The BOC just dropped one of their preferred CPI measures
On Wednesday the BOC (Bank of Canada) Governor Tiff Macklem delivered a speech titled “What’s happening to inflation and why it matters”. It was a hawkish speech which explained the key drivers behind inflationary forced in Canada. But a key take-home is that they are no longer monitoring common CPI and instead will focus on the trimmed mean and median CPI indicators, to better assess whether inflation really has topped.
Highlights from Macklem’s speech
- …demand for goods and services here at home is running ahead of the economy’s ability to supply them.
- …we need to slow spending in the economy so supply can catch up with demand
- …we indicated that interest rates will likely need to go higher still to bring inflation down to the 2% target
- Going forward, we will be watching our measures of core inflation closely for clear evidence of a turning point in underlying inflation.
- Of our three measures, CPI-common is becoming more difficult to use in real time because it has been subject to large historical revisions
- CPI-trim and CPI-median, in contrast, are more robust to changes in the behaviour of prices
- With this in mind, we are more focused on these two measures and we are reassessing CPI-common
- …we are also closely watching inflation expectations
- …longer-term inflation expectations remain reasonably well anchored, but we are acutely aware that Canadians will need to see inflation clearly coming down to sustain this confidence
- …further interest rate increases are warranted.
It’s encouraging to see that their preferred measures of inflation – CPI trimmed mean and median – have finally begun to top out. Yet there remains a large gap between inflation and the 5-year breakeven rate, and the BOC are concerned that if inflation does not come down quickly enough then inflation expectations will rise and keep realised inflation higher in the process. And whilst the market-based measure of inflation remains relatively low (for now), the same cannot be said for survey-based measures.
According to inflation expectation surveys, over 80% of respondents expect inflation to remains over 3% over the next 6 months and two years, and both surveys show this trend has been rapidly increasing.
4% (minimum) cash rate for BOC by year end?
The BOC’s cash rate currently sits at 3.25% and have hiked over the past five meetings by a total of 300bp. Their final two meetings of the year are October 26th and December 7th and the 1-month OIS suggests a 72% chance of a 25bp hike. Yet, given the hawkishness of that statement I suspect a 50bp hike seems more likely – if not a 75bp hike. But at this stage a 4% cash rate by the year end seems feasible, if not more if the Fed are as hawkish as they are letting on.
Canada’s employment report unlikely to change the BOC’s course
Canadian employment data is in focus (alongside NFP) later today, so there’s potential for some volatility for CAD pairs should the data deviate too much from expectations. Last month headline employment fell -39k but expected to post a 20k rise today with unemployment expected to remain flat at 5.4%. Yet we doubt the employment report will change much in regards to the BOC’s policy, who have made it clear they will continue to hike to keep inflation expectations in check.
CAD/JPY 1-hour chart
The pair topped out on Wednesday and a bearish trend has formed on the 1-hour chart. Prices are consolidating below the weekly R1 pivot in a sideways consolidation / bear flag, which favours a bearish breakout and move towards 105. Should prices instead break to the upside, bears could seek evidence of a swing high below 106, which is near the 50-bar EMA and weekly pivot point.
How to trade with City Index
You can easily trade with City Index by using these four easy steps:
-
Open an account, or log in if you’re already a customer
• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
- Search for the company you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.
City Index is a trading name of StoneX Financial Pty Ltd.
The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.
While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.
StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.
It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.
StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.
© City Index 2024