- BoC’s preferred ‘core’ gauges are on the 2% target at the margin
- Services inflation vapourizes as core goods inflation remains subdued
- Shelter CPI was an ongoing BoC concern and is waning
- BoC to cut 50bps, but is at strong risk of reigniting inflationary pressures
- Canadian CPI, m/m %, September, NSA:
- Actual: -0.4 / 1.6
- Scotia: -0.1 / 2.0
- Consensus: -0.3 / 1.8
- Prior: -0.2 / 2.0
- ‘Core’ gauges, m/m % SAAR:
- Trimmed mean CPI: 2.3%
- Weighted median CPI: 1.7%
- Traditional core CPI: 2.4%
There has been a lot of baseless on– and off-speculation around the Bank of Canada’s next move but it needed data to justify a call. We now have that. The Bank of Canada is likely to cut 50bps next Wednesday on the heels of a report that shows that the Bank’s preferred core measures are on target. That was our instant reaction with our traders and clients seconds after seeing the core gauges. There is still the risk that the BoC—that has surprised markets many times in the past—could opt for –25bps, but the hurdle to doing so is set rather high now. I’ll also argue that while it’s our call, we disagree with upsizing.
Key is that the average of the trimmed mean and weighted median measures of core inflation slowed to an average of 2% m/m SAAR in September (chart 1). Weighted median CPI was the higher of the two at 2.3% m/m SAAR but trimmed mean CPI at 1.7% balances that out and the BoC tends to take an average. Traditional core (ex-food and energy) was up 2.4% m/m SAAR but this is on the heels of just 0.8% the prior month (chart 2).
On a three-month moving average basis, traditional core CPI (ex-food and energy) is up by just 1.6% m/m SAAR, and both the weighted median and trimmed mean CPI gauges are up 2.1%.
So why 50bps?
- Symmetry around the 2% inflation target amidst readings like these would be taken by the BoC as a need to focus more upon the risk of undershooting the 2% inflation target.
- The output gap is estimated to be significantly negative which adds to this concern.
- The BoC is likely to downgrade Q3 GDP growth from 2.8% in their prior forecast to around half that next week, thus advancing a narrative that their forecast rebound is being stymied at least for now.
- Population growth is not yet slowing given the LFS reading that indicated another gain of over 100k in September which means—rightly or wrongly—the BoC can point to ongoing concerns about per capita numbers (partly still wrongly imo).
- The BoC has surprised markets in the past, but it would need strong arguments to negatively surprise markets priced by 50. They would also need steely resolve to go against markets, most economists, and heavy pressure from the business community and politicians.
- Macklem is unlikely to be that person who goes against such pressure given his naturally dovish instincts and so the BoC’s reaction function has to get a high weight in the forecast call.
- With the policy rate presently at 4.25% and hence somewhere around 150bps above neutral, the BoC is significantly restrictive and still has room after cutting to 3.75% so say that they need to be careful going forward.
- Services inflation has recently disappeared (chart 3) to go alongside weak core goods inflation (chart 4).
- Furthermore, the one main area where the BoC has been concerned about inflation risk in the short-term is shelter cost and that too waned sharply last month (chart 5). While the small roughly 3% weight in the basket on mortgage interest continues to wane, the BoC will place more emphasis upon charts 6 and 7 showing that perhaps rent and replacement cost of housing are more subdued on a trend basis.
Opting to cut 50bps and the aggressive market easing around the expected path forward are likely to ignite growth faster over 2025–26 than otherwise, closing the output gap quicker than estimated along ongoing other sources of inflation risk from real wage gains alongside terrible productivity, severe housing shortages and ongoing immigration, likely fiscal pump-priming into an election year, and our work on the pent-up demand and pent-up savings that exist in the household sector. The BoC is at significant risk of unleashing inflationary forces.
Across other components, the transportation sector is driving disinflationary momentum (chart 8) as vehicle price changes are subdued (chart 9), airfare fell (chart 10) and gasoline prices fell (chart 11).
Food prices were up but the low weight on the noisy trend did not have much impact on headline CPI (chart 12).
Clothing prices fell (chart 13).
The 0.1% m//m SA rise and the roughly 10% weight on the recreation/education/reading leisure categories drove little impact on overall inflation notwithstanding significant variation within the category (chart 14).
Please see more charts in the following pages that break out more of the components, as well as the detailed table at the back of this publication including measures of dispersion and micro-charts.
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DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.