April Inflation: "Great success" for Canada's economy!

"Canada inflation is like cost of goat: very high. But now, it goes down like prices at Kazakhstan market. Very nice!! No need to sell my sister to buy bread! High five!"
—Borat Sagdiyev

From Kazakhstan to Bay Street, Canadian inflation forecasts just took a turn for the better, courtesy of April's CPI. Shelter aside, inflation came in like maple syrup in January: slow and sweet.

The good news arrived in bulk:

  • Core measures inched just 0.14% higher m/m (solid disinflation)
  • The BoC's closely-watched 3-month core measure was just 1.65%, well below the 2% target
  • Average core has dropped every month this year
  • Excluding mortgage interest—the dominant CPI driver:
    • average core inflation was a tame 1.6% y/y
    • headline's even lower at only 1.2% y/y!
  • Rent and mortgage interest inflation slowed further
  • Oil is well below last month's average (presaging an even kinder and gentler May CPI)
  • Food inflation showed the steepest drop-off since August 2020.

In short, our dollar's stretching further (no fake news).

Here are the official annualized numbers:

  • Headline inflation: 2.7% (est. 2.7% | prior 2.9%)
  • Average core inflation: 2.75% (est. 2.8% | prior 3.05%)

Those with keen eyes will notice that this "prior" 3.05% core value is a revision. StatsCan raised it from the original 2.95% reported last month. But keep those party hats on; we're still headed in the right direction, down a whopping 30 bps m/m on average core.

June meeting: To cut or not to cut

Economists are bickering over whether the BoC should cut in June or July. The prudent choice, and in keeping with prior BoC guidance, would be July, says Scotiabank's Derek Holt.

Capital Economics says, "Despite the continued progress, the Bank of Canada may hold off on cutting interest rates in June, in order to confirm that lower core inflation will be sustained in the next two CPI releases ahead of the July meeting."

But Tiff & co. are starting to feel the heat from Bay Street to cut sooner and avoid economic harm. "By maintaining such a restrictive monetary policy, it risks inflicting unnecessary damage on the economy," said National Bank Economics today.

Both BMO and CIBC are also advocating for swift action, with CIBC asserting, "Today's data should have provided the all clear on the inflation front that the Bank of Canada needed to start cutting interest rates in June."

From our angle, given the facts that:

  • policy is tighter than a Rouge coach seat, with the overnight rate now 225 bps above average core, the most since November 2007
  • inflation has considerable downward momentum
  • even StatsCan's talking about a "broad-based deceleration" in prices.
  • CPIX (the measure the BoC forsake but shouldn't have) is back to 2021 pre-hike levels
  • policy will remain tight for several months given the 12-18 month policy transmission delay...

...there's now enough cover for Tiff to take out the rate scissors.

Calendar guessing aside, imminent rate relief appears in the cards. Some of the spotlight will now shift to the post-cut trajectory. Based on past patterns, when rates are this high above the #neutral rate#, the BoC doesn’t stop at just one or two cuts.

In fact, it would be historically rare for the Bank not to slash rates 100+ bps in the next 12 months. The market concurs, implying a prime rate of 6.20% or less by this time next year.

Of course, the BoC will peek over the fence at next week’s U.S. core PCE inflation figures before making any decisions. If they come in hot, chances of the BoC deferring to July go up.

Market reaction

Canada's 4yr swap rate (Source: Refinitiv Eikon)

Canadian yields closed lower across the curve on Tuesday, including the fixed-leading #4-year swap# (above).

#OIS# traders are looking for two cuts, but this should move to three or more if we get a 25-bps trim in June and/or July, as expected.

#OIS#-implied BoC rates (Source: Refinitiv Eikon)

Fixed mortgage rates have been edging lower industry-wide since last week. Given the light economic calendar, the odds are decent for further dips before month-end. We'll loop back with a fresh, forward rate outlook (including charts) upon receipt of data from CanDeal DNA.


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