they’re hot, then it’s a little more complicated and we’re left hanging somewhat until the next pre-decision inflation print. A hot one followed by a cool one, for instance, would probably be enough for the BoC to cut again while pointing to the trend and its inflation forecast which may dominate their thinking in any event.
This CPI report will adjust the spending weights in the annual exercise. Statcan does not revise CPI figures for basket weight changes and only incorporates them on a go forward basis at the link month which in this case in May. That said, during the same exercise last year, Statcan made a point of referencing that if old weights had been used in the May figures, then CPI in y/y terms would have been a tenth lower. This time, we’re figuring that based on comparing the effects of the weight changes for April it would have been one-tenth higher on headline CPI and two-tenths higher on core inflation (chart 2). We will also see house prices make a touch more of a still small contribution but one that may well be at an inflection point with probably more to come (chart 3). See my week ahead for further elaboration (here).
The other markers on the path to the July 24th BoC decision will include the BoC’s household and business surveys including measures of inflation expectations on the 15th, CPI for June the next day, this Friday’s GDP figures for April and May, and next Friday’s jobs report. Markets are priced for about 15bps of a quarter point cut on July 24th (chart 4).
Also see the stunning by-election outcome in Canada where a Toronto riding held by the Liberals for three decades was won by the Conservative candidate by a 42.1% to 40.5% margin (here). Not even the Conservatives truly thought they’d win. Toronto is typically a Liberal town and this particular riding is the heartland of the popularly termed ‘limosine liberals’. The vote was widely viewed as a referendum on the current Liberal leadership and a litmus test of PM Trudeau’s ability to lead the party into the next election. The outcome reinforces current polling and seat projections that predict a Conservative landslide if an election were to be held today (here). An election has to be held by no later than October of next year so there is a lot of ground to cover between now and then.
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